[Senate Hearing 107-84]
[From the U.S. Government Publishing Office]


                                                         S. Hrg. 107-84

  ROLE OF U.S. CORRESPONDENT BANKING IN INTERNATIONAL MONEY LAUNDERING

=======================================================================


                                HEARINGS

                               before the

                       PERMANENT SUBCOMMITTEE ON
                             INVESTIGATIONS

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                        MARCH 1, 2, AND 6, 2001

                               __________

                             VOLUME 1 OF 5

                               __________

      Printed for the use of the Committee on Governmental Affairs


                   U.S. GOVERNMENT PRINTING OFFICE
71-166                     WASHINGTON : 2001

_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402


                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
           JOSEPH I. LIEBERMAN, Connecticut, Ranking Democrat
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi            MAX CLELAND, Georgia
JUDD GREGG, New Hampshire            THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah              JEAN CARNAHAN, Missouri
             Hannah S. Sistare, Staff Director and Counsel
     Joyce A. Rechtschaffen, Democratic Staff Director and Counsel
                     Darla D. Cassell, Chief Clerk

                                 ------                                

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                   SUSAN M. COLLINS, Maine, Chairman
                 CARL LEVIN, Michigan, Ranking Democrat
TED STEVENS, Alaska                  DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi            MAX CLELAND, Georgia
JUDD GREGG, New Hampshire            THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah              JEAN CARNAHAN, Missouri
         Christopher A. Ford, Chief Counsel and Staff Director
     Linda J. Gustitus, Democratic Chief Counsel and Staff Director
             Elise J. Bean, Democratic Deputy Chief Counsel
       Robert L. Roach, Democratic Counsel and Chief Investigator
                     Mary D. Robertson, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Collins......................................... 1, 51, 101
    Senator Levin........................................... 4, 53, 102
    Senator Carnahan.............................................     9

                               WITNESSES
                        Thursday, March 1, 2001

John M. Mathewson, former owner of Guardian Bank and Trust 
  (Cayman) Ltd., accompanied by Oscar C. Gonzalez, Esq...........    10
James C. Christie, Senior Vice President, Global Treasury Risk 
  Management, Bank of America, Oakland, California...............    22
David A. Weisbrod, Senior Vice President, Treasury Services 
  Division, The Chase Manhattan Bank, New York, New York.........    27

                         Friday, March 2, 2001

Jack A. Blum, Partner, Lobel, Novins and Lamont, Washington, DC..    57
Anne Vitale, former Managing Director and Deputy General Counsel, 
  Republic National Bank of New York, and Current Special 
  Litigation Counsel, HSBC USA, Inc., New York, New York.........    60
Robb Evans, Managing Partner, Robb Evans and Associates, Sun 
  Valley, California.............................................    62
Jorge A. Bermudez, Executive Vice President and Head of e-
  Business, Citibank, N.A., New York, New York...................    75
Carlos Fedrigotti, President and Country Corporate Officer for 
  Citibank Argentina, Buenos Aires, Argentina....................    78
Martin Lopez, Vice President and Citibank Corporate Bank Head, 
  Republic of South Africa.......................................    80

                         Tuesday, March 6, 2001

Arthur O. Jacques, Esquire, Jacques Little Barristers and 
  Solicitors, Toronto, Ontario, Canada...........................   105
Joseph M. Myers, Acting Deputy Assistant Secretary (Enforcement 
  Policy), U.S. Department of the Treasury, Washington, DC.......   117
Mary Lee Warren, Deputy Assistant Attorney General, Criminal 
  Division, U.S. Department of Justice, Washington, DC...........   120

                      Alphabical List of Witnesses

Bermudez, Jorge A.:
    Testimony....................................................    75
    Prepared statement with attachments..........................   180
Blum, Jack A.:
    Testimony....................................................    57
    Prepared statement...........................................   162
Christie, James C.:
    Testimony....................................................    22
    Prepared statement...........................................   143
Evans, Robb:
    Testimony....................................................    62
    Prepared statement...........................................   172
Fedrigotti, Carlos:
    Testimony....................................................    78
    Prepared statement...........................................   223
Jacques, Arthur O.:
    Testimony....................................................   105
    Prepared statement with attachments..........................   241
Lopez, Martin:
    Testimony....................................................    80
    Prepared statement...........................................   233
Mathewson, John M.:
    Testimony....................................................    10
    Prepared statement...........................................   139
Myers, Joseph M.:
    Testimony....................................................   117
    Prepared statement...........................................   250
Vitale, Anne:
    Testimony....................................................    60
    Prepared statement...........................................   168
Warren, Mary Lee:
    Testimony....................................................   120
    Prepared statement...........................................   256
Weisbrod, David A.:
    Testimony....................................................    27
    Prepared statement...........................................   156

                                Appendix

``Correspondent Banking: A Gateway to Money Laundering,'' report 
  by the Minority Staff Report of the Permanent Subcommittee on 
  Investigations (see contents for report on page 274)...........   273

                                Exhibits

* May be found in the files of the Subcommittee
                                                                   Page

 1. Diagrams on correspondent banking...........................   692
 2. American International Bank marketing documents.............   694
 3. Three nested banks at American International Bank...........   697
 4. Bank of America call memo on American International Bank....   698
 5. American International Bank's correspondent account history.   699
 6. Internet gambling advertisement naming Bank of America......   700
 7. Fortuna Alliance deposits into Swiss American Bank account 
  at Chase Manhattan.............................................   702
 8. Chase Manhattan Bank e-mail of 9/10/99 concerning Swiss 
  American/Antigua Bank..........................................   703
 9. Chase Manhattan Bank e-mail of 8/5/98 regarding Swiss 
  American Bank..................................................   706
10. Chase Manhattan Bank memo of 11/17/98 regarding Swiss 
  American Bank..................................................   707
11. Frauds through Swiss American Bank/Swiss American National 
  Bank...........................................................   708
12. Chase Manhattan Bank e-mail of 12/6/99 regarding Swiss 
  American Bank..................................................   709
13. Internet gambling advertisements naming Chase Manhattan Bank   710
14. Chase Manhattan Bank e-mail of 3/19/93 regarding Swiss 
  American Bank..................................................   718
15. Citibank summary of M.A. Bank seizure.......................   719
16. Letter of 9/29/00 from Citibank counsel to the Permanent 
  Subcommittee on Investigations regarding M.A. Bank.............   721
17. Seizure Warrant of 5/14/98 regarding M.A. Bank..............   725
18. Subpoena to Citibank New York dated 5/18/98 regarding M.A. 
  Casa de Cambio.................................................   727
19. Example of an M.A. Bank withdrawal slip.....................   731
20. Citibank e-mail of 12/3/99 regarding anti-money laundering 
  procedures.....................................................   732
21. Letter of 9/29/00 from Citibank counsel to the Permanent 
  Subcommittee on Investigations regarding correspondent banking 
  policy.........................................................   734
22. Report of Citigroup Anti-Money Laundering Unit..............   740
23. Schedule of wire transfers through Citibank New York and 
  American Exchange Company......................................   742
24. Monthly statements of Citibank New York correspondent 
  accounts for Banco Republica, American Exchange Company, and 
  Federal Bank...................................................   743
25. Ownership diagram of Grupo Moneta...........................   749
26. Excerpts from Citibank documents regarding relationship with 
  Grupo Moneta...................................................   751
27. Citibank and Central Bank of Argentina documents regarding 
  the anti-money laundering program of Federal Bank..............   752
28. Excerpt from Resolution No. 395/96 of the Central Bank of 
  Argentina......................................................   754
29. Excerpt from Citibank memo regarding ownership of Federal 
  Bank...........................................................   756
30. Citibank account opening steps..............................   757
31. Excerpts regarding Citibank's policy on opening accounts for 
  offshore shell banks...........................................   758
32. Series of letters exchanged between the Central Bank of 
  Argentina and Citibank Argentina regarding ownership of Federal 
  Bank...........................................................   760
33. British Trade and Commerce Bank certificates of deposit.....   782
34. British Trade and Commerce Bank documents...................   784
35. Internet advertisements for offshore shell banks............   789
36. Treasury Regulations on Suspicious Activity Reports.........   804
37. 1997 Citibank memo regarding Grupo Moneta...................   805
38. Bank of America and Chase Manhattan Bank comments on Swiss 
  American Bank..................................................   807
39. Chase Manhattan Bank e-mail of 10/12/95 regarding Swiss 
  American Bank..................................................   809
40. Chase Manhattan Bank call memo of 1/23/96 regarding AIB.....   810
41. Chase Manhattan Bank e-mail of 9/9/99 regarding Swiss 
  American Bank..................................................   812
42. Bank of America call memo of 9/4/92 regarding Swiss American 
  Bank...........................................................   813
43. Letter of 3/12/97 from Chase Manhattan Bank to AIB regarding 
  account closing................................................   814
44. Chart entitled ``Gateway to U.S. Banks''....................   815
45. Summary of Gold Chance Fraud prepared by the Minority Staff 
  of the Permanent Subcommittee on Investigations, March 6, 2001.   816
46. Guardian Bank and Trust Visa Card produced by John Mathewson 
  at the March 1, 2001, Permanent Subcommittee on Investigations 
  hearing........................................................   823
47. Permanent Subcommittee on Investigations' staff rendition of 
  a chart entitled ``$3 Million Deposit of Gold Chance Funds 
  Depleted in Wire Transfers By British Trade & Commerce Bank to 
  33 Bank Accounts in 45 Days, December 1999-January 2000'' 
  included in the testimony of Arthur Jacques before the 
  Subcommittee on March 6, 2001..................................   824
48. Supplemental remarks of Jorge Bermudez......................   825
49. Supplemental remarks of Carlos Fedrigotti...................   827
50. Supplemental questions and answers of the U.S. Department of 
  Justice........................................................   829
51. Supplemental questions and answers of U.S. Department of the 
  Treasury.......................................................   855
52. Supplemental questions and answers of Citibank..............   863
53. Supplemental questions and answers of Bank of America.......   867
54. Supplemental questions and answers of J.P. Morgan Chase.....   868
55. Documents from foreign governments relevant to the Permanent 
  Subcommittee on Investigations staff report or hearings on 
  money laundering:
    a. Government of Antigua and Barbuda letter dated July 14, 
  2000...........................................................   871
    b. Jersey Financial Services Commission letter dated March 
  13, 2001.......................................................   874
    c. Guernsey Financial Services Commission letter dated March 
  15, 2001.......................................................   876
    d. Government of Anguilla Statement of Facts................   879
    e. Press articles on new shell bank prohibitions in the 
  Bahamas and Cayman Islands.....................................   883

                                Volume 2

56. Documents related to American International Bank, Caribbean 
  American Bank or Overseas Development Bank and Trust Company 
  (Case Studies No. 1-3):
    a. American International Bank general documents............   885
    b. Ford/Forum documents.....................................   950
    c. Mark Harris bank documents...............................   998
    d. Carribean American Bank documents........................  1024
    e. Bank of America documents................................  1196
    f. Toronto Dominion Bank (New York) documents...............  1225
    g. Chase Manhattan Bank documents...........................  1234
    h. Popular Bank of Florida (now BAC Florida Bank) documents.  1249
    i. Overseas Development Bank and Trust documents............  1297
    j. First National Bank of Commerce (now Bank One 
  Corporation) documents.........................................  1449
    k. AmTrade International Bank documents.....................  1481
57. Documents related to British Trade and Commerce Bank (Case 
  Study No. 4):
    a. British Trade and Commerce Bank (BTCB) general documents.  1493
    b. BTCB financial documents.................................  1604
    c. BTCB management and employee documents...................  1729

                                Volume 3

    d. BTCB high yield investment program documents.............  1823
    e. Internet gambling documents..............................  1842
    f. Banco Industrial de Venezuela documents..................  1908
    g. Security Bank documents..................................  1989
    h. First Union National Bank documents......................  2027
    i. Koop fraud documents.....................................  2099
    j. Cook fraud documents.....................................  2238
    k. Gold Chance fraud documents..............................  2287
    l. $10 million CD interpleader documents....................  2484
   m. Miscellaneous documents relating to BTCB:
         1. KPJ Trust/Tiong documents...........................  2621
         2. Brett/Bailett documents.............................  2670
         3. Vector Medical Technology documents.................  2682
    n. Permanent Subcommittee on Investigation Deposition of 
  John G. Long IV, February 26, 2001.............................     *
    o. SEALED EXHIBIT: Suspicious Activity Reports..............     *

                                Volume 4

58. Documents related to Hanover Bank (Case Study No. 5):
    a. Hanover Bank general documents...........................  2789
    b. Harris Bank International and Standard Bank Jersey Ltd. 
  documents......................................................  2857
    c. Clerical Medical documents...............................  2907
    d. Eric Rawle Samuel documents..............................  2919
    e. Koop fraud documents.....................................  2943
    f. Casio Computer fraud documents...........................  2984
    g. FSA investigation documents..............................  3016
    h. Unanswered information request to Richard O'Dell Poulden.  3043
59. Documents related to British Bank of Latin America (Case 
  Study No. 6):
    a. British Bank of Latin America general documents..........  3049
    b. Bank of New York documents...............................  3100
    c. 1999 and 2000 National Money Laundering Strategy excerpts  3127
    d. Operation Casablanca and Operation Juno documents........  3138
    e. SEALED EXHIBIT: Proprietary information on British Bank 
  of Latin America...............................................     *
60. Documents related to European Bank (Case Study No. 7):
    a. European Bank general documents..........................  3182
    b. Citibank documents.......................................  3219
    c. Taves fraud documents....................................  3319
    d. Benford account documents................................  3435
    e. Internet Processing Corp. account documents..............  3627
    f. Nest Bank documents......................................  3682

                                Volume 5

61. Documents related to Swiss American Bank and Swiss American 
  National Bank (Case Study No. 8):
    a. Swiss American Bank and Swiss American National Bank 
  general documents..............................................  3703
    b. Bank Ownership...........................................  3715
    c. Bank Leadership..........................................  3735
    d. Fitzgerald case documents................................  3814
    e. Gherman fraud documents..................................  3931
    f. Debella fraud documents..................................  3957
    g. Fortuna Alliance fraud documents.........................  4035
    h. Documents related to other frauds or questionable 
  accounts.......................................................  4083
    i. Bank of New York documents...............................  4122
    j. Bank of America documents................................  4175
    k. Chase Manhattan Bank documents...........................  4222
    l. InterSafe Global documents...............................  4269
   m. Documents related to Peter Herrington.....................  4282
62. Documents related to M.A. Bank (Case Study No. 9):
    a. M.A. Bank general documents..............................  4391
    b. Permanent Subcommittee on Investigations correspondence 
  with M.A. Bank representatives.................................  4411
    c. Permanent Subcommittee on Investigations correspondence 
  with M.A. Bank agents in Uruguay...............................  4422
    d. Court filings and U.S. Department of Justice 
  correspondence.................................................  4434
    e. M.A. Bank documents related to Mr. DiTullio..............  4474
    f. U.S. Customs records of interviews.......................  4477
    g. Permanent Subcommittee on Investigations correspondence 
  with Citibank..................................................  4501
    h. Citibank documents related to M.A. Bank..................  4504
63. Documents related to Federal Bank (Case Study No. 10):
    a. Central Bank of the Bahamas documents....................  4585
    b. CEI related documents....................................  4617
    c. Account opening and closing documents....................  4629
    d. Resolution No. 395 of the Central Bank of Argentina......  4647
    e. Analyses of Banco Republica, Federal Bank and other Grupo 
  Moneta entities in Citibank files..............................  4665
    f. Excerpts from the audits of Banco Republica by the 
  Central Bank of Argentina......................................  4793
64. Koop Fraud documents related to Overseas Development Bank 
  and Trust, British Trade and Commerce Bank, and Hanover Bank...  4835

 
  ROLE OF U.S. CORRESPONDENT BANKING IN INTERNATIONAL MONEY LAUNDERING

                              ----------                              


                        THURSDAY, MARCH 1, 2001

                                       U.S. Senate,
                Permanent Subcommittee on Investigations,  
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:34 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Susan M. 
Collins, Chairman of the Subcommittee, presiding.
    Present: Senators Collins, Levin, and Carnahan.
    Staff Present: Christopher A. Ford, Chief Counsel and Staff 
Director; Mary D. Robertson, Chief Clerk; Rena Johnson, Deputy 
Chief Counsel; Frank Fountain, Senior Counsel; Eileen Fisher, 
Investigator; Claire Barnard, Detailee/HHS; Linda Gustitus, 
Democratic Staff Director and Chief Counsel; Elise Bean, 
Democratic Deputy Chief Counsel; Bob Roach, Democratic Counsel; 
Laura Stuber, Democratic Counsel; Ken Saccoccia, Congressional 
Fellow; Anne Fisher and Judy White (Senator Cochran); Kathleen 
Long (Senator Levin); Marianne Upton and Karla Mitchell 
(Senator Durbin); and Sandy Fried (Senator Carnahan).

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. The Subcommittee will come to order. Good 
morning.
    During the next few days, the Permanent Subcommittee on 
Investigations will examine the complex world of correspondent 
banking and the extent to which the international correspondent 
banking system can involve U.S. banks in money laundering, 
allowing criminals to exploit our financial system. These 
hearings, initiated by the Subcommittee's Ranking Minority 
Member Senator Levin, are the culmination of a lengthy 
investigation into correspondent banking by his staff and 
represent the second phase of the Subcommittee's examination of 
money laundering and its effect on our financial system.
    Correspondent banking is the means by which one bank, the 
correspondent bank, provides financial services to another 
bank, often referred to as the respondent bank. Typically, the 
respondent bank has no physical presence in the jurisdiction in 
which it maintains a correspondent account. Correspondent 
banking thus enables the respondent bank to provide services to 
its customers that otherwise would be unavailable because of 
geographic limitations.
    Correspondent banking is an integral part of the domestic 
and international banking systems. Without correspondent 
banking, in fact, it would often be impossible for banks to 
provide comprehensive nationwide and international banking 
services--among them, the vital capacity to transfer money by 
wire with amazing speed and accuracy across international 
boundaries. U.S. banks maintain thousands of correspondent 
relationships, through which billions of dollars move every 
day.
    American banks provide some correspondent clients with fee-
based products only, such as currency exchange services, 
interest-bearing and demand-deposit accounts, and wire 
transfers to investment services. For other clients, U.S. banks 
also offer credit-related products, such as loans, credit 
extensions, and lines of credit. This distinction between the 
provision of fee-based products and service-based products is 
significant because the Minority investigation has shown that 
some U.S. banks conducted more due diligence when evaluating 
potential correspondent banking clients for credit 
relationships--in other words, when their own finances were at 
stake--than when only fee-based services were at issue.
    Not surprisingly, money launderers have capitalized on this 
relative lack of scrutiny for non-credit relationships. They 
too often can fly under the radar of the U.S. banks. In other 
words, money launderers gamble that the banks will not notice--
or perhaps not scrutinize--the source of funds flowing through 
their correspondent accounts.
    The Subcommittee investigation has shown that, in some 
instances, the gamble has paid off. Through such accounts, the 
perpetrators of criminal schemes have succeeded in moving their 
ill-gotten gains around the world ahead of law enforcement 
officials, in many cases ultimately returning these funds to 
the United States in a laundered form that they can enjoy with 
impunity.
    Regrettably, the source of these monies was often 
fraudulent schemes perpetrated by Americans against Americans. 
For example, Melvin Ford of Maryland was the central figure in 
the Forum, which appears to be a Ponzi-type investment scheme. 
Ford targeted low- and middle-income African Americans who 
attended his seminars and rallies, promising them 
extraordinarily high returns for their investment. The Forum 
established a relationship with American International Bank in 
1993 and accounted for perhaps as many as 6,000 of American 
International Bank's 8,000 customers. By 1997, in fact, more 
than half of American International Bank's $110 million in 
assets were attributable to the Forum and its investors.
    The Subcommittee's investigation has established that three 
types of foreign banks are particularly high risk, that is, 
prime candidates to harbor the funds of money launderers. They 
are: First, ``shell'' banks; second, offshore banks; and, 
third, banks in jurisdictions with strong bank secrecy and weak 
anti-money laundering laws. ``Shell'' banks do not maintain a 
physical presence anywhere, which makes it very difficult for 
the licensing jurisdiction to regulate them.
    Offshore banks are not able to conduct business with the 
residents of their licensing jurisdiction. Because they have no 
effect upon local citizens, and because they are often 
lucrative profit centers for the licensing jurisdiction, local 
government regulators often have very little incentive to 
engage in serious oversight.
    The third category of high-risk foreign banks consists of 
banks in jurisdictions that simply have weak anti-money 
laundering laws. The lax regulatory environment obviously 
attracts those who wish to launder money. U.S. banks that rely 
upon local regulators in such cases to police respondent banks 
hang their hopes only upon a shadow.
    The investigation revealed troubling gaps in U.S. banks' 
oversight of their correspondent relationships with these three 
types of banks. Moreover, labyrinthine banking relationships 
can also make due diligence more difficult. In several cases, 
U.S. banks were actually surprised to learn that they were 
conducting transactions for foreign banks with whom they had no 
direct correspondent account. These foreign banks had 
established correspondent accounts at other foreign banks, 
which in turn maintained correspondent accounts at the U.S. 
institutions.
    Given the intricate nature of the schemes that criminals 
use to launder money, there are obviously some practical 
limitations upon the intensity of scrutiny that U.S. banks can 
give to the customers of their correspondent banking clients, 
or to any particular link in the chain of ``nested'' 
correspondent accounts. A requirement that U.S. banks 
thoroughly investigate the business dealings of each and every 
customer of a correspondent banking client--in other words, 
their customers' customers--might well provide burdensome and 
impractical, doing more harm to the financial industry than 
good in preventing money laundering.
    Nevertheless, the investigation's case studies make it 
equally apparent that U.S. banks must do a better job, first, 
of initially screening correspondent banking clients and then 
of monitoring these clients' accounts once they are opened. For 
example, some U.S. banks neglected to verify that their 
correspondent banking customers had effective anti-money 
laundering procedures in place at the time that they opened 
correspondent accounts. Moreover, U.S. banks have sometimes 
been far too slow to react to information they receive from 
government officials and from the media about suspicious 
activity by their correspondent banking customers. There is 
clearly much room for improvement here.
    I see the goals of these hearings as twofold: First, a 
careful examination of the case studies of those who have 
successfully manipulated the correspondent banking system to 
launder money should shed some light on how these schemes have 
worked and point out some weaknesses in current anti-money 
laundering procedures and protections. These disclosures should 
make it possible for U.S. banks to better understand and act 
upon the warning signs of money laundering in correspondent 
banking, helping to prevent such abuses in the future.
    Second, we must consider whether both banks and regulators 
have the tools they need to prevent money laundering through 
correspondent banking. I want to emphasize that the banking 
industry has made great strides in its efforts to stem money 
laundering. For example, the Office of the Comptroller of the 
Currency has noted that banks have generally complied 
successfully with their obligations under the Bank Secrecy Act 
to implement good currency transaction reporting programs. 
Nevertheless, gaps in oversight clearly still occur, and they 
are serious ones. One way of preventing such gaps is for the 
banking community to work more closely with the regulators and 
law enforcement officials to exchange information.
    I look forward to hearing the testimony of our witnesses 
today and in the subsequent 2 days of hearings.
    At this time I would like to recognize the distinguished 
Ranking Minority Member of the Subcommittee, Senator Levin, for 
his opening statement, but before I do so, I first want to 
thank him and his staff for their extraordinary and extensive 
work on this very complex investigation.
    Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Thank you very much, Madam Chairman, for 
calling these hearings, for convening them, and for your very 
kind remarks.
    Today we are going to be taking an insider's look at how 
U.S. banks are being used by rogue and high-risk foreign banks 
and their criminal clients to launder the proceeds of crimes 
such as drug trafficking, financial fraud, Internet gambling, 
and tax evasion.
    Now, what does it mean to launder money? It means that you 
take the dirty money that you get from selling drugs or 
accepting a bribe or defrauding someone and you move it through 
bank accounts or businesses in order to lose any link between 
the money and its source. And then you can spend that money 
without anyone asking any questions. One way you can do that is 
to move the money through correspondent bank accounts at U.S. 
banks.
    The U.S. banking system is one of the premier banking 
systems in the world. It is also one of the safest and 
soundest. Our strong regulatory environment helps to ensure 
that. And our dollar is the strongest currency in the world, 
which is one of the reasons why U.S. banks are so attractive.
    So if criminals can move their money through U.S. banks, 
they can not only disguise their money but they can also 
acquire the prestige of the U.S banking system and the services 
that banking system provides.
    Here is a rather simple chart that shows how the proceeds 
from criminal activity and corruption can make its way into 
U.S. banks.\1\ Ordinarily, the dirty money from criminal 
activity cannot get into a U.S. bank directly. It cannot go 
directly down to a U.S. bank, as shown on the right-hand side 
of that chart. That is because U.S. banks have to report cash 
transactions over $10,000, and they keep watch on the 
activities of their individual banking clients. But that same 
money can get into the same U.S. bank, by using an offshore 
bank that has a correspondent account at the U.S. bank. In 
other words, instead of going directly into the bank, which it 
is frustrated from doing by our regulatory apparatus, if it can 
move to an offshore bank and then use that offshore bank's 
account at the U.S. bank, it can accomplish very simply what it 
cannot do directly. That is what has happened over and over and 
over again in the high-risk foreign banks investigated by my 
staff.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 44 that appears in the Appendix on page 814.
---------------------------------------------------------------------------
    For most Americans, a bank conjures up positive images of 
respectability and sound fiscal management. We picture a well-
maintained building, a trained staff, a prudent bank president, 
all operating under regulations that ensure the bank's safe, 
sound and lawful operation. But not all banks fit that image. 
Some banks in the world are quite the opposite. They operate 
without controls, without regulatory oversight, and even 
without physical offices or trained staff. Some of these high-
risk foreign banks are themselves engaged in criminal behavior, 
such as financial frauds; some have clients who are engaged in 
criminal behavior, such as drug trafficking and political 
corruption; and some have such poor anti-money laundering 
controls that they don't know--and some don't care--whether or 
not their clients are engaged in criminal behavior.
    One might suppose that those kinds of foreign banks would 
be unable to open accounts at U.S. banks, that U.S. banks would 
recognize them as posing such high money laundering risks that 
they would not give them entry into the U.S. financial system. 
But you would be wrong.
    A year-long investigation by my Subcommittee staff has 
found that high-risk foreign banks have been able to open 
accounts at U.S. banks, and some of these U.S. accounts have 
become conduits for criminal proceeds. When one bank opens an 
account for and provides banking services to another bank, it 
is called correspondent banking. The bank that provides the 
banking services is called the correspondent bank. The client 
that uses the services is called the respondent bank. 
Correspondent banking is essential to the movement of money 
around the world for international trade and commerce. But 
because many U.S. banks have failed to adequately screen and 
monitor foreign banks which open accounts, correspondent 
banking has also become a gateway to the U.S. financial system 
for criminals and money launderers.
    Based on its work over the past year, the staff 
investigation identified three categories of foreign banks that 
pose high money laundering risks, as outlined by the Chairman: 
Shell banks, offshore banks, and banks in foreign jurisdictions 
that do not cooperate with international anti-money laundering 
efforts.
    ``Shell bank,'' as we use that term, means a bank that does 
not have a fixed physical presence in any country. It is a bank 
that does not have a physical office where customers go to 
conduct banking transactions or where regulators can go to 
inspect records and observe bank operations. Instead, these 
shell banks enjoy a shadowy existence, operating out of the 
offices of a related company, or from an undisclosed location 
that may be hinted at but never named. We found one shell bank 
that was operated out of the owner's home.
    Due to their lack of visibility and presence, these shell 
banks have largely evaded the public spotlight, and U.S. banks 
opening accounts for them appear too often not to care how they 
operate.
    The staff conducted an in-depth investigation of four shell 
banks: Caribbean American Bank, Federal Bank, Hanover Bank, and 
M.A. Bank. In all four cases, the investigation found the shell 
bank to be operating far outside the parameters of normal 
banking practice, without basic administrative controls, and 
without anti-money laundering safeguards. The investigation 
found that the banks had avoided regulatory oversight both in 
their licensing jurisdiction and in the countries where they 
conducted transactions. All four shell banks used accounts at 
U.S. banks to move millions of dollars in suspect funds across 
international lines, funds associated with drug trafficking, 
financial fraud, bribe money, or other misconduct.
    Offshore banks are banks whose licenses bar them from 
transacting banking activities with the citizens of their own 
home jurisdiction, but empower them to transact business 
``offshore'' with the citizens of other countries. In other 
words, the countries that create these banks protect their own 
citizens from them, but unleash them on the rest of the 
international community. One might ask why any U.S. bank would 
want to do business with a bank which is not allowed to 
transact business in its home jurisdiction, but they do. Major 
U.S. banks have opened accounts for hundreds, if not thousands, 
of offshore banks.
    About 4,000 offshore banks now hold licenses from about 60 
countries around the world and control almost $5 trillion in 
assets. About half of these offshore banks are thought to be 
located in the Caribbean and Latin America, with the rest in 
Europe, Asia, Africa, and the Middle East. The offshore banking 
sector continues to grow, even as the international outcry over 
their association with crime and corruption is also increasing.
    One reason that offshore banks pose high money laundering 
risks is that the country licensing the bank has less incentive 
to police it, since that bank is barred from doing business 
with the country's own citizenry. Another reason is that 
offshore banking is a money-making enterprise for the 
governments of small countries which license them, and the less 
demands made by the government on bank owners, the more 
attractive the country becomes as a licensing locale. Offshore 
banks often rely on these disincentives to minimize regulatory 
oversight of their operations, increasing the risk that some 
will become vehicles for money laundering, tax evasion, or 
other crimes.
    The third category of high-risk foreign banks are banks 
that are licensed by jurisdictions that do not cooperate with 
international anti-money laundering efforts. In June of 2000, 
the Financial Action Task Force on Money Laundering, which is 
the leading international body fighting money laundering, 
issued a list of 15 countries determined to be non-cooperative 
with international anti-money laundering efforts. Together, 
these 15 jurisdictions have licensed hundreds and perhaps 
thousands of banks, all of which introduce money laundering 
risks into international correspondent banking. In July of 
2000, U.S. banking regulators issued advisories warning U.S. 
banks against doing business with banks in the listed 
jurisdictions. But if you thought that these advisories caused 
U.S. banks to stop doing business with those banks, think 
again.
    Now, why do U.S. banks open correspondent accounts for 
these high-risk banks? For some banks, correspondent accounts 
are easy money. When a U.S. bank isn't extending credit, 
correspondent accounts carry no monetary risk to the U.S. bank, 
they provide income through the fees charged for the services 
rendered, and the attitude has been that ``a bank is a bank is 
a bank.'' We know, though, that that is not true. Some U.S. 
banks are apparently unaware of the money laundering involved; 
others seem to assume their systems will catch specific 
problems. But too often U.S. banks have failed to conduct the 
initial and ongoing due diligence which is needed to get a 
clear picture of the foreign banks using their services. And 
when negative press reports or information regarding suspicious 
activity did come to the attention of U.S. banks, in too many 
cases the information did not result in a serious review of the 
foreign banks involved or in concrete actions to prevent money 
laundering.
    The result is that U.S. banks, through their correspondent 
account services, become aiders and abetters, unwittingly--but 
aiders and abetters, nonetheless--of laundering the proceeds of 
drug trafficking or financial fraud or tax evasion or Internet 
gambling or other illegal acts. We cannot spend billions of 
taxpayer dollars to interdict drugs and eradicate coca farms 
and at the same time let drug lords deposit illegal drug 
profits in foreign banks with U.S. correspondent accounts. We 
cannot be consistent and are not consistent if we condemn 
corruption in foreign business practices and make illegal the 
payment of bribes by our businesses to foreign government 
officials, and then let bribe money be deposited in U.S. bank 
accounts earning interest.
    We cannot fight for human rights in all parts of the globe 
and then let corrupt public officials from other countries 
steal from their own people and place corrupt funds in U.S. 
bank accounts to enjoy the safety and soundness of the U.S. 
banking system. Money laundering not only finances crime, it 
pollutes international banking systems, it impedes the 
international fight against corruption, it distorts economies, 
and it undermines honest government.
    The Subcommittee is devoting 3 days of hearings to the 
money laundering problems posed by high-risk foreign banks' 
opening correspondent accounts at U.S. banks. Again, I want to 
thank our Subcommittee Chairman, Senator Collins, for her 
support of this investigation and for allocating these 3 days 
of hearings to this subject.
    Today we are going to look at how high-risk banks work and 
how U.S. banks respond to them. Tomorrow's hearing will focus 
on the special problems posed by foreign offshore shell banks. 
And the third day of hearings, next Tuesday, will focus on what 
can and should be done to strengthen anti-money laundering 
safeguards in U.S. correspondent banking. Based on the 
testimony and recommendations received, I will be introducing 
legislation in the near future to try to strengthen U.S. law in 
this area in order to close the net around criminals using 
accounts of high-risk foreign banks in U.S. banks to launder 
money.
    Today we are going to hear first from a U.S. citizen, John 
Mathewson, who used to own and manage an offshore bank in the 
Caribbean called Guardian Bank and Trust. After 10 years at the 
bank, Mr. Mathewson was arrested in the United States for tax 
evasion and money laundering. He pled guilty to charges and 
agreed to cooperate with U.S. law enforcement. One action which 
he took, which was the first and so far the only time that I 
know of in U.S. law enforcement history that it has happened, 
Mr. Mathewson turned over a year's worth of offshore banking 
records for inspection and review. These records not only 
provided invaluable information about how an offshore bank 
operates, but has also enabled U.S. law enforcement to initiate 
prosecutions of numerous of his bank's clients for tax evasion 
and other misconduct. Mr. Mathewson has since provided valuable 
testimony in many of these prosecutions, and today he will 
provide testimony about how an offshore bank and its clients 
have used U.S. bank accounts to launder funds. He will also 
explain how dependent offshore banks are on other banks to 
conduct their operations and how U.S. banks hold tremendous 
power in their hands to decide which offshore banks will gain 
access to the U.S. banking system.
    We will then hear from two U.S. banks, Bank of America and 
Chase Manhattan Bank, that opened correspondent accounts for 
offshore banks. One case involves American International Bank, 
an offshore bank that was able to open accounts at these as 
well as other U.S. banks, despite having a bad local 
reputation, its own correspondent accounts for rogue banks, and 
increasing evidence that the bank's accounts held suspect funds 
related to major financial frauds. Another offshore bank, Swiss 
American Bank, opened accounts at both banks as well. It 
maintained these accounts for years, despite mounting evidence 
that the Swiss American Bank's accounts were repositories for 
funds associated with financial frauds or Internet gambling or 
other illicit activities. In the face of repeated evidence of 
questionable activities, our U.S. banks kept open the Swiss 
American Bank accounts, and today we are going to find out how 
that could happen.
    Last year, U.S. taxpayers spent $600 million in the fight 
against money laundering. U.S. banks are required by law to 
join in this fight by operating anti-money laundering programs 
designed to detect and stop criminals from washing their dirty 
money through U.S. banks. We cannot condemn jurisdictions with 
weak anti-money laundering controls, weak banking oversight, 
and unregulated offshore sectors, and then tolerate U.S. banks 
doing business with the very banks that those jurisdictions 
license and unleash on the world.
    Since the report was issued last month, we have already 
seen some results. With respect to the high-risk foreign banks 
that were the subject of the case histories, the governments of 
Antigua-Barbuda, the Bahamas, and Dominica have revoked or 
suspended the license of four of the banks. The Cayman Islands 
also announced that by the end of this year, all of its 
offshore banks that are not branches or units of other banks, 
of which there are 62, will have to enhance their physical 
presence on the island by opening an office with bank records 
and a resident manager. In the United States, the New York 
Clearing House Association, which is composed of a dozen of the 
largest correspondent banks in the United States, has announced 
its intention to develop a code of best practices for the 
industry. And we have also been told by banks like Chase 
Manhattan that they have begun top-to-bottom reviews of their 
correspondent accounts. These are encouraging signs, although 
obviously much more must be done.
    Our banks, our U.S. banks, are the gatekeepers through 
which foreign banks and their clients have to pass to get 
access to U.S. dollars; U.S. banking services such as wire 
transfers, investments, and credit; and the U.S. banking 
system, which is surely one of the best in the world. When it 
comes to high-risk foreign banks, U.S. banks have too often not 
lived up to that gatekeeping role. They need to do a better job 
in screening and monitoring the high-risk foreign banks that 
want access to our banking system. Only then will we end the 
money laundering activities and help to ensure that crime 
doesn't pay.
    Thank you.
    Senator Collins. Senator Carnahan, I want to welcome you as 
a new Member of the Subcommittee, and I would call upon you for 
any opening comments that you might have.

             OPENING STATEMENT OF SENATOR CARNAHAN

    Senator Carnahan. Thank you, Senator Collins. I commend you 
for calling this hearing, and I look forward to working with 
you in the days ahead on future investigative hearings.
    Senator Levin, I would like to thank you for your 
leadership on this investigation and in developing this very 
valuable report.
    I am greatly concerned about this issue. I think the 
average American would be shocked to learn how easy it is for 
drug dealers and scam artists to launder money or evade taxes. 
And as a result, we are spending a tremendous amount of money 
dealing with the consequences of this illicit activity. I am 
pleased that Senator Levin and the Subcommittee have exposed 
this problem and made recommendations on how to prevent this 
fraud and abuse on American consumers.
    Thank you.
    Senator Collins. Thank you.
    We will be using our timing system today. Each witness will 
be asked to limit their oral testimony to 10 minutes. Your 
entire written testimony will be submitted in the record. There 
is a timing system that we use. When the red light comes on, 
you have about 1 minute to conclude your comments. We will also 
be doing rounds of questioning that will be 10 minutes in 
length also.
    Without objection, I am going to make all of the exhibits 
that are used today part of the hearing record.
    I would now like to introduce our first witness this 
morning. He is John Mathewson, who formerly owned Guardian Bank 
in the Cayman Islands. Mr. Mathewson's testimony will provide 
insider knowledge regarding how an offshore bank can use the 
products and services available through its correspondent 
accounts to conceal the proceeds of crime. Mr. Mathewson will 
be accompanied this morning by his attorney, Oscar Gonzalez.
    Pursuant to Rule VI, all witnesses who testify before the 
Subcommittee are required to be sworn. At this time I would ask 
that the witness please stand and raise his right hand. Do you 
swear that the testimony you are about to give to the 
Subcommittee will be the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Mr. Mathewson. I do.
    Senator Collins. Mr. Mathewson, you may proceed with your 
statement.

  TESTIMONY OF JOHN M. MATHEWSON,\1\ FORMER OWNER OF GUARDIAN 
BANK AND TRUST (CAYMAN) LTD., ACCOMPANIED BY OSCAR C. GONZALEZ, 
                              ESQ.

    Mr. Mathewson. First, I would like to express my 
appreciation and surprise at the amount of knowledge both 
Senator Collins and Senator Levin have elicited in their 
opening statements. And, also, I should address Senator 
Collins, Senator Levin, Senator Carnahan, distinguished 
persons. Having spent more than 10 years in the offshore 
industry, it is surprising to hear a couple of Americans who 
have accumulated the knowledge that the two of you have 
accumulated for purposes of protecting the United States from 
offshore banking.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Mathewson appears in the Appendix 
on page 139.
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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         BALANCE
----------------------------------------------------------------------------------------------------------------
June 1998                                                  $0      $7,531,481         $2,843,531      $4,702,514
----------------------------------------------------------------------------------------------------------------
July 1998                                          $4,702,514      $1,959,222         $4,311,023      $2,349,448
----------------------------------------------------------------------------------------------------------------
August 1998                                        $2,349,448      $2,706,444         $4,076,552        $983,035
----------------------------------------------------------------------------------------------------------------
September 1998                                       $983,035      $3,503,107         $1,362,231      $3,128,526
----------------------------------------------------------------------------------------------------------------
October 1998                                       $3,128,526      $9,104,555  \178\ $11,525,055        $199,781
----------------------------------------------------------------------------------------------------------------
November 1998                                        $199,781      $2,471,456         $1,142,509      $1,513,716
----------------------------------------------------------------------------------------------------------------
December 1998                                      $1,513,716      $1,256,985         $2,436,698        $334,430
----------------------------------------------------------------------------------------------------------------
January 1999                                         $334,430        $932,660         $1,075,860        $139,939
----------------------------------------------------------------------------------------------------------------
February 1999                                        $139,939      $3,927,591         $3,346,225        $722,161
----------------------------------------------------------------------------------------------------------------
March 1999                                           $722,161        $740,980         $1,914,233         $41,262
----------------------------------------------------------------------------------------------------------------
April 1999                                            $41,262      $1,776,821           $698,192      $1,119,728
----------------------------------------------------------------------------------------------------------------
May 1999                                           $1,119,728        $543,072                 $0      $1,726,521
----------------------------------------------------------------------------------------------------------------
June 1999                                          $1,726,521      $1,346,212   \179\ $2,603,353        $447,978
----------------------------------------------------------------------------------------------------------------
July 1999                                            $447,978        $943,969           $885,209        $485,338
----------------------------------------------------------------------------------------------------------------
August 1999                                          $485,338      $1,276,015         $1,497,505        $275,793
----------------------------------------------------------------------------------------------------------------
September 1999                                       $275,793      $1,591,406         $1,764,662        $100,866
----------------------------------------------------------------------------------------------------------------
October 1999                                         $100,866      $1,233,542           $718,733        $617,388
----------------------------------------------------------------------------------------------------------------
November 1999                                        $617,388      $1,175,632         $1,326,191        $236,179
----------------------------------------------------------------------------------------------------------------
December 1999                                        $236,179      $2,285,069         $1,907,943        $387,808
----------------------------------------------------------------------------------------------------------------
January 2000                                         $387,808      $1,546,739         $1,460,796        $464,204
----------------------------------------------------------------------------------------------------------------
February 2000                                        $464,204      $1,679,586   \180\ $2,187,400        $103,244
----------------------------------------------------------------------------------------------------------------
March 2000                                           $103,244      $1,333,168         $1,439,092          $4,944
----------------------------------------------------------------------------------------------------------------
TOTAL:                                                            $50,865,712        $49,310,114
----------------------------------------------------------------------------------------------------------------
Prepared by U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, November 2000.
 
\177\ Records were subpoenaed from June 1998 to March 2000. The account remained open until July 2000.
\178\ Includes $6 million withdrawal from Supernow Account-02.
\179\ Includes $1 million withdrawal from Supernow Account-02.
\180\ Includes $200,000 withdrawal from Supernow Account-02.


                                  BTCB MONTHLY ACCOUNT ACTIVITY AT FIRST UNION
                                          September 1998-February 2000
----------------------------------------------------------------------------------------------------------------
                                                   OPENING                                            CLOSING
                    MONTH                          BALANCE     DEPOSITS \181\  WITHDRAWALS \182\      BALANCE
----------------------------------------------------------------------------------------------------------------
September 1998                                             $0         $10,000                 $0          $9,912
----------------------------------------------------------------------------------------------------------------
October 1998                                           $9,912              $0                 $0          $9,941
----------------------------------------------------------------------------------------------------------------
November 1998                                          $9,941        $190,000                 $0        $200,185
----------------------------------------------------------------------------------------------------------------
December 1998                                        $200,185         $52,041                 $0        $252,862
----------------------------------------------------------------------------------------------------------------
January 1999                                         $252,862        $109,441           $175,000        $187,804
----------------------------------------------------------------------------------------------------------------
February 1999                                        $187,804        $278,980                 $0        $467,449
----------------------------------------------------------------------------------------------------------------
March 1999                                           $467,449          $9,500           $462,000         $15,941
----------------------------------------------------------------------------------------------------------------
April 1999                                            $15,941      $6,250,445         $3,929,780      $2,336,908
----------------------------------------------------------------------------------------------------------------
May 1999                                           $2,336,908         $40,000         $1,755,818        $617,476
----------------------------------------------------------------------------------------------------------------
June 1999                                            $617,476      $3,131,007         $1,665,228      $2,070,975
----------------------------------------------------------------------------------------------------------------
July 1999                                          $2,070,975         $94,055         $2,162,187          $3,502
----------------------------------------------------------------------------------------------------------------
August 1999                                            $3,502      $2,367,820           $732,900      $1,642,611
----------------------------------------------------------------------------------------------------------------
September 1999                                     $1,642,611        $226,263         $1,837,721         $32,068
----------------------------------------------------------------------------------------------------------------
October 1999                                          $32,068      $1,363,509           $806,375        $589,525
----------------------------------------------------------------------------------------------------------------
November 1999                                        $589,525        $289,243           $804,275         $74,951
----------------------------------------------------------------------------------------------------------------
December 1999                                         $74,951      $3,986,184         $3,051,363      $1,011,538
----------------------------------------------------------------------------------------------------------------
January 2000                                       $1,011,538          $2,655         $1,014,175            $211
----------------------------------------------------------------------------------------------------------------
February 2000                                            $211             $56               $229              $0
----------------------------------------------------------------------------------------------------------------
TOTAL:                                                            $18,401,199        $18,397,051
----------------------------------------------------------------------------------------------------------------
Prepared by U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, November 2000.
\181\ Does not include interest/dividend payments.
\182\ Does not include wire transfer or annual fees.


                                              BTCB RELATED ACCOUNTS
                                                 AT FIRST UNION
----------------------------------------------------------------------------------------------------------------
           ACCOUNT HOLDER             TYPE OF ACCOUNT     ACCOUNT NUMBER      ACCOUNT STATUS         REMARKS
----------------------------------------------------------------------------------------------------------------
British Trade & Commerce Bank        CAP                998-387-1373       Open 9/17/98-2/4/00  Key account
                                     BRK                17624265           Open 9/17/98-2/4/00  Never used
----------------------------------------------------------------------------------------------------------------
Banque Francaise Commerciale         DDA-corporate      209-000-140-8334   Open 5/15/96-now
                                     IIDA               200-009-067-1052   Open 8/28/98-5/17/
                                                                            99
                                     IIDA               200-009-060-0120   Open 5/14/99-now
----------------------------------------------------------------------------------------------------------------
FEC Financial Holdings Inc.          DDA-corporate      202-000-072-6184   Open 11/12/98-6/30/
                                                                            00
----------------------------------------------------------------------------------------------------------------
BTC Financial Services Inc.          DDA-corporate      200-000-282-1162   Open 11/2/99-now
----------------------------------------------------------------------------------------------------------------
Robert F. Garner Attorney At Law     DDA-corporate      202-000-035-7100   Open 1/30/98-now
----------------------------------------------------------------------------------------------------------------
Global/Vector Medical Technologies   DDA-corporate      209-000-294-6659   Open 9/30/98-11/01/
 Inc.                                                                       99
                                     CAP                998-324-6063       Open 1/6/99-now      Key account
                                     DDA-corporate      200-000-276-0469   Open 8/30/99-now
                                     DDA-corporate      200-000-276-0375   Open 9/8/99-now
                                     DDA-corporate      200-000-748-1837   Open 5/10/00-now     $5-$8 million
                                     BRK                24021271           Open now             $6-$7 million
                                     Money manager      4063000997         Open now
                                                                                                Possibly other
                                                                                                 accounts in
                                                                                                 First Union
                                                                                                 private bank
----------------------------------------------------------------------------------------------------------------
Michael H. Salit, M.D.               DDA-individual     109-001-566-5656   Open 4/28/98-now
----------------------------------------------------------------------------------------------------------------
Signal Hill Media Grp                DDA-corporate      200-000-677-7665   Open 6/30/00-now
----------------------------------------------------------------------------------------------------------------
Prepared by U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, December 2000

                           Case History No. 5


                              HANOVER BANK

    Hanover Bank is an offshore shell bank licensed by the 
Government of Antigua and Barbuda (GOAB). This case history 
looks at how an offshore bank, operating well outside the 
parameters of normal banking practice with no physical 
presence, no staff, virtually no administrative controls, and 
erratic banking activities, transacted business in the United 
States by utilizing a U.S. correspondent account belonging to 
another foreign bank and became a conduit for millions of 
dollars in suspect funds.
    The following information was obtained from documents 
provided by GOAB, Hanover Bank, and Harris Bank International; 
court pleadings; documents associated with regulatory 
proceedings in Jersey and the United Kingdom; interviews of 
persons in Antigua and Barbuda, Ireland, Jersey, the United 
Kingdom and the United States; and other materials. A key 
source of information was a June 26, 2000 interview of Hanover 
Bank's sole owner, Michael Anthony (``Tony'') Fitzpatrick, an 
Irish citizen who voluntarily cooperated with the 
investigation. Another key bank official, Richard O'Dell 
Poulden, a British citizen no longer with the bank, refused to 
provide either an interview or answers to written questions. 
Two additional key interviews were conducted on March 30, 2000, 
with William H. Koop, a U.S. citizen who has pled guilty to 
laundering money from a financial fraud through Hanover Bank, 
and on July 23, 2000, with Terrence S. Wingrove, a British 
citizen fighting extradition to the United States to stand 
trial on criminal charges related to the Koop fraud.\183\ 
Wingrove was interviewed at Wormwood Scrubs prison in London. 
The investigation also greatly benefited from assistance 
provided by the Antigua and Barbuda Government, the Jersey 
Financial Services Commission, and the Jersey Attorney General.
---------------------------------------------------------------------------
    \183\ See United States v. Koop (U.S. District Court for the 
District of New Jersey Criminal Case No. 00-CR-68); United States v. 
Wingrove (U.S. District Court for the District of South Carolina 
Criminal Case No. 0:00-91); and United States v. Cabe (U.S. District 
Court for the District of South Carolina Criminal Case No. 0:00-301). 
See also the description of the Koop fraud in the appendix.
---------------------------------------------------------------------------

A. THE FACTS

  (1) Hanover Bank Ownership and Management

    The Hanover Bank, Ltd. (``Hanover Bank'') was established 
as an international business corporation on August 12, 1992. 
According to one document, the bank received its offshore 
banking license the same day; according to another, the license 
was actually granted 4 months later on December 8, 1992. As of 
this writing, Hanover Bank remains a fully licensed offshore 
bank. Throughout its existence, the bank has had no physical 
office or permanent staff other than Fitzpatrick, the bank's 
sole owner, who operates the bank from his residence in 
Ireland.
    Hanover Bank's Formation. When asked how Hanover Bank got 
started and how he ended up as its sole owner and chief 
executive despite a lack of banking experience, Fitzpatrick 
provided the following information. Fitzpatrick indicated that, 
in 1992, when he decided to try to open an offshore bank in 
Antigua and Barbuda, he realized he would need assistance from 
persons with banking experience. Fitzpatrick stated in his 
interview that he was ``not a banker'' and did not have any 
banking experience prior to his involvement with Hanover Bank. 
He said that his business background was in marketing, and 
later noted that he had never ``gone to university.'' A copy of 
his resume, which he submitted to GOAB in 1993 in connection 
with Hanover Bank, lists credentials in the field of journalism 
and public relations, including serving from 1981-82, as public 
relations advisor to the Honorable Charles Haughey, then Prime 
Minister of Ireland.
    Fitzpatrick turned to two individuals with banking 
experience to help him establish Hanover Bank. The first was 
Richard O'Dell Poulden, a British citizen with whom Fitzpatrick 
had done business in the past. He said that he turned to 
Poulden, because Poulden's credentials, which include a London 
and Harvard Business School degree, an Oxford law degree, and 
work at a leading merchant bank and accounting firm, would 
impress GOAB authorities, and because Poulden's business 
connections would help attract deposits for the bank. He said 
that Poulden agreed in a telephone call to serve as the bank's 
nominal owner and chairman.
    The second individual with banking experience who helped 
Fitzpatrick establish Hanover Bank was William W. Cooper.\184\ 
Fitzpatrick said that he met Cooper through the Antiguan office 
of PriceWaterhouse (now PriceWaterhouseCoopers), an accounting 
firm he had contacted for assistance. Fitzpatrick said that he 
worked with one of the PriceWaterhouse partners, Don Ward, to 
set up the bank. He said that Ward introduced him to Cooper, an 
American who was an Antiguan resident with extensive banking 
experience and who owned Antigua Management and Trust, Ltd., 
which was experienced in obtaining bank licenses. He said that 
GOAB law required a local director for each of its banks, and 
Cooper had agreed to serve as Hanover Bank's local director. He 
said that Ward also introduced him to Justin L. Simon, an 
Antiguan citizen who was then legal counsel to PriceWaterhouse 
and who agreed to serve as the bank's local registered agent, 
another requirement under GOAB law. He indicated that 
PriceWaterhouse prepared the paperwork necessary to ``set up 
the bank for me.'' \185\ Fitzpatrick said that he paid 
PriceWaterhouse a total of $25,000, of which $10,000 went for 
the bank's initial licensing fees.
---------------------------------------------------------------------------
    \184\ Cooper is also associated with American International Bank, 
another case history examined in this investigation.
    \185\ Fitzpatrick and Poulden also established Hanover Nominees 
Ltd., described in Fitzpatrick's resume as a ``marketing subsidiary of 
The Hanover Bank.''
---------------------------------------------------------------------------
    GOAB documentation corroborates this description of Hanover 
Bank's formation. The August 1992 application to establish 
Hanover Bank Ltd., for example, lists Cooper and Simon as the 
company's original ``incorporators,'' as does the company's 
articles of incorporation. The company's by-laws state that the 
``initial Board of Directors shall consist of the following 
members: Justin Simon, Richard O'Dell Poulden and Antigua 
Management & Trust Ltd.'' [Lower case letters added to original 
text.] The banking license application names the same three 
``proposed directors'' for the bank. Although Fitzpatrick's 
name does not appear on any of the 1992 incorporation or 
licensing documents, Simon confirmed that Fitzpatrick was the 
moving force behind the formation of the bank. Cooper also 
recalled Fitzpatrick's being associated with the bank from its 
inception.
    When asked, Fitzpatrick indicated that although he was the 
initial organizer and financial backer of Hanover Bank, he did 
not undergo any due diligence review by GOAB authorities in 
1992. He said that GOAB authorities instead focused on Poulden, 
who was then the bank's sole shareholder and chief executive. 
Because Poulden refused to respond to requests for information, 
he did not provide any description of his role in Hanover 
Bank's formation. Ward of PriceWaterhouseCoopers also declined 
to cooperate with the investigation and so was unavailable to 
answer questions about his role in the bank's formation.
    In early 1993, Fitzpatrick was listed for the first time in 
filings submitted by the bank to GOAB as Hanover Bank's sole 
owner. Notice of his status is recorded in a Hanover Bank 
corporate resolution which was signed by Fitzpatrick, as sole 
shareholder, and submitted to GOAB on March 31, 1993. The 
resolution stated that Hanover Bank had replaced Antigua 
Management & Trust Ltd. with two new directors, Fitzpatrick and 
Cooper. The official form notifying the government of this 
change did not explain how Fitzpatrick had become the bank's 
sole shareholder, nor what happened to Poulden.
    According to Fitzpatrick, Poulden had decided to resign 
from the bank after the Clerical Medical scandal, described 
below, and, in 1993, transferred all of his shares to 
Fitzpatrick, in return for about $200,000 that was never paid. 
Simon also recalled a transfer of shares in 1993, and promised 
to look for the official notification to the government of the 
change in bank ownership. Although neither Fitzpatrick nor 
Simon produced documentation to substantiate this explanation 
of how Fitzpatrick assumed control of the bank, the 
investigation found no evidence to contradict it. It is 
undisputed that, from 1993 to the present, Fitzpatrick--a man 
without any banking experience--took control of Hanover Bank 
and served as its sole owner and chief executive.
    Hanover Bank Management. Hanover Bank's chief executive, 
holding the titles of Chairman of the Board and Managing 
Director, has long been Fitzpatrick. The bank has no other paid 
staff, either on a management or clerical level, although 
Fitzpatrick indicated that the bank could hire employees on a 
part-time basis if needed and has paid commissions to 
individuals in the past for bringing in deposits or performing 
other services. Fitzpatrick said during his interview that it 
had always been his intent to hire professionals to manage 
Hanover Bank, but the persons he had dealt with had ``never 
delivered,'' and he had essentially been operating the bank on 
his own ``most of the time.'' He said that he believed his lack 
of banking experience and misjudgements had contributed to 
problems at the bank.
    GOAB documentation does not identify Hanover Bank's 
management team other than Fitzpatrick, but does record 8 years 
of frequent changes in Hanover Bank's directors, including nine 
individuals and one company.\186\ The Bankers Almanac, a 
leading source of information about banks worldwide, states in 
a 1999 entry for Hanover Bank that the bank had five employees, 
including three executives besides Fitzpatrick: John Burgess, 
described as the bank's ``general manager''; Brian Shipman, in 
the bank's ``International Division''; and Jeffre St. James, in 
the bank's ``Foreign Exchange & Documentary Credits'' division. 
Older versions of the Bankers Almanac list Poulden as the 
general manager and Peter Coster as the head of correspondent 
banking. When asked about the Bankers Almanac information, 
Fitzpatrick said the named individuals had been bank employees 
or officers in the past, although never ``full time.'' However, 
Burgess told a Minority staff investigator that, although he 
had received commissions from the bank and did ``not want to 
embarrass Tony,'' he had never been a Hanover Bank employee. 
When told that the Bankers Almanac described him as Hanover 
Bank's general manager, Burgess laughed and said, ``That's the 
first I've heard of it.''
---------------------------------------------------------------------------
    \186\ Hanover Bank's directors included the following:

      4/92 LInitial directors: Simon, Poulden, and Antigua Management 
& Trust Ltd. (AMT), the company owned by Cooper.
      3/93 LAMT was removed as a director, and Fitzpatrick and Cooper 
were appointed. Although the status of Simon and Poulden is unclear 
from the documentation, it appears that Simon remained a director, 
while Poulden resigned during 1993.
          Cooper resigned at some point.
          C. Peter Crawshay appointed at some point.
      10/97 LCrawshay resigned on 10/7/97, and Peter Coster was 
appointed. Directors were: Fitzpatrick, Simon, Coster.
      3/98 LPoulden and Tbeoddor Tsuru appointed directors by bank 
resolution on 3/12/98, with notice provided to GOAB on 5/11/98, in 
Hanover Bank's annual report (item 5). Directors were: Fitzpatrick, 
Poulden, Tsuru, Simon and Coster. Tsuru appointment was later 
rescinded, and Poulden apparently resigned or his appointment was ended 
at some point in 1998.
      4/99 LCoster resigned.
      11/99 LMohammad Jawad and Michael Gersten appointed. Directors 
were: Fitzpatrick, Simon, Jawad and Gersten.
---------------------------------------------------------------------------
    Proposed Bank Sale in 1998. Fitzpatrick indicated in his 
interview that he had attempted several times to sell Hanover 
Bank and was still interested in selling it. He said that one 
set of negotiations took place in 1998, when Poulden telephoned 
him unexpectedly and asked whether he would consider selling 
Hanover Bank to a group of Japanese stockbrokers looking to 
form a financial group. Fitzpatrick indicated that he would, 
and said it was unclear whether Poulden was representing the 
group as an attorney or as a business partner who might become 
one of the bank owners. He said that Poulden introduced him to 
Theoddor Tsuru and Takuma Abe, two Japanese businessmen who 
appeared to be part of the group negotiating to buy Hanover 
Bank, although Poulden never identified the specific 
individuals involved. Fitzpatrick said that Poulden engaged in 
detailed negotiations on behalf of the group, including 
settling on a $1 million purchase price and proposing to 
structure the sale by using a company to purchase the bank. He 
said that the designated company was at first Cranest Capital 
S.A., a company that appeared to be associated with Tsuru, but 
it later changed to Societe Suisse S.A., a bearer share 
corporation then owned by Poulden. Societe Suisse S.A. made an 
initial payment of =20,000 towards the purchase price, and a 
second payment of $100,000 was made from another source, before 
the deal fell through during the summer of 1998.
    Fitpatrick said that as part of the purchase negotiations, 
Poulden had requested and he had agreed to immediately appoint 
Poulden as the chairman of the bank and to appoint Tsuru as a 
director. He said that Hanover Bank issued a corporate 
resolution in March 1998 appointing both men to the board of 
directors, but never filed formal notice of the change in 
directors with the government, as required by GOAB law, so the 
appointments never became final. When asked why the required 
papers were not filed, he said that he had been keeping them 
until closure of the deal and awaiting final paperwork from 
Poulden and Tsuru that never arrived. Fitzpatrick stated that 
he did not conduct any due diligence review of Tsuru prior to 
appointing him a bank director, but relied on Poulden's 
judgment as to Tsuru's reputation and suitability. He said when 
he later learned of Tsuru's possible involvement in the Casio 
fraud, described below, he rescinded the Tsuru appointment. He 
said the Poulden board appointment also ended after the bank 
purchase fell through.
    Documentation obtained by the investigation indicates that, 
whether or not the Poulden and Tsuru appointments became final 
under GOAB law, during 1998, Poulden repeatedly represented 
himself as the bank's chairman. In addition, Hanover Bank's 
1997 annual submission to the GOAB announced in Note 5, ``two 
new appointments to the Board of Directors,'' naming Poulden 
and Tsuru. Poulden also exercised joint signatory authority 
over Hanover Bank's correspondent account at Standard Bank, 
which was opened in 1998. Fitzpatrick explained that he had 
agreed to make Poulden a signatory on the account, because 
Poulden had helped convince Standard Bank to open the 
correspondent account, he thought Poulden would attract new 
business to the bank, and his group would soon be the bank 
owner. He said that he did not give Poulden sole signatory 
authority over the account, because he had to protect the 
assets of the bank until the purchase was complete. He said 
that because the transfer of ownership over the bank was still 
``in transition,'' it had seemed appropriate for them to share 
control over the Hanover account and so became joint 
signatories.
    Fitzpatrick indicated that, while serving as bank chairman 
in 1998, Poulden also became actively involved in the bank's 
management. He said that Poulden opened accounts, attracted new 
deposits, and approved all outgoing wire transfers. He said he 
had communicated with Poulden two or three times per week, 
usually by telephone or fax. He said that he had also traveled 
with Poulden to Antigua and introduced him to government 
officials and other business contacts. Fitzpatrick indicated 
that Poulden's management role at the bank had ended when the 
purchase agreement fell through in the latter half of 1998.
    Fitzpatrick said that he had entertained other offers to 
buy Hanover Bank as well. He said that one of the bank clients, 
Terrence Wingrove, had repeatedly expressed interest in buying 
the bank in 1998, but never took any concrete action to do so. 
In 1999, he said, two British residents, Mohammad Jawad and 
Michael Gersten, had offered to buy the bank for $500,000. He 
appointed them directors in November 1999, and notified GOAB 
authorities. As of December 2000, however, the bank had not yet 
changed hands.

  (2) Hanover Bank Financial Information

    GOAB law requires offshore banks to submit annual audited 
financial statements. Hanover Bank's financial statements for 3 
years, 1997, 1998 and 1999, were audited by Vaghela Unadkat & 
Co., which the investigation has been told is a one-man firm 
operating out of the accountant's residence in Birmingham, 
England. These statements show, over a 3-year period, 
tremendous swings in Hanover Bank assets, liabilities and 
expenses, as well as significant payments to Fitzpatrick.
    The 1997 statement depicted an active bank with rapidly 
growing earnings, and net profits of over $1.3 million.\187\ It 
indicated that customer deposits had skyrocketed over the prior 
year to almost $14 million, almost all of which would turn out 
to be related to the Koop and Casio frauds, described below. 
The financial statement also showed a dividend payment to 
Fitzpatrick, the bank's sole shareholder, of $350,000.
---------------------------------------------------------------------------
    \187\ Assets included ``[f]ee income'' of over $1.3 million, and 
``[i]nterest receivable'' of over $1.1 million, both of which showed a 
tenfold increase over the prior year. Expenses exceeded $1 million, 
including ``[m]anagement charges'' of $124,500; ``[c]ommissions and 
consultancy fees'' of almost $276,000; travel expenses exceeding 
$93,000; and interest charges exceeding $562,000. The financial 
statement showed ``[c]ash & inter bank deposits'' of $1.2 million; 
``Government securities'' valued at about $1 million; ``[o]ther listed 
securities'' valued at $4.1 million; and ``[b]ills of exchange'' valued 
at $6.4 million. ``Loans and advances'' were $3.4 million. ``Issued 
share capital'' was $1 million, the minimum required under GOAB law. 
Audit and accountancy fees were a bargain, just $15,000.
---------------------------------------------------------------------------
    The 1998 statement presented a more mixed picture of the 
bank, but an even larger dividend payment to Fitzpatrick.\188\ 
Net profits were about $1 million. Customer deposits had fallen 
from $14 million to $650,000. The dividend payment to 
Fitzpatrick had climbed to $1.9 million, twice the amount of 
net profits.
---------------------------------------------------------------------------
    \188\ Assets showed fee income had dropped to about $965,000, while 
interest receivables had increased to about $1.4 million. Expenses 
again exceeded $1 million, including management charges of $82,000; 
commissions and consultancy fees of more than $344,000; travel expenses 
exceeding $71,000; and interest charges exceeding $645,000. A new 
expense for ``[f]oreign exchange trading losses'' exceeded $186,000. At 
the same time, ``[c]ash and inter bank deposits'' had fallen tenfold to 
about $150,000. Assets represented by securities were zeroed out, while 
``[b]ills of exchange'' had risen slightly to $6.5 million. ``Loans and 
advances'' had increased significantly to $5.6 million. ``Issued share 
capital'' increased fivefold, from $1 million to $5 million, in 
response to GOAB's new capital requirement for offshore banks. At the 
same time, the financial statement included a new entry for $4 million 
in ``[p]romissory notes,'' suggesting that the bank's $4 million in 
additional capital might have been financed through a book entry loan. 
Audit and accountancy fees remained at $15,000.
---------------------------------------------------------------------------
    The 1999 statement depicted a much less active and 
profitable bank.\189\ Net profits were 80% lower, at about 
$211,000. Customer deposits had fallen another 10% to about 
$563,000. No dividend payment was made to Fitzpatrick. This 
statement covers the period in which, according to Fitzpatrick, 
Hanover Bank had ceased operations and kept its funds in its 
solicitor's account in London.
---------------------------------------------------------------------------
    \189\ Fee income had fallen to about $119,000, and interest 
receivables were down to about $283,000. Expenses had also fallen, with 
management charges down to $60,000; commissions and consultancy fees 
down tenfold to $24,000; travel expenses halved to about $37,000; and 
both interest charges and foreign exchange losses zeroed out. ``Cash & 
inter bank deposits'' were down to about $66,000. ``Bills of exchange'' 
were down tenfold to $658,000. ``Loans and advances'' were down a 
similar amount to about $630,000. A new category of liability appeared 
called ``Directors loan accounts,'' for about $84,000. The promissory 
note total had increased to about $4.2 million. Audit and accountancy 
fees were halved to $7,500.
---------------------------------------------------------------------------
    The three financial statements show wild swings in the 
bank's assets and liabilities. In the space of a year, customer 
deposits plummeted from $14 million to $650,000; Hanover Bank's 
own deposits fell from $1.2 million to $150,000; commission 
payments dropped from $344,000 to $24,000; securities valued at 
$5 million disappeared; foreign exchange losses of $186,000 
appeared one year and disappeared the next; dividend payments 
swung from $1.9 million to nothing. These financial statements 
suggest an offshore bank that was neither stable nor engaged in 
the prudent banking activities typical of a U.S. financial 
institution subject to safety and soundness regulation.

  (3) Hanover Bank Correspondents

    Fitzpatrick told the investigation that he kept 100% of 
Hanover Bank's client deposits in correspondent accounts. 
Although the Minority Staff investigation never discovered any 
U.S. bank that opened a correspondent account for Hanover Bank, 
Hanover Bank nevertheless gained access to the U.S. banking 
system by using U.S. correspondent accounts belonging to other 
foreign banks, such as American International Bank and Standard 
Bank.
    American International Bank. Fitzpatrick indicated that 
when Hanover Bank began operation in 1992, he opened its first 
correspondent account at American International Bank (AIB), an 
offshore bank that was also licensed in Antigua and Barbuda. He 
said that he left this account open for years, despite making 
little use of it. He indicated that, in 1997, he received a 
letter from Overseas Development Bank and Trust (ODBT) 
indicating that AIB had gone into liquidation and ODBT would be 
opening an office in Antigua and taking over AIB's accounts. He 
said that he, again, left Hanover Bank's account open and, in a 
1997 submission to GOAB, listed ``Overseas Development Bank 
Ltd.'' in Antigua as Hanover Bank's ``banker.'' He said that he 
later learned ODBT had closed its Antiguan office, but 
continued to operate in Dominica.
    AIB and OBDT each opened a number of correspondent accounts 
in the United States, as explained in the AIB case history. By 
maintaining an account at AIB and then ODBT, Hanover Bank 
maintained access to their U.S. correspondent accounts as well. 
Fitzpatrick said that, in 2000, he had telephoned ODBT to see 
if he could deposit a client's funds in Hanover Bank's account 
at that bank. He said he was informed that ODBT had 
unilaterally closed the Hanover Bank account due to inactivity, 
and he took no steps at that time to re-open it.
    Standard Bank/Harris Bank International. Fitzpatrick said 
that he soon discovered that clients in Europe did not want to 
deal with a bank whose only correspondent was another Antiguan 
offshore bank. He said that is why, in 1992, Hanover Bank 
opened a correspondent account at Standard Bank Jersey Ltd. 
According to the Bankers Almanac, Standard Bank Jersey Ltd. is 
a subsidiary of Standard Bank Offshore Group Ltd., and is 
related to The Standard Bank of South Africa Ltd., a major 
financial institution with over $22 billion in assets, and 
subsidiaries and related companies worldwide. According to the 
Bankers Almanac, Standard Bank Jersey Ltd. alone has over 200 
employees and more than $600 million in assets.
    When asked how Hanover Bank was able to open a 
correspondent account at Standard Bank Jersey Ltd. (``Standard 
Bank''), Fitzpatrick attributed it to Poulden's business 
contacts. He said that, in 1992, Poulden served on the boards 
of several companies, including a venture capital company whose 
board included David J. Berkeley, then managing director of 
Standard Bank. He said that Poulden telephoned Berkeley 
directly to request a correspondent account for Hanover Bank. 
He said it was his understanding that Berkeley immediately 
agreed on the telephone, and the account opening forms were a 
mere formality. Because Standard Bank declined to respond to 
requests for information, it has not provided a description of 
or documentation related to the 1992 account opening.
    Fitzpatrick stated that he knew in 1992, that Standard Bank 
had a U.S. dollar account with Harris Bank International in New 
York, and that by opening an account with Standard Bank in 
Jersey, Hanover Bank would be able to transact business through 
Standard Bank's account in the United States.
    Fitzpatrick indicated that Standard Bank closed the Hanover 
account in 1993, after less than a year, due to the Clerical 
Medical scandal, described below. However, he said that 6 years 
later in 1998, Standard Bank opened a new account for Hanover 
Bank, again after Poulden contacted Berkeley, who was still at 
Standard Bank. Fitzpatrick explained that, to strengthen the 
bank in connection with the proposed 1998 sale, Poulden had, 
again, telephoned Berkeley and reached him at an airport. He 
said that Berkeley gave his approval for the correspondent 
account during the telephone call, instructed Poulden to wait 5 
minutes to give him time to contact a Standard Bank employee, 
and then to call that employee who would provide him with an 
account number. He said that Berkeley told Poulden that he 
could complete the account opening documentation at a later 
time. He said that the Clerical Medical scandal was not 
discussed. He said that Poulden followed the instructions and 
immediately obtained an account number for Hanover Bank from a 
Standard Bank employee. He said they later met with Standard 
Bank employees in person and completed the account opening 
documentation. Fitzpatrick said that Standard Bank should not 
have opened the account in the way that it did, but it was 
instructive to him to see that large banks also sometimes broke 
the rules.
    Because Standard Bank declined to respond to requests for 
information, it has not provided a description of or 
documentation related to the 1998 account opening. What is 
known, however, is that Jersey banking regulators subsequently 
investigated and censured Standard Bank for exercising 
inadequate due diligence in opening the Hanover Bank account. 
In a statement issued on July 13, 2000, the Jersey Financial 
Services Commission stated that, in opening the Hanover Bank 
account, ``the senior officers [at Standard Bank] directly 
involved failed to follow proper procedures'' and ``[t]he 
conduct of the Bank fell well short of the standards expected 
by the Commission'' with respect to due diligence. As a result 
of the investigation, Berkeley and another senior official left 
Standard Bank. The Commission's July statement observed: ``The 
Commission is also satisfied that senior management changes in 
place, including the departure of the officers concerned, have 
strengthened the management of the Bank.'' When contacted by 
Minority Staff about this investigation, Jersey regulators 
indicated that the facts they uncovered did not match 
Fitzgerald's description of the 1998 account opening, but 
declined to provide the text of the report, a description of 
their findings or the underlying documentation, because the 
report had not been made public. The regulators indicated that, 
as a rule, such reports are not made public, although the 
Commission had yet to make a decision with respect to the 
Hanover Bank matter.
    Fitzpatrick indicated that Hanover Bank actually used the 
Standard Bank correspondent account for only about 3 months, 
primarily from April to June 1998, after which the account was 
frozen amid questions regarding possibly suspicious activity. 
Fitzpatrick said the account was actually closed in December 
1998 or January 1999.
    Documents obtained by the investigation substantiate this 
description of the Hanover correspondent account at Standard 
Bank. In response to a Subcommittee subpoena, Harris Bank 
International provided copies of Standard Bank account 
statements for 1998 and 1999. These account statements and 
related wire transfer documentation show Hanover transactions 
taking place over approximately a 3-month period, with the 
first on March 30, and the last on June 16, 1998. Harris Bank 
International also provided a copy of a June 14, 2000 letter 
from Standard Bank attaching ``a schedule detailing all items 
relating to Hanover Bank which were received and paid through 
Harris Bank for the whole period during which Hanover Bank 
maintained accounts with our client.'' The Standard Bank 
schedule shows a total of about $17.4 million in deposits and 
$13.9 million in withdrawals moving through the Harris Bank 
International over the 3-month period. Other documentation 
indicates that Hanover Bank made use of other Standard Bank 
correspondent accounts, for example, to transact business in 
British pounds or Australian dollars. Harris Bank did not have, 
and Standard Bank did not produce any records relating to the 
closing of the Hanover Bank account in late 1998 or early 1999.
    Hanover Bank has had at least a few other correspondent 
accounts during its 8 years of existence, including a 1992 
account at Lombard National Westminster Bank in Cyprus, and 
perhaps an account at a bank in Switzerland. The investigation 
did not attempt to document its non-U.S. correspondent 
accounts.
    No Current Correspondent Bank. Fitzpatrick indicated that, 
as of his June 2000 interview, Hanover Bank had become inactive 
and had no correspondent account at any bank. According to 
Fitzpatrick, all remaining funds in the Hanover Bank account at 
Standard Bank had been transferred in late 1998 or early 1999 
to an attorney trust account belonging to Finers in London, 
Hanover Bank's legal counsel. He indicated that funds remained 
in that account, although reduced, in part, by legal fees. The 
bank's 1998 financial statement shows that Hanover Bank also 
paid Fitzpatrick a 1998 `` dividend'' of $1.9 million, twice 
the amount of the bank's net profits. It is unclear whether any 
client deposits were used for the dividend.

  (4) Hanover Bank Operations and Anti-Money Laundering Controls

    Because the investigation was interested in the day-to-day 
operations of a shell offshore bank, Minority Subcommittee 
investigators interviewed Fitzpatrick about how his bank 
actually conducted business. His explanations and other 
information provide vivid details about a bank operating with 
few, if any, of the administrative procedures and internal 
controls in place at U.S. banks.
    According to Fitzpatrick, Hanover Bank did not have a 
permanent office or a permanent staff other than himself, and 
he was not a banker or accountant by training. Fitzpatrick said 
that he generally kept records associated with Hanover Bank at 
his residence in Ireland, although Poulden also kept some 
records during the time he was associated with the bank. 
Fitzpatrick stated that he did not have ``computerized'' 
records for Hanover Bank in Ireland, nor did the bank have an 
electronic ledger.
    Fitzpatrick indicated that, for about a 6-month period in 
1997, the bank used the services of an Antiguan company called 
American International Management Services Ltd. (``AIMS'') to 
handle Hanover Bank's back office operations, including 
administering its client accounts and keeping the bank's 
books.\190\ He said that he had visited the company in Antigua 
and found a ``very professional'' operation handling 
administrative matters for six or seven ``small obscure banks 
like mine.'' He said, however, that Hanover Bank could not 
afford the $5,000 per month cost. He also described an 
unpleasant encounter with the head of AIMS, John Greaves, over 
what he described as improper disclosures of confidential 
information to a Hanover Bank client, which led him to sever 
relations with AIMS and return to operating the bank on his 
own.
---------------------------------------------------------------------------
    \190\ AIMS is also discussed in the case history for American 
International Bank.
---------------------------------------------------------------------------
    Fitzpatrick said that Hanover Bank kept 100% of its client 
funds in its correspondent accounts. He said that the bank 
dealt mostly in U.S. dollars, but also occasionally in other 
major currencies such as sterling or yen. He said the bank 
usually had only a few client accounts open at a time, and he 
kept track of each client's funds by analyzing the monthly 
account statements sent by the correspondent banks. He said the 
monthly statements showed all of the deposits, withdrawals and 
fees affecting the Hanover Bank accounts, and he would use this 
information to attribute deposits, withdrawals and fees to 
Hanover Bank's individual client accounts.
    Fitzpatrick said that Hanover Bank did not routinely 
prepare bank statements for its clients, nor did it pay 
interest on client funds. He said that most persons using a 
bank like his were concerned about confidentiality, and did not 
want monthly statements sent to them because they did not want 
others knowing they had an offshore bank account. He said the 
bank usually prepared account statements only upon request. He 
described one occasion in 1998, when he and Poulden together 
typed up statements for two client accounts, the Wingrove and 
Doi accounts, using Poulden's computer in England. He said they 
prepared the statements without assistance from anyone else, 
using the information in correspondent banks' monthly 
statements. His description indicated that it was an unusual 
and ad hoc effort.
    One of Hanover Bank's clients, Terrence Wingrove, who was 
interviewed by Minority Staff investigators, confirmed that the 
bank did not routinely prepare account statements. When asked 
how he felt about not receiving monthly account statements, 
Wingrove said, ``You don't go into a fish and chip shop and ask 
for filet mignon.'' He said that he had trusted Fitzpatrick to 
handle his money properly, without worrying about the 
paperwork, and had told Fitzpatrick, ``If my money goes 
walkabout, you go walkabout. That wasn't a threat, it was a 
promise.'' He said that, while Hanover Bank was not the most 
``efficient'' bank, Fitzpatrick had acted as his ``personal 
banker'' and provided acceptable service, which was why he had 
maintained an account there.
    When asked how Hanover Bank found clients, Fitzpatrick 
indicated that it was willing to pay commissions to individuals 
who brought deposits to the bank. He said the bank also had an 
entry in the Bankers Almanac, which helped demonstrate to 
clients that the bank was an established institution with an 8-
year track record. He said that the bank did not engage in 
extensive marketing efforts, which was one reason it had so few 
accounts at a time.
    Subsequent to the Fitzpatrick interview, another Hanover 
Bank client, John Burgess, voluntarily contacted a Minority 
Staff investigator and discussed his experience with the bank. 
Burgess said that for a period of time, from 1997 until early 
1998, a Swiss company he controlled, The Trust and Agency Co. 
(``Tragenco''), had managed a portion of the bank's business. 
He said Tragenco had operated under an agreement which 
authorized it to unilaterally open Hanover Bank accounts for 
Tragenco clients engaged in investment activities. He said 
these clients collectively made $50-$60 million in deposits and 
provided Hanover Bank with about $2 million in earnings, until 
Tragenco ended its investment program. While the investigation 
did not attempt to confirm this activity, it suggests the 
existence of another roster of Hanover Bank clients functioning 
through another, unidentified correspondent account, perhaps in 
Switzerland, raising additional questions about Hanover Bank's 
account opening procedures and internal controls.
    When asked how the bank handled wire transfers, Fitzpatrick 
indicated that Hanover Bank did not have its own capability to 
send or receive wire transfers, but worked through its 
correspondent banks. He said that incoming wire transfers were 
handled entirely by the correspondent bank, which unilaterally 
decided whether to accept the incoming funds and credit them to 
Hanover Bank's account. He said that he played no role in 
deciding whether the funds should be accepted. He said that he 
usually learned of an incoming wire transfer some days after 
the funds had come in, when he received and reviewed Hanover 
Bank's monthly account statement from the correspondent bank. 
He said that the monthly statement would list all deposits into 
the Hanover Bank account, virtually all of which would have 
been made by wire transfer.
    Fitzpatrick said that the monthly statements often provided 
little or no information about particular deposits, and he 
sometimes had to contact the correspondent bank to get 
additional information to determine which client account should 
be credited with the incoming funds. He said, for example, that 
the wire transfer documentation often failed to name a Hanover 
Bank accountholder as the beneficiary of the funds, instead 
referencing individuals or companies who were not 
accountholders at the bank. When asked how he knew to attribute 
these incoming funds to a particular client, Fitzpatrick said 
that the bank generally had only a few accounts and he could 
figure it out. He said that Hanover Bank's clients also often 
contacted him to let him know funds were coming in and should 
be attributed to their account.
    When asked about outgoing wire transfers, Fitzpatrick 
explained that he personally approved all outgoing wires. 
Fitzpatrick said that the outgoing wire transfers were actually 
made by correspondent bank personnel who would debit the funds 
from Hanover Bank's correspondent account. He said that the 
bank would complete an outgoing wire transfer only after 
receiving written ``wire instructions'' from Hanover Bank 
specifying the amount, the beneficiary and the beneficiary's 
bank, and signed by a person authorized to withdraw funds from 
the account. He said that he usually faxed the wire 
instructions from his residence in Ireland to the appropriate 
correspondent bank personnel.
    Fitzpatrick described, for example, how Hanover Bank worked 
with Standard Bank in 1998 with respect to wire transfers. He 
said that incoming funds were typically in U.S. dollars and 
wired to Standard Bank's correspondent account at Harris Bank 
International in New York. He said that the accompanying wire 
transfer documentation, identifying the originator and intended 
recipient of the funds, went to Harris Bank International, and 
was not routinely forwarded to Hanover Bank. He said that what 
he received was Hanover Bank's monthly account statement from 
Standard Bank, which was sent to his address in Ireland. He 
said that he would review the monthly statement to determine 
what deposits had been made into the account. However, the 
monthly statements often listed an incoming amount without any 
origination or beneficiary information. He indicated that, even 
when information was provided, he was sometimes unable to 
determine who was the intended recipient of the funds at 
Hanover Bank and would have to contact his clients to ask about 
particular deposits.
    With respect to outgoing wire transfers, Fitzpatrick 
explained that he and Poulden had joint signatory authority 
over the 1998 Hanover account at Standard Bank, and had to 
jointly approve all funding withdrawals. He said that, 
typically, if an outgoing wire transfer involved an account he 
had opened, such as the Wingrove account, he would initiate a 
fax with the desired wire transfer instructions and send it to 
Poulden; Poulden would sign the instructions with no questions 
asked; and Poulden would fax the instructions to Standard Bank. 
He said that if an outgoing wire transfer involved an account 
that had been opened by Poulden, Poulden would initiate the fax 
to him, he would sign it with no questions asked, and he would 
fax the instructions to Standard Bank. Standard Bank would then 
complete the transfer.
    Fitzpatrick discussed one incident in May 1998, which 
suggested that the wire transfer approval process did not 
always work smoothly. He said that, on the day he was moving to 
a new residence in Ireland, he received a request from Wingrove 
for an outgoing wire transfer. He said that he approved the 
wire and sent the wire instructions to Poulden, without first 
checking Wingrove's account balance because the bank records 
were inaccessible during the move. Standard Bank completed the 
wire transfer, and Fitzgerald later discovered that there was a 
shortfall in the Wingrove account of more than $800,000. That 
meant the outgoing wire transfer had been paid for with funds 
deposited by another Hanover client. Both he and Wingrove 
stated that neither had been aware there were insufficient 
funds in Wingrove's account to cover the wire transfer. Both 
said that Wingrove quickly repaid about $400,000 of the 
shortfall but, as of July 2000, 2 years later, about $400,000 
plus interest remained unpaid.
    Hanover Bank's Anti-Money Laundering Controls. When asked 
about Hanover Bank's anti-money laundering efforts, Fitzpatrick 
provided a copy of a 1997, one-page ``Policy Statement on the 
Opening and Conduct of Accounts.'' Fitzpatrick indicated that 
he had drafted the policy statement in response to efforts by 
the Antiguan government to strengthen their banks' anti-money 
laundering controls. The Hanover Bank policy statement set 
forth a number of due diligence requirements for opening new 
accounts, including the following:

      --Customers must supply one reference from another 
banking institution covering the customer's banking history for 
at least 5 years.
      --[A] customer must supply two professional references, 
by whom the customer has been known for at least 10 years.
      --In respect of a corporation, the same references must 
be supplied for each director as well as for the corporation 
itself.
      --Each and every signatory or proposed signatory of an 
account . . . must be personally interviewed by a Bank officer 
prior to the opening of the account.
      --[T]he required account opening forms must be 
completed.
      --[T]he original of each signatory's passport must be 
inspected and a copy taken for the Bank's file.
      --[A] notarized statutory declaration, duly legalized, 
as to beneficial ownership of funds . . . must be completed.
      --Cash transactions are prohibited.
      --All transactions in excess of USD 50,000 have to be 
personally authorized by a bank director.

    Fitzpatrick said that he was responsible for implementing 
these due diligence requirements, but admitted that he did not 
always comply with them. For example, he said that when he 
opened the Wingrove account in November 1997, a month after 
issuing the policy statement, he did not perform any due 
diligence review. He said that he had known Wingrove for 
several years and was convinced that Wingrove was an 
established art dealer with access to substantial funds. 
Fitzpatrick said that, contrary to Hanover Bank policy, he did 
not obtain any bank or professional references prior to opening 
the account. He said that he had actually asked Wingrove for 
these references, but he had not produced them, and Fitzpatrick 
had opened the account anyway. He acknowledged that there were 
only two pages of account opening documentation for the 
Wingrove account, a one-page application form and a 1-page copy 
of Wingrove's passport photograph. In his interview, Wingrove 
said that he had signed the account opening documentation while 
at an airport in England, and never saw or was asked to sign a 
signatory card for the account.
    Fitzpatrick said that although he normally was the only 
person who opened accounts at Hanover Bank, in 1998 Poulden 
also opened them. Fitzpatrick explained that, since Poulden was 
then chairman of the bank, he and Poulden had agreed that 
Poulden could open accounts on his own authority, without the 
prior approval of Fitzpatrick. He said that he had instructed 
Poulden on how to open an account, by completing certain 
paperwork and performing a due diligence review on the 
prospective client, as set out in Hanover Bank's policy 
statement. Fitzpatrick said that because Poulden was a 
``practicing barrister'' and experienced businessman and seemed 
to want a successful Hanover Bank as much as he did, he had 
trusted Poulden to comply with the account opening requirements 
and never doublechecked his efforts. He said that Poulden had 
also often told him he had the paperwork for the accounts he 
had opened, so Fitzpatrick had not bothered to obtain a copy 
for his files.
    Fitzpatrick said he later determined, however, that Poulden 
had opened some accounts without telling him and had failed to 
complete any account opening or due diligence documentation. 
Fitzpatrick was also unaware of what due diligence reviews 
Poulden had conducted, if any. According to Fitzpatrick and 
documentation obtained during the investigation, Poulden 
appears to have opened at least four accounts in 1998:

      (1) Account No. 930509--$2.4 million deposit made on 4/
1/98 for Yoshiki Doi;
      (2) Account No. 930510--opened for Cranest Capital S.A., 
but no apparent transactions;
      (3) Account No. 930511--$190,000 deposit made on 4/24/98 
for Ted Tsuru and Takuma Abe joint account; and
      (4) Account No. 930512--$10 million deposit made on 6/2/
98 for Morgan Steepleton Investment & Securities S.A.; funds 
withdrawn and wire transferred 2 weeks later on 6/15/98 to a 
Morgan Steepleton account at another bank.

    Fitzpatrick said that, because there was no account opening 
or due diligence documentation, he could not say with certainty 
who the account signatories were or what the relationships were 
among the accounts. He said that he had no information about 
Doi other than an address in Japan, and had never met or spoken 
with him. He thought that Poulden, Tsuru and Abe had 
administered the Doi account but was not sure who had signatory 
authority over it. Fitzpatrick thought Cranest Capital and 
Morgan Steepleton Investment & Securities were companies 
associated with Tsufu, but was not sure and was unaware who had 
signatory authority over either of those accounts.
    When asked about the $2.4 million deposit to the Doi 
account, Fitzpatrick said that he first learned of that deposit 
when reviewing Hanover Bank's April 1998 account statement from 
Standard Bank. He said the amount ``surprised'' and 
``delighted'' him, because he assumed it was the result of 
Poulden's efforts to bring new deposits to the bank and 
provided proof that Poulden had access to individuals with 
substantial funds. He said that after he saw the deposit, he 
telephoned Poulden who told him about opening the account for 
Doi. Fitzpatrick said that he did not know the purpose of the 
deposit or the source of the funds.
    When asked what had happened to the $2.4 million, 
Fitzpatrick said that a number of large outgoing wire transfers 
initiated by Poulden had utilized funds from the Doi 
account.\191\ Fitzpatrick thought these transfers were used, in 
part, to purchase an oil company in Texas and a securities firm 
in New York; \192\; to pay legal or consulting fees; and to 
help finance the purchase of Hanover Bank.\193\ Fitzpatrick 
said that another $400,000 was inadvertently withdrawn from the 
Doi account in connection with the Wingrove overdraft. He said 
that he wrote to Doi several times about the overdraft, but Doi 
had never responded or requested the return of his $400,000, 
which Fitzpatrick said he found surprising and suspicious.
---------------------------------------------------------------------------
    \191\ U.S. bank records show outgoing transfers totaling over $1.3 
million, including $300,000 on 4/6/98; $100,000 (in two $50,000 
payments) on 4/9/98; $300,000 on 4/9/98; $150,000 on 4/20/98; $400,000 
on 5/15/98; and $100,000 on 6/19/98, that were apparently initiated by 
Poulden or associated with the accounts opened by Poulden. Other bank 
records show outgoing transfers of =135,000 (U.S. $225,000) on 4/21/98; 
and 130 million Japanese yen (U.S. $500,000) on 5/29/98.
    \192\ The $300,000 payment on 4/9/98 was made to an account at 
Texas Commerce Bank N.A. for ``Anglo Gulf Energy Inc.'' Articles of 
incorporation for Anglo-Gulf Energy Inc., filed in Texas in October 
1997, indicate that it is a Texas corporation and Poulden was one of 
its two initial directors. An article in Private Equity Week, dated 8/
10/98, states: ``Anglo-Gulf Energy Inc. of Spring, Texas, is raising $3 
million through a private placement of common stock. . . . Alden 
Capital Markets Inc. of New York is acting as agent for a sales 
commission of $300,000.'' It is possible that Alden Capital Markets 
Inc. was the securities firm referred to by Fitzpatrick.
    \193\ With respect to purchasing Hanover Bank, Fitzpatrick 
indicated that he thought Poulden had obtained approval to transfer 
$100,000 from the Doi account, in two $50,000 payments on 4/9/98, to 
Fitzpatrick's personal bank accounts, in partial satisfaction of the 
bank's proposed $1 million purchase price. When asked whether Doi was 
one of the Japanese stockbrokers buying the bank, Fitzpatrick said that 
was never made clear.
---------------------------------------------------------------------------
    When asked about the $10 million deposit in June and its 
withdrawal 2 weeks later, Fitzpatrick indicated that he did 
make inquiries about those wire transfers at the time. He said 
that Poulden had told him the $10 million was going to be used 
to purchase ``prime bank notes,'' and that Poulden was acting 
as a middleman in the transaction, between the sellers of the 
notes and the purchaser, Tsuru. Fitzpatrick said that Poulden 
had agreed with him that it was a scam, since prime bank notes 
are fictitious instruments with no tradeable market, but 
Poulden said he had been unable to convince Tsuru not to go 
forward with the purchase. Fitzpatrick thought, in the end, 
however, the purchase had not gone forward. Fitzpatrick said he 
did not know Tatsuya Omura, the person identified on the wire 
transfer documentation as the originator of the $10 million 
deposit, nor did he know the source of the funds. He also had 
no information about the Morgan Steepleton account to which the 
$10 million was transferred.
    Fitzpatrick was also asked about Hanover Bank's lending 
activities. He said that Hanover Bank did not engage in regular 
lending, but occasionally issued a letter of credit, 
certificate of deposit or loan, which he would approve. The few 
credit transactions examined during the Minority Staff 
investigation presented additional evidence of questionable 
operations at the bank. For example, an April 3, 1998 letter 
signed by Fitzpatrick stated that Doi had $16.5 million in his 
account, even though bank records indicate that the account 
never held more than $2.4 million. When asked about the letter, 
Fitzpatrick said that Doi had asked for a ``temporary loan,'' 
and Hanover Bank had engaged in a ``book transaction'' in which 
it loaned him the funds and he repaid them a few days later, 
returning his account to its original status. When asked where 
Hanover Bank had obtained the capital to make a $16.5 million 
loan, Fitzpatrick said that it was ``just a book transaction'' 
that took place on paper and did not involve actual funds. He 
said that Poulden had drafted and asked him to sign the letter. 
He said he had trusted Poulden ``one hundred percent,'' thought 
Poulden would not want to get him or the bank into trouble, and 
so had done as he asked in signing the letter. Fitzpatrick 
could not provide any other information about the transaction. 
A second questionable credit transaction, involving a $1 
million letter of credit issued to an individual seeking to 
launder criminal proceeds, is described below in connection 
with the criminal conviction of Eric Rawle Samuel who once 
worked for Hanover Bank.
    Together, the information collected by the Minority Staff 
investigation about the day-to-day operations of Hanover Bank 
show a bank that operated with few formalities, few controls, 
few records, and few worries about client due diligence or 
money laundering.

  (5) Regulatory Oversight of Hanover Bank

    In 8 years of operation, Hanover Bank never underwent a 
bank examination by its primary regulator, the Government of 
Antigua and Barbuda. GOAB authorities did not conduct 
examinations of any of its licensed banks until 1999, 
previously relying on audited financial statements and other 
filings prepared by its banks to monitor their activities. In 
1999, GOAB authorities initiated a new program for government-
sponsored bank examinations and, in 2000, began its first 
examination of Hanover Bank.\194\ The examination completed a 
review of the bank's documents in Antigua over the summer and 
requested an on-site inspection in Ireland in late 2000.
---------------------------------------------------------------------------
    \194\ See 8/25/00 letter from the GOAB's International Financial 
Sector Regulatory Authority to Elise Bean of Senator Levin's office, at 
2.
---------------------------------------------------------------------------
    Irish banking authorities have also never conducted an 
examination of Hanover Bank. Personnel from the Central Bank of 
Ireland indicated, when contacted by the Minority Staff 
investigation, that they had been unaware of Hanover Bank's 
activities in Ireland. They indicated that they had not known 
that Fitzpatrick was involved in international banking, that he 
was the sole owner of Hanover Bank, or that he was keeping bank 
records and faxing wire transfer instructions from his 
residence in Ireland. They also indicated that Ireland does not 
exercise any regulatory authority over Hanover Bank, since it 
is licensed by GOAB and apparently does not solicit deposits in 
Ireland.
    Although it has not been the subject of routine bank 
examinations, Hanover Bank has undergone three special reviews 
by bank regulators. The first took place in 1993, shortly after 
the bank was licensed, when it was alleged to be involved in 
the Clerical Medical fraud, described below. U.K. authorities 
conducted a lengthy investigation, but took no formal action 
against the bank. GOAB authorities apparently did not 
investigate or take any action against the bank in this matter.
    A few years later, however, as part of a general offshore 
banking reform effort, GOAB issued a March 24, 1997 notice of 
its intent to revoke Hanover Bank's license. The specified 
grounds were the bank's failure to pay its 1996 registration 
fees and its failure in 1992 to commence banking operations 
within 6 months of receiving a license. GOAB actually revoked 
the bank's license 2 days later. Hanover Bank was one of over a 
dozen banks whose licenses were revoked in the 1997 GOAB reform 
effort, and it is included in a list of banks that GOAB told 
the U.S. State Department were closing their doors. But Hanover 
Bank refused to close. Justin Simon, the bank's local director 
and registered agent, filed suit in court to overturn the 
license revocation. According to Simon, the suit was heard by 
Justice Kenneth Allen in 1997. Although GOAB authorities 
thought the court had overturned the revocation as a result of 
that proceeding, Simon indicated that Justice Allen did not 
actually issue a decision on the merits. He said that, instead, 
Keith Hurst, then head of the GOAB's International Business 
Corporations (IBC) Unit, unilaterally reversed the government's 
position and reissued the bank's license. The May 30, 1997 
certificate reinstating Hanover Bank's license is signed by IBC 
Director Hurst.
    In 1998, U.K. and Jersey banking authorities commenced a 
special investigation of Hanover Bank after receiving evidence 
that the bank was conducting illegal banking activities in both 
jurisdictions, as described below. In July 1998, the U.K. 
Financial Services Authority (FSA) obtained a court injunction 
prohibiting Hanover Bank from conducting banking activities in 
the United Kingdom. The FSA rescinded this injunction only 
after receiving Hanover Bank's assurance that it would not 
conduct business in the jurisdiction. Jersey banking 
authorities conducted a parallel investigation into Hanover 
Bank's activities in Jersey. This investigation led to its 
censuring Standard Bank Jersey Ltd. for opening a Hanover Bank 
correspondent account; alerting U.S. authorities to suspicious 
activity in Standard Bank's U.S. correspondent account at 
Harris Bank International related to Hanover Bank; and alerting 
GOAB authorities to their findings and concerns about Hanover 
Bank. These actions contributed to the unraveling, of the Koop 
fraud and the filing of multiple U.S. indictments,\195\ as well 
as GOAB's subsequent decision to conduct an on-site examination 
of Hanover Bank in 2000.
---------------------------------------------------------------------------
    \195\ See appendix for a more detailed description of the Koop 
fraud.
---------------------------------------------------------------------------

  (6) Money Laundering and Fraud Involving Hanover Bank

    The Minority Staff investigation found evidence of 
fraudulent and criminal activities throughout Hanover Bank's 8 
years of operation, involving millions of dollars lodged in 
various correspondent bank accounts. Three frauds in 1998, 
involving virtually all of Hanover Bank's clients and 100% of 
the funds it moved through a U.S. correspondent account, raise 
particular concerns. Together, they demonstrate that Hanover 
Bank's inadequate oversight of its few clients, associates and 
transactions contributed to fraudulent activity and multiple 
violations of banking, civil and criminal laws in the United 
States, United Kingdom, Jersey and elsewhere.

  (a) Clerical Medical Scandal

    In 1993, soon after receiving its banking license, Hanover 
Bank became embroiled in a major financial scandal involving 
=20 million, a prominent British insurance company called 
Clerical Medical, and a fraudulent investment scheme involving 
prime bank notes. Prime bank notes are fictitious financial 
instruments which typically contain a false promise or 
``guarantee'' by a well-known or ``prime'' bank to pay a 
specified amount of funds, and the notes are then fraudulently 
characterized as available for trade at a discounted price. 
Fitzpatrick said during his interview that he now knows that no 
trading market exists for prime bank notes and they are 
considered a warning sign of financial fraud, but said he did 
not have that information at the time. The 1993 scandal, highly 
visible at the time, is still cited on occasion as one of the 
earliest examples of prime bank note fraud.\196\
---------------------------------------------------------------------------
    \196\ See, for example, ``Primed for fraud,'' Accountancy (4/95).
---------------------------------------------------------------------------
    Fitzpatrick explained that, soon after the bank began 
operations, Poulden and he began to negotiate a prime bank note 
investment with Managed Opportunities Ltd., an Isle of Man 
corporation that managed funds for the Clerical Medical Group. 
He said the negotiations led to an agreement among Hanover 
Bank, Managed Opportunities Ltd., and a Cyprus company called 
Kinitor Ltd., which essentially provided that Kinitor would 
provide certain prime bank notes in exchange for =20 million to 
be deposited into a Hanover Bank correspondent account at 
Lombard National Westminster Bank in Cyprus. Other companies, 
such as Bankhall Investment Management and Corporate Financial 
Investments were also involved.
    Press reports indicate that after the =20 million was 
transferred to Hanover Bank's account at the Cyprus bank in or 
around June 1993, Clerical Medical claimed the transfer was 
unauthorized and demanded return of the funds.\197\ Legal 
injunctions and lawsuits followed, freezing the funds in the 
Hanover account in Cyprus for about a year. Inquiries were 
launched by two U.K. bodies, the Securities and Investments 
Board and the Financial Intermediaries, Managers and Brokers 
Regulatory Association, as well as by the fraud office of the 
International Chamber of Commerce. Fitzpatrick said that, in 
the end, Clerical Medical recovered the =20 million, and the 
lawsuits were settled. He said that none of the inquiries 
reached any conclusions regarding Hanover Bank's knowing 
participation in a fraud. When the Minority Staff contacted the 
U.K. Financial Services Authority (FSA) for its evaluation of 
the Clerical Medical matter, the FSA declined to provide any 
information because, as the FSA stated in a letter, ``the 
Financial Services Act of 1986 . . . does not provide for 
publication of any report . . . and use of, and/or disclosure 
to third parties, of information contained in any such report 
or otherwise obtained in the course of a Section 105 
investigation is subject to statutory restrictions.'' \198\
---------------------------------------------------------------------------
    \197\ See, for example, ``Suspension lifted on fund managers,'' 
Financial Times (London) (7/19/94); ``Clerical Medical regains Pounds 
20m,'' The Times (7/11/94); ``British Firm Sues Two Lebanese Men For 
Embezzlement,'' AP Worldstream (4/28/94); ``SIB investigates switch of 
Clerical Medical funds to Cyprus,'' The Times (1/3/94); ``Clerical 
Medical rejects demands over funds,'' The Times (8/23/93); ``Insurer 
sues over controls of Pounds 20m,'' The Times (8/14/93).
    \198\ Letter dated 5/30/00 from FSA to Subcommittee.
---------------------------------------------------------------------------
    The Clerical Medical scandal was the first indication that 
Hanover Bank was possibly engaging in questionable activity. 
Despite the lengthy investigations into its conduct, U.K. 
policies against releasing FSA reports meant than none of the 
FSA information was made available to the public or persons 
attempting to evaluate Hanover Bank's track record.

  (b) Eric Rawle Samuel Criminal Conviction

    In September 1993, just after the Clerical Medical scandal 
broke, Eric Rawle Samuel was arrested in the United States for 
offering to launder up to $12 million through Hanover 
Bank.\199\ In January 1994, Samuel pled guilty to one count of 
money laundering related to his actions and was sentenced to 
more than 5 years imprisonment in the United States.
---------------------------------------------------------------------------
    \199\ See United States v. Samuel (U.S. District Court for the 
Northern District of Georgia Criminal Case No. 93-CR-420-ALL), 
indictment dated 10/5/93; ``News Release'' dated 1/19/94, by the U.S. 
Attorney for the Northern District of Georgia, announcing guilty plea; 
``Judgement in a Criminal Case'' dated 3/30/94.
---------------------------------------------------------------------------
    Samuel had ``represented himself to be an employee'' of 
Hanover Bank, according to the indictment. Fitzpatrick said in 
his interview that Samuel was never an employee of the bank, 
although he had occasionally performed some services for it. 
According to the indictment, Samuel had traveled to the United 
States on two occasions, in August and September 1993, to 
negotiate the sale of letters of credit to be issued by Hanover 
Bank in exchange for drug proceeds and a $100,000 fee for each 
$1 million laundered through the bank. A publicly available 
affidavit filed by U.S. law enforcement noted that Samuel had 
specifically mentioned Hanover Bank's correspondent 
relationships with Standard Bank in Jersey and Harris Bank in 
New York in connection with the laundering scheme.\200\ The 
affidavit indicated that Samuel had also mentioned Hanover 
Bank's involvement with a ``scam'' involving ``prime bank 
guarantees'' and laundering funds ``from Nigeria.'' \201\ 
Samuel was arrested in Atlanta, Georgia, after exchanging a 
$1,000,000 Hanover Bank letter of credit for ``what he believed 
to be . . . $100,000 in cash.'' \202\
---------------------------------------------------------------------------
    \200\ See United States v. Samuel, ``Affidavit'' dated 9/10/93, 
paragraph (3).
    \201\ Id., paragraphs (19) and (25).
    \202\ United States v. Samuel, indictment, paragraph (17).
---------------------------------------------------------------------------
    In his interview, Fitzpatrick characterized the U.S. 
prosecution as a case of ``clear entrapment.'' He said that it 
was his understanding that Samuel had received an unexpected 
telephone call from someone he knew in the United States, who 
was secretly participating in a law enforcement sting operation 
in an effort to reduce his own criminal sentence after an 
arrest. He said that the individual had apparently told Samuel 
that he had cash to invest, and wanted to buy a certificate of 
deposit or letter of credit from Hanover Bank with a face value 
of $1 million, for which he would pay $800,000 up-front and the 
rest later. He said that Samuel had told him about the 
proposal, which he had considered essentially a loan request, 
and he had approved going forward. Fitzpatrick said that he 
personally drafted the letter of credit Samuel used in the 
transaction. He said that Samuel then telephoned the person in 
the United States to inform him that the deal had been 
approved.
    He said that the person had then told Samuel that he had 
``dirty money,'' and Samuel ``fell for it'' and said he 
``didn't mind'' and would accept the cash. He said that Samuel 
flew to the United States with the letter of credit and met the 
person at a hotel, where their conversation was apparently 
recorded by the Federal Bureau of Investigation (FBI). He said 
that the person had apparently again told Samuel that he had 
``dirty money'' and Samuel had again said he ``didn't mind'' 
and would accept it. He said the FBI then arrested Samuel who 
spent 5 years in prison.\203\
---------------------------------------------------------------------------
    \203\ Fitzpatrick said that after the arrest, a friend of Samuel 
had telephoned him and told him what had happened, and he had sent some 
money to help pay Samuel's legal fees. He said that he was never 
questioned by anyone about the matter and was never asked to testify.
---------------------------------------------------------------------------
    GOAB authorities indicated, when asked about the Samuel 
money laundering conviction, that they had no knowledge or 
record of the indictment or Hanover Bank's involvement. Hanover 
Bank's local director and registered agent, Justin Simon, 
indicated that he thought the indictment had involved a 
different Hanover Bank and was surprised to hear that 
Fitzpatrick had acknowledged his bank's involvement in the 
facts underlying that prosecution. The Samuel money laundering 
conviction provided a second strong, and early indication of 
Hanover Bank misconduct, but news of the conviction apparently 
never even reached the bank's licensing authority.

  (c) Koop Fraud

    William H. Koop, a U.S. citizen from New Jersey, utilized 
Hanover Bank in a financial fraud in which, from 1997 to 1998, 
he bilked hundreds of U.S. investors out of millions of dollars 
through a high yield investment scam.\204\ In interviews with 
Minority Staff investigators, Fitzpatrick, Koop and Wingrove 
offered different and often conflicting views of what happened 
during the fraud, who was defrauding whom, and who knew what 
was going on when. Rather than attempt to evaluate their 
conflicting statements or assign culpability, the investigation 
focused on how Hanover Bank, whether knowingly or unknowingly, 
became a conduit for millions of dollars in illicit fraud 
proceeds.
---------------------------------------------------------------------------
    \204\ For more information about the Koop fraud, see the appendix 
and the case histories for British Trade and Commerce Bank and Overseas 
Development Bank and Trust.
---------------------------------------------------------------------------
    The evidence indicates that Hanover Bank played a prominent 
role in the Koop fraud in two ways. First, Koop sent almost $5 
million in fraud proceeds to Hanover Bank, partly in response 
to claims by Wingrove that Koop could earn returns of 20% or 
more. Second, Hanover Bank became a featured element in Koop 
promotional materials. Koop urged potential investors in his 
fraudulent high yield program to wire their investment funds to 
his Hanover Bank account and offered, for a fee, to open a 
Hanover Bank account for any investor wanting an offshore 
account. Documentation suggests that Koop pretended to open 
over 200 Hanover Bank accounts for his defrauded clients, 
eventually charging over $3,300 to open each new account.
    Laundering $5 Million in Fraud Proceeds. In his interview, 
Koop stated that he first learned of Hanover Bank in late 1997, 
during a London meeting in which he was introduced to Wingrove. 
In a sworn deposition, Koop said that Wingrove had claimed to 
be a ``majority stockholder of Hanover Bank'' \205\ and an 
international trader who could produce significant returns on 
short term investments.\206\ Koop indicated that, after 
checking into the background of both Wingrove and Hanover Bank, 
he had decided to open an account and direct some of his 
illicit proceeds to Wingrove for investment.\207\
---------------------------------------------------------------------------
    \205\ Koop deposition in Schmidt v. Koop (12/10/98) at 182.
    \206\ Id. at 169, 232.
    \207\ Id. at 169-71.
---------------------------------------------------------------------------
    Koop said that he never spoke with anyone else at Hanover 
Bank, including Fitzpatrick, and did not find out for a number 
of months that Wingrove had no official position with the 
bank.\208\ He said that he thought Wingrove had opened a 
Hanover Bank account for him, under the name of IFS, for which 
Koop was the sole signatory, and which paid 20% interest on 
deposits.\209\ He said that he later discovered that no account 
had ever been opened, and all the funds he sent to Hanover Bank 
had actually been deposited into Wingrove's account at the 
bank.\210\
---------------------------------------------------------------------------
    \208\ Id. at 225. See also Koop deposition in Schmidt v. Koop (3/2/
99) at 369.
    \209\ Koop deposition in Schmidt v. Koop (12/10/98) at 165-167.
    \210\ Id. at 165-66, 182-83.
---------------------------------------------------------------------------
    Koop maintained in his deposition that, of the nearly $5 
million that he and his associates directed to Hanover Bank, 
about $3 million was supposed to have been deposited into his 
account, while the other $2 million was intended for Wingrove, 
for international investments.\211\ Koop said that Wingrove 
actually took control of all $5 million and has yet to return a 
single dollar of these funds. Koop indicated that Wingrove had 
led him to believe he was investing the funds in artwork and 
antiquities, ``currency trading'' and ``computer chips,'' 
although he did not ask and was not informed about specific 
trades made with his funds.\212\
---------------------------------------------------------------------------
    \211\ Koop deposition in Schmidt v. Koop (12/10/98) at 166, 178-80.
    \212\ Id. at 169, 227-232.
---------------------------------------------------------------------------
    Wingrove maintained in his interview that he never 
misrepresented his relationship to Hanover Bank and never 
agreed to make investments of any type other than in art and 
antiquities, which were his specialty. He said that he did 
promise Koop to produce a 50% return over a 5-year period from 
the purchase and sale of art and antiques. Both Koop and 
Wingrove agreed, however, that this promise was never put in 
writing, and Koop sent Wingrove millions of dollars without any 
formal agreement.
    Wingrove said that ``within weeks'' of their first meeting, 
Koop began sending him money to speculate in art. He said, at a 
later point, Koop arranged for him to meet his associate, 
Johnny Cabe, who was in London on a business trip. He said that 
Cabe also began to invest funds with him and introduced him to 
his London accountant, Winston Allen.
    Both Koop and Wingrove indicated that the $5 million sent 
to Hanover Bank was part of a larger sum, $12 million, that 
Koop directed to Wingrove over the course of 6 months using 
accounts at several banks. According to Wingrove, the funds 
sent to Hanover Bank were at first deposited by Koop through 
his company IFS,\213\ or by Cabe through his company Hisway 
International Ministries. Later, Wingrove said, funds were sent 
to Hanover Bank by third parties in the United States with whom 
he had no direct contact. He said these third party deposits 
caused confusion and cash flow problems, because the timing and 
amounts of the deposits often conflicted with information 
provided by Koop or Cabe about incoming funds.
---------------------------------------------------------------------------
    \213\ As explained in the BTCB case history, ``IFS'' refers to 
several different corporations controlled by Koop, including 
International Financial Solutions. Ltd. and Info-Seek Asset Management 
S.A.
---------------------------------------------------------------------------
    Standard Bank account statements at Harris Bank 
International and a Hanover Bank account statement prepared for 
the Wingrove account \214\ show numerous deposits related to 
the Koop fraud, totaling almost $5 million. Fitzpatrick 
confirmed that he attributed all of these funds to the Wingrove 
account. He explained that he had never met Koop or any of the 
other persons indicted in the Koop fraud and had never opened 
an account for any of them other than Wingrove. Fitzpatrick 
indicated that he had no idea that Koop and Cabe thought they 
had accounts at Hanover Bank and were directing funds into 
them. According to him, that was why it never occurred to him, 
when a $240,000 deposit was made on April 6, 1998, to 
``International Financial Solutions,'' or a $103,000 deposit 
was made on April 22, 1998, to ``Hisway Inc.,'' that the funds 
might be intended for an account other than the Wingrove 
account.\215\ Banking experts, however, have told the Minority 
Staff that a bank's casual acceptance of deposits earmarked for 
persons or accounts not associated with the bank is both 
unusual and improper bank procedure.
---------------------------------------------------------------------------
    \214\ Fitzpatrick and Poulden prepared one account statement for 
the Wingrove account, covering the months of April and May 1998. This 
document was turned over by Hanover Bank in discovery proceedings 
associated with a U.S. civil suit filed by an investor attempting to 
recover his funds from Koop, Schmidt v. Koop (U.S. District Court for 
the District of New Jersey Civil Case No. 978-CIV-4305). This suit 
named Hanover Bank as a defendant, but voluntarily dismissed the bank 
from the suit after obtaining discovery documents.
    \215\ Virtually all of the deposits credited by Fitzpatrick to the 
Wingrove account were directed to be paid to someone other than 
Wingrove. For example, the very first deposit into the 1998 Hanover 
Bank account at Standard Bank was for $250,000 on March 30, 1998. That 
deposit was made by wire transfer from the United States and directed 
the funds to be paid to ``Financial Solutions Ltd.'' Three days later, 
on 4/2/98, $1.2 million was deposited into the Hanover Bank account for 
further credit to ``Acct A01001001 INT.'' Fitzpatrick acknowledged in 
his interview that Financial Solutions Ltd. was not a Hanover Bank 
accountholder, nor would Hanover Bank's numbering system produce an 
account number like ``A01001001.'' He said that many of the deposits 
into the Hanover Bank account referenced companies or individuals who 
were not accountholders at the bank and were unfamiliar to him. When 
asked how he knew to credit such funds to the Wingrove account, 
Fitzpatrick said that Wingrove had sometimes called to alert him to 
expected incoming funds, while other times Wingrove had appeared 
surprised by particular deposits but agreed they should be attributed 
to his account.
---------------------------------------------------------------------------
    Fitzpatrick noted that Hanover Bank had only a handful of 
accounts in 1998, and the Wingrove account was the only one 
receiving numerous deposits at the time.\216\ He said that he 
opened the Wingrove account in November 1997, but Wingrove did 
not begin using it until March 1998, when Hanover Bank opened 
its correspondent account at Standard Bank. Fitzpatrick stated, 
and bank records confirm, that from the day the account opened, 
Wingrove immediately began moving millions of dollars through 
it.
---------------------------------------------------------------------------
    \216\ Fitzpatrick said that the only other active Hanover Bank 
accounts in 1998 had been opened by Poulden, who would tell him when 
incoming funds should be credited to one of his clients' accounts.
---------------------------------------------------------------------------
    The bank records and other information indicate that 
Wingrove quickly transferred the deposits made into his Hanover 
Bank account to other bank accounts around the world. 
Fitzpatrick said that the quick passage of the funds through 
the Wingrove account did not strike him as suspicious, since he 
assumed Wingrove was receiving funds from clients and 
immediately using the funds to purchase artwork. Legal action 
on behalf of Koop fraud victims has since been taken to seize 
remaining funds from Wingrove-controlled accounts as well as 
some of the artwork purchased with the Koop funds.
    Advertising Hanover Bank in the Fraud. In early 1998, 
promotional materials associated with the Koop fraud began to 
feature Hanover Bank. One example is a packet of information 
entitled, ``The I.F.S. Monthly `Prime' Program,'' which Koop 
gave to potential investors to convince them to place funds in 
his fraudulent investment program. Section 2 of the packet, 
entitled ``Wire Transfer Instructions,'' directed all investors 
to send their funds to the IFS account at Hanover Bank.\217\ 
The Koop packet also provided background information about 
Hanover Bank, describing the bank's establishment, services and 
correspondents, and claiming the bank had ``one of the most 
extensive and complete list of correspondent banks in the 
entire banking business.''
---------------------------------------------------------------------------
    \217\ These instructions stated in part:

      ``Deposit Funds To: Harris Bank International, New York, New 
York
      For Credit To: Standard Bank Jersey, Limited, Isle of Jersey, 
Channel Islands
      For Further Credit To: Hanover Bank, Limited
      For Further Credit To: I.F.S. Account #A01-001-001.''
---------------------------------------------------------------------------
    In an early version of the Koop packet, a document entitled 
``Banking Information'' stated:

      We have made arrangements with The Hanover Bank to open 
accounts for each of our clients . . . without any charge to 
you. If you are interested in doing so, please send a duplicate 
copy of your bank reference letter and a copy of your passport 
picture page. . . . IFS will then open an account for you in 
The Hanover Bank in the name of your trust. We are negotiating 
for the purchase of this bank at this time.

    A later version of this document stated that, ``[a]s of 
April 1st, 1998, IFS has . . . become the largest stockholder . 
. . of the Hanover Bank.'' A document entitled, ``Trusts and 
Bank Accounts'' offered to set up an offshore trust and bank 
account at Hanover Bank for $3,375, with checks made payable to 
Koop. Both the early and late versions of the Koop packet 
provided blank copies of Hanover Bank's account opening forms 
for personal and corporate accounts.
    Still another document, dated June 22, 1998, and entitled 
``A Personal Letter from the Desk of William H. Koop,'' 
described how Koop's company, IFS, had been experiencing 
problems with its prior bank, Overseas Development Bank, and 
decided to make a ``changeover'' to Hanover Bank. The document 
described plans to ``re-structure'' the bank and move its 
``operating office from Antigua to the Island of Jersey.'' The 
Koop letter promised ``in the very near future'' to ``unveil 
the positive factors of the bank, showing you the opportunities 
that it will present to you personally [including]. . . . 
numbered accounts[,] . . . high interest rates on time deposit 
accounts[, and] . . . debit cards.'' The Koop letter remarked 
that, by June 1998, ``[m]ost of you'' already had Hanover Bank 
accounts. Documents collected in civil proceedings associated 
with the Koop fraud \218\ included a specific list of investors 
who supposedly had Hanover Bank accounts. This list identified 
over 200 individuals by name, providing each with a fictitious 
account number at Hanover Bank.
---------------------------------------------------------------------------
    \218\ Schmidt v. Koop, (U.S. District Court for the District of New 
Jersey Civil Case No. 978-CIV-4305).
---------------------------------------------------------------------------
    Fitzpatrick indicated during his interview that he had no 
idea at the time that Koop was purporting to open Hanover Bank 
accounts. Fitzpatrick speculated, and Wingrove separately 
confirmed, that Koop had obtained copies of Hanover Bank's 
account opening forms and wire transfer instructions from 
Wingrove, who had that information. Wingrove stated in his 
interview that he had sent the Hanover Bank account opening 
forms to Koop, because Koop had been considering opening an 
account.
    When asked about statements in the IFS promotional 
materials about purchasing Hanover Bank, Koop indicated during 
his interview that he and Wingrove had often spoken about 
buying the bank, but never completed the transaction. In a 
sworn deposition, Koop said Wingrove had told him he was 
``going to have a percentage of stock in [Hanover Bank, but] . 
. . never turned the stock over to me.'' \219\
---------------------------------------------------------------------------
    \219\ Koop deposition in Schmidt v. Koop, (12/10/98) at 158.
---------------------------------------------------------------------------
    Koop created further confusion about his relationship to 
Hanover Bank and the bank's role in the Koop fraud by 
incorporating a Dominican company called ``Hanover B Ltd.'' and 
opening an account at British Trade and Commerce Bank (BTCB) in 
the name of this corporation. Koop stated in a sworn deposition 
that he chose the company's name ``to correspond to Hanover 
Bank.'' \220\ Wingrove indicated during his interview that he 
was well aware of the account at BTCB, thought Koop had opened 
it in a deliberate attempt to ``mirror'' the Hanover Bank 
account, and thought it had helped Koop appear to be opening 
Hanover Bank accounts for Koop investors. Fitzpatrick indicated 
that he knew nothing of ``Hanover B Ltd.,'' had never had any 
contact with BTCB, and had never opened a correspondent account 
for Hanover Bank at BTCB.
---------------------------------------------------------------------------
    \220\ Koop deposition in Schmidt v. Koop (3/2/99) at 431.
---------------------------------------------------------------------------
    The Koop fraud provides a detailed account of how criminals 
can use an offshore bank to launder funds and perpetuate 
financial frauds. It also demonstrates how loose bank controls 
and nonexistent money laundering oversight contribute to the 
ability of criminals to carry out their activities. Fitzpatrick 
repeatedly said that he had no knowledge of Koop's misconduct, 
Wingrove's misrepresentations, or their joint misuse of the 
bank, yet he also failed to follow basic banking procedures 
that would have enhanced his awareness and understanding of the 
transactions taking place through his bank. When asked when he 
first got wind of possible wrongdoing, Fitzpatrick said that 
the first indications probably came in the summer of 1998, when 
he learned that the U.K. Financial Services Authority was 
investigating Hanover Bank for illegal banking activities in 
England and Jersey and asking about Wingrove's role at the 
bank.

  (d) Illegal Bank Activities in England and Jersey

    In 1998, for the first time since the Clerical Medical 
scandal 5 years earlier, bank regulators in England and Jersey 
took a close look at Hanover Bank. They determined that the 
bank was not only operating illegally in both their countries, 
but was also moving millions of dollars in suspect funds. Their 
inquiry led to exposure of the Koop fraud, the censure of 
Standard Bank for providing correspondent services to Hanover 
Bank, and additional regulatory examination of this offshore 
shell bank's activities.
    The 1998 inquiry began after an individual who was 
considering depositing funds with the bank asked Jersey banking 
authorities to confirm that Hanover Bank had a Jersey banking 
license and a London representative office.\221\ The Jersey 
authorities contacted the U.K. Financial Services Authority 
(FSA) which obtained a search warrant, entered the alleged 
Hanover Bank office in London, and seized documents. The 
documents included Hanover Bank ``brochures'' stating that 
``[t]he bank holds a license to conduct international banking 
business on the Island of Jersey'' and was ``operating within 
the security of Jersey's stringent banking laws.'' \222\ 
Another document described the London address as Hanover Bank's 
``Representative Office.'' \223\ FSA investigators then 
interviewed persons associated with the London office, 
including Terrence Wingrove, Winston Allen \224\ and Patrick 
Makosso-Jouvam.
---------------------------------------------------------------------------
    \221\ See FSA v. The Hanover Bank Ltd., ``First Affidavit of Peter 
Geoffrey Brian Willsher,'' (7/23/98) at 4. See also FSA Press Release, 
``The FSA gains injunctions against Hanover Bank Limited, Winston Allen 
and Patrick Makosso-Jouvam'' (7/24/98), reprinted at www.fsa.gov.uk/
pubs/press/1998/050.html; and Terry Wingrove, Winston Allen, Patrick 
Makosso-Jouvam (CH 1998 Case No. F4107) before the High Court of 
Justice, Chancery Division. Neither the FSA nor Jersey authorities 
would provide copies of the pleadings. However, Fitzpatrick provided 
copies of certain pleadings to the plaintiff in Schmidt v. Koop 
pursuant to discovery in that case, and plaintiff provided copies to 
the Minority Staff investigation.
    \222\ Id. at 5.
    \223\ Id. at 7-8.
    \224\ Evidence obtained by the Minority Staff investigation 
indicates that Allen was also associated with the Koop fraud. For 
example, documentation and interviews establish that, in 1997 and 1998, 
Allen worked for Cabe, Hisway International Ministries, and related 
companies. In a sworn deposition, Koop described Allen as ``a personal 
friend'' to whom he loaned over $140,000 to purchase and furnish an 
apartment in New York. See Schmidt v. Koop, Koop deposition (12/10/98) 
at 209, 211-14, 235-36, 243; and Koop deposition (3/2/99) at 393-95. A 
10/1/98 fax sent by Koop to Leonard Bedneau at BTCB, asked the bank to 
establish a new Dominican corporation called Atlantic Marine Bancorp, 
Ltd. and ``add Winston Allen as an organizer with William H. Koop.'' 
Wingrove indicated in his interview that Allen was also involved in 
Koop's establishment of the Hanover B account at BTCB.
---------------------------------------------------------------------------
    On July 24, 1998, at the request of the FSA, the High Court 
in London issued an emergency injunction prohibiting Hanover 
Bank from conducting banking activities in the United Kingdom, 
since it was not licensed to accept deposits or operate a 
representative office.\225\ An affidavit filed in the case by 
an FSA official stated that Wingrove had allegedly represented 
himself to be Hanover Bank's chairman and promised to pay 
commissions to Allen and Jouvam if they located new deposits 
for the bank.
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    \225\ The injunction also prohibited Wingrove, Allen, and Jouvam 
from ``using the name Hanover Bank,'' describing themselves as bankers, 
or otherwise engaging in banking activities within the United Kingdom. 
A second FSA affidavit in FSA v. The Hanover Bank Limited, ``Second 
Affidavit of Peter Geoffrey Brian Willsher (7/28/98), asked the court 
to restrain Wingrove from ``making certain misleading, false or 
deceptive statements'' regarding Hanover Bank.
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    Fitzpatrick said that he first learned of the FSA 
injunction when, in July 1998, he received a letter from 
Standard Bank stating that it intended to close Hanover Bank's 
correspondent account due to its distribution of inaccurate 
literature. He said the letter was a ``shock,'' and he 
immediately began investigating the matter. Fitzpatrick said he 
eventually learned of the role of Wingrove, who denied 
misrepresenting his relationship with Hanover Bank and admitted 
only to describing Hanover Bank's willingness to pay 
commissions for new deposits. Fitzpatrick said that Allen and 
Jouvam had used a computer to design new Hanover Bank 
``literature'' to market the bank, included incorrect 
information about its license and ability to transact business 
in the U.K. and Jersey; and began prospecting for clients.\226\ 
Fitzpatrick indicated that he did not know how many clients had 
been contacted or how many accounts had been purportedly opened 
in the Allen-Jouvam marketing effort, but believed no deposits 
had actually been made to the bank in connection with the 
effort.\227\
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    \226\ In his interview, Wingrove essentially confirmed 
Fitzpatrick's description of what happened, but maintained that Allen 
and Jouvam had prepared the false Hanover Bank literature without his 
knowledge or involvement.
    \227\ An analysis of Hanover and Wingrove account statements by 
Minority investigators, however, found one $50,000 deposit on May 20, 
1998, described in wire transfer documentation as a transfer from 
``Metro Telecom Inc.'' for further credit to ``Ottershaw Consultancy 
Ltd.,'' but which was credited to the Wingrove account and appeared to 
be associated with the Allen-Jouvam marketing effort. When asked about 
this deposit, Fitzpatrick said that he was unfamiliar with the names 
and could not recall the circumstances surrounding the deposit. He said 
it was possible that Wingrove had told him to credit the $50,000 to his 
account and he did so without asking additional questions.
---------------------------------------------------------------------------
    On November 26, 1998, the High Court in London withdrew the 
injunction against Hanover Bank, with the consent of the FSA 
and on Hanover Bank's representation that it would not transact 
any banking business in the U.K. Hanover Bank issued a press 
release claiming it had been cleared and including the 
Fitzpatrick statement, ``I am delighted the FSA has accepted 
that the bank was not involved in any wrongdoing.''
    But the FSA had not cleared Hanover Bank of wrongdoing. To 
the contrary, the inquiry led FSA and Jersey authorities to 
take a much closer look at Hanover Bank and its Standard Bank 
account. Jersey authorities alerted U.S. authorities to signs 
of suspicious activity in the Standard Bank account at Harris 
Bank International, which led to a U.S. law enforcement 
investigation of the Koop fraud, and the resulting guilty pleas 
and pending indictments, including the pending indictment of 
Wingrove. Jersey authorities not only cooperated with the U.S. 
investigation, but also launched an investigation of Standard 
Bank, resulting in the censure of the bank and the departure of 
the bank's chairman.
    Fitzpatrick was asked during his interview, what steps 
Hanover Bank had taken or could take in the future to prevent 
third parties like Koop, Wingrove, Allen and others from 
misusing the bank's name and pretending to own it. Fitzpatrick 
responded that he was only one person, the bank was very small, 
and it was very difficult to guard against third parties 
misusing the name and reputation of the bank. He said that he 
had experienced repeated instances of strangers misrepresenting 
the ownership of Hanover Bank, and there was ``nothing [he] can 
do to stop it'' unless others demanded adequate proof of 
ownership.
    He related an incident of several years ago in which his 
Antiguan agent, Justin Simon, telephoned him from Antigua to 
say that a Brazilian businessman was on the island claiming to 
be the Brazilian representative of Hanover Bank and 
investigating the bona fides of the bank. He asked Simon to 
have the gentleman telephone him in Ireland. He said that the 
person called, and Fitzpatrick informed him of his ownership of 
Hanover Bank. He said the Brazilian told him that a U.S. 
citizen had shown him documents establishing his ownership of 
the bank and had asked him to become the bank's Brazilian 
representative to find new deposits for the bank. Fitzpatrick 
said that the Brazilian told him he had already raised $15,000. 
Fitzpatrick said that when he asked for the name, address and 
telephone number of the U.S. person claiming ownership of the 
bank, the Brazilian said that he did not have that information. 
Fitzpatrick said this was not the only incident of this kind--
it had happened a number of times over the years.

  (e) Casio Fraud

    227An analysis of Hanover and Wingrove account statements 
by Minority investigators, however, found one $50,000 deposit 
on May 20, 1998, described in wire transfer documentation as a 
transfer from ``Metro Telecom Inc.'' for further credit to 
``Ottershaw Consultancy Ltd.,'' but which was credited to the 
Wingrove account and appeared to be associated with the Allen-
Jouvam marketing effort. When asked about this deposit, 
Fitzpatrick said that he was unfamiliar with the names and 
could not recall the circumstances surrounding the deposit. He 
said it was possible that Wingrove had told him to credit the 
$50,000 to his account and he did so without asking additional 
questions.
    In 1998, banking authorities examined Hanover Bank for 
illegal banking activities in Jersey and the United Kingdom and 
launched an investigation into what would turn out to be the 
Koop fraud, but they apparently missed the bank's possible 
involvement in still another multi-million-dollar financial 
fraud, which began in Japan and led to legal proceedings in 
multiple jurisdictions. The fraud involved a major Japanese 
electronics company, Casio Computer Co. Ltd. (``Casio''), which 
filed suit in Japan, the United Kingdom and the United States, 
among other countries, claiming that a senior employee, Osamu 
Sayo, had defrauded the company out of $100 million.\228\ The 
legal suits sought worldwide injunctions against Sayo and other 
individuals and corporate entities associated with the fraud, 
including Theoddor Tsuru, who had apparently been hired by Sayo 
to help hide and invest a portion of the stolen funds.
---------------------------------------------------------------------------
    \228\ See, for example, Casio Computer Co. v. Sayo (CH 1998-C No. 
3241) before the High Court of Justice Chancery Division in London, 
including 6/10/98 ``Injunction Prohibiting Disposal of Assets 
Worldwide'' naming Tsuru, among other defendants; and Casio Computer 
Co. v. Sayo (U.S. District Court for the Southern District of New York, 
Civil Case No. 98-Civ-3772-WK), including 6/18/98 ``Second Amended 
Complaint'' naming Tsuru, among other defendants.
---------------------------------------------------------------------------
    Casio alleged in its U.S. complaint that ``the various 
conspirators lied to, and cheated, Casio and each other, 
generated fraudulent records to conceal the frauds, and engaged 
in an elaborate series of wire transfers in an effort to 
launder the stolen funds and conceal their racketeering 
activities.'' \229\ Tsuru is described as a key conspirator 
who, beginning in February 1997, helped transfer Casio funds 
through numerous bank accounts and place them in various high 
yield investment schemes. The U.S. complaint alleged, among 
other misconduct, that Tsuru personally misappropriated a 
portion of the missing money, stating: ``All told, it appears 
that Tsuru stole at least $8,000,000 of the Casio funds.'' 
\230\
---------------------------------------------------------------------------
    \229\ Casio Computer Co. v. Sayo (U.S. District Court for the 
Southern District of New York, Civil Case No. 98-Civ-3772-WK), Second 
Amended Complaint at 2.
    \230\ Id. at 15.
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    In June 1998, the London court issued a worldwide Mareva 
injunction freezing Tsuru's assets, including a $2 million 
house in Japan, a $2 million house in Florida, a $1.8 million 
apartment in New York, and a $4 million yacht. It later issued 
a judgment against him and ordered him to repay $3.3 million to 
Casio. Additional civil litigation in the United States 
involving Tsuru and the Casio funds is ongoing in Florida, 
Illinois and New York.
    Based upon the Minority Staff investigation's analysis of 
bank records and other evidence, it appears that three 1998 
Hanover Bank deposits totaling about $12.6 million are likely 
associated with the Casio fraud. The deposits were made on 
three occasions in 1998, using Standard Bank's U.S. 
correspondent account at Harris Bank International.\231\ The 
evidence linking the deposits to the Casio fraud includes the 
following:
---------------------------------------------------------------------------
    \231\ The three deposits were:

      --$2.475 million deposited on 3/31/98, which Hanover Bank 
credited to the Doi account;
      --$190,000 deposited on 4/22/98, which Hanover Bank apparently 
credited to the Tsuru-Abe joint account; and
      --$10 million deposited on 5/29/98, which Hanover Bank 
apparently credited to the Morgan Steepleton account.

      --Both Fitzpatrick \232\ and Wingrove \233\ indicated 
during their interviews that they thought the deposits were 
likely related to the Casio fraud.
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    \232\ When asked whether he thought Tsuru was using Hanover Bank in 
connection with the Casio fraud, Fitzpatrick said that he did not know, 
but ``it looks like that.'' He said he first found out about the Casio 
fraud through an article in The Observer that ``had Tsuru's name all 
over it.'' He said he immediately wrote to Poulden expressing concern 
and the need to remove Tsuru from the bank's board, and later rescinded 
Tsuru's appointment. Fitzpatrick said that he also wrote to Doi asking 
him whether his account was associated with the Casio fraud, and 
received a letter denying any connection. He agreed to provide copies 
of that letter exchange, but did not do so. He noted, however, that Doi 
was from Japan, the source of funds in his account was unclear, and Doi 
allegedly allowed his funds to be used for various investments at the 
direction of Tsuru, Abe and Poulden. Fitzpatrick also noted that when 
$400,000 was mistakenly withdrawn from the Doi account due to the 
Wingrove overdraft, Doi never complained or demanded return of the 
funds, which he found unlikely conduct with respect to legitimate 
funds.
    \233\ Wingrove indicated that he also believed the funds deposited 
in Hanover Bank were associated with the Casio fraud. He indicated that 
he was first introduced to Tsuru and Poulden by Fitzpatrick in March of 
1998, when Tsuru was attempting to recover funds from another 
individual associated with the Casio fraud, Joseph R. Kelso. (Kelso's 
role in the Casio fraud is described, for example, in ``Wanted--over 
there, but not over here,'' The Observer (4/12/98); and ``Casio admits 
to $100m loss as executive goes into hiding,'' The Observer (6/21/98).) 
Wingrove said that he met with Kelso on Tsuru's behalf while Kelso was 
detained in England on alleged immigration violations and obtained some 
promising information. Wingrove indicated that, because he spoke fluent 
Japanese and was promised 10% of any funds he recovered, he also 
traveled to Japan on behalf of Tsuru and Poulden. He declined to 
provide specific information about the trip, other than to say he met 
with Doi among others, and when he returned in May 1998, warned 
Fitzpatrick about what he had found out. He said that, in the end, he 
never recovered any funds for Tsuru.

      --The funds were deposited into accounts opened at the 
direction of Poulden, who was then an associate and 
representative of Tsuru, a key figure in the Casio fraud.\234\
---------------------------------------------------------------------------
    \234\ Poulden had introduced Tsuru and convinced Fitzpatrick to 
appoint Tsuru to Hanover Bank's board in March 1998. Tsuru stated in 
pleadings before the London High Court that, from September 1997 until 
well into 1998, he had employed Poulden as a ``barrister'' to represent 
him in matters relating to unsuccessful investments made with the Casio 
funds. See Casio Computer Co. v. Sayo (CH 1998-C No. 3241), ``Third 
Affirmation of Theoddor Tsuru'' (1/12/99) at 63. Since, by Tsuru's own 
admission, Poulden was representing him in 1997 and 1998, in matters 
involving investments made with Casio funds, it is logical to assume 
Poulden was continuing to do so in connection with their dealings with 
Hanover Bank.

      --The deposits were made in 1998, when Tsuru was still 
handling Casio funds, and were deposited to accounts associated 
with Tsuru, including a joint Tsuru-Abe account, the Doi 
account and a corporate account for Morgan Steepleton, a 
---------------------------------------------------------------------------
company Fitzpatrick said was associated with Tsuru.

      --The bulk of the funds were withdrawn through wire 
transfers authorized by Poulden during the period he was 
associated with Tsuru.

    While the evidence linking the $12.6 million to the Casio 
fraud is far from conclusive, it is more than sufficient to 
raise concern. U.S. legal counsel for Casio indicated that they 
were spending considerable time trying to track down funds and 
assets related to the Casio fraud, had been wholly unaware of 
the Tsuru-related accounts at Hanover Bank, and were interested 
to learn of the deposits and withdrawals.
    The fate of the Casio funds that were still on deposit with 
Hanover Bank when the bank became inactive in 1998 is also of 
interest. Fitzpatrick indicated that all remaining funds in its 
account at Standard Bank were transferred in December 1998 or 
January 1999, to an attorney trust account belonging to the 
bank's London solicitor, Finers. No documents were produced, 
however, showing exactly how much was transferred to the Finers 
account. Evidence obtained by the investigation indicates that, 
at the time, a dispute arose between Fitzpatrick and Poulden 
over where the funds should be transferred, with each man 
insisting on a different attorney trust account. Fitzpatrick 
resolved the dispute by terminating Poulden's relationship with 
Hanover Bank and instructing Standard Bank to transfer the 
funds to Finers. There is also some evidence that Tsuru may 
have asserted ownership of the funds, which Fitzpatrick 
declined to acknowledge in light of the Casio fraud and 
uncertainty over the funds' status.
    Fitzpatrick indicated during his June 2000 interview, that 
the funds sent to Finers remain in the attorney trust account, 
although somewhat reduced by legal fees. The bank's 1998 
financial statement shows that Hanover Bank also paid 
Fitzpatrick a 1998 ``dividend'' of $1.9 million. The source of 
the funds used to pay the $1.9 million dividend is unclear; if 
the funds were drawn from the Hanover Bank correspondent 
account at Standard Bank, they may have included illicit 
proceeds from the Casio fraud.

  (7) Correspondent Account at Harris Bank International

    In 1998, over a 3-month period, Hanover Bank accumulated 
deposits of more than $17 million. Nearly $5 million of these 
deposits came from the self-confessed Koop fraud; the remainder 
appears likely to have been associated with the Casio fraud. 
All $17 million was deposited into and later transferred from 
Standard Bank's U.S. correspondent account at Harris Bank 
International in New York. The evidence indicates this U.S. 
account was the account Hanover Bank used most often during 
1998, although Harris Bank International had no knowledge it 
was providing correspondent services to this offshore shell 
bank.
    Information about Hanover Bank's use of the Harris Bank 
International account was obtained, in part, through interviews 
with Harris Bank International personnel involved in the 
administration of the Standard Bank account. Standard Bank 
declined to provide either an interview or written response to 
a letter requesting information. Documentation in Harris Bank 
International files, account statements, and other materials 
and information were collected and reviewed.
    Harris Bank International. Harris Bank International Corp. 
(``Harris Bank International'') is a wholly owned subsidiary of 
Harris Trust and Savings Bank, a major Midwestern bank with 
over 6,500 employees and over $26 billion in assets.\235\ 
Harris Bank International, an Edge Act corporation with about 
40 employees, is headquartered in New York City, with a 
representative office in London. Both banks are members of the 
Bank of Montreal Group of companies.
---------------------------------------------------------------------------
    \235\ See Harris Bank website at www.harrisbank.com/facts.html; and 
6/15/00 letter from Harris Bank International to the Subcommittee.
---------------------------------------------------------------------------
    According to Harris Bank International personnel, its core 
business is international correspondent banking, particularly 
handling U.S. dollar ``electronic funds transfers of 
international origin.'' \236\ In the Bankers Almanac, about 40 
foreign banks identify Harris Bank International as their U.S. 
correspondent. These 40 banks include a few large banks and 
many smaller banks, including banks in jurisdictions known for 
bank secrecy, weak anti-money laundering controls or high money 
laundering risks, such as Austria, Bosnia-Hercegovina, Costa 
Rica, Latvia, Luxembourg, and Turkey. One of the 40 is Standard 
Bank Jersey Ltd.
---------------------------------------------------------------------------
    \236\ Letter dated 6/15/00 from Harris Bank International to 
Subcommittee.
---------------------------------------------------------------------------
    Standard Bank and Hanover Bank. Harris Bank International 
indicated that Standard Bank Jersey Ltd. was one of its larger 
clients. Harris Bank International account statements for 
Standard Bank Jersey Ltd. show numerous transactions involving 
millions of dollars each day, including large bank-to-bank and 
bank-to-broker transfers and smaller transfers involving 
individual clients. The transactions included significant sums 
transferred to or from foreign banks in the Standard Bank 
group. In 1998 and 1999, the Standard Bank account saw so many 
transactions each day that Harris Bank International issued 
daily account statements. Daily account totals during April 
1998, for example, ranged from a low of $3.4 million on April 
10th to a high of $134 million on April 28th. In just 3 months, 
from April to June 1998, when the Hanover Bank account was 
active, more than $1.5 billion was deposited into the Standard 
Bank account at Harris Bank International, primarily through 
inter-bank transfers and the sale of large blocks of 
securities. Of that $1.5 billion, only about $17 million, or 
about 1% of the total, were deposits to Hanover Bank.
    Harris Bank International stated in its letter to the 
Subcommittee that it has ``never maintained an account 
relationship for Hanover Bank Ltd., Antigua and has acted only 
as an intermediary to transactions on behalf of Standard Bank, 
Jersey.'' Harris Bank personnel indicated that the bank did not 
even know that it had been providing correspondent services to 
Hanover Bank in 1998. Fitzpatrick and Harris Bank personnel 
agreed that the two banks had never communicated directly with 
each other.\237\ Harris Bank International indicated that it 
had not known that Hanover Bank was an offshore shell bank, or 
that it was owned by a single individual and licensed by a 
secrecy jurisdiction. It indicated that, if Hanover Bank had 
applied directly for a correspondent relationship, Harris Bank 
International would likely have rejected the application.
---------------------------------------------------------------------------
    \237\ Wingrove said in his interview that he frequently spoke with 
Harris Bank International customer service personnel in 1998, to find 
out whether certain wire transfers had been deposited into the Hanover 
Bank account, but the bank indicated that its customer service 
representatives had no recollection of Wingrove.
---------------------------------------------------------------------------
    Harris Bank International's lack of awareness of Hanover 
Bank is attributable, in part, to the relatively small number 
and dollar volume of transactions involving Hanover Bank, when 
compared to the other activity in the Standard Bank account. But it is 
also attributable to Harris Bank International's practice of 
not asking its respondent banks about their bank clients.
    Harris Bank International indicated, for example, that 
despite having a longstanding correspondent relationship with 
Standard Bank of Jersey, it had no information on Standard 
Bank's own correspondent practices. Harris Bank International 
did not know how many accounts Standard Bank had opened for 
foreign banks, nor did it know whether Standard Bank would 
readily accept offshore shell banks or banks in secrecy 
jurisdictions with weak anti-money laundering controls. Harris 
Bank International indicated that, even after the Hanover Bank 
incident, it had not collected information on what foreign 
banks may be utilizing Standard Bank's account, and had no 
immediate plans to find out.
    Harris Bank International stated in its letter to the 
Subcommittee that it did conduct ongoing due diligence reviews 
of Standard Bank and its correspondent account. It indicated, 
for example, that it took steps to ensure that Standard Bank 
had an active anti-money laundering program in place, and 
provided a copy of Standard Bank's November 1999 ``Anti-Money 
Laundering Handbook.'' Standard Bank's Handbook provides 
general information and specific bank procedures for combating 
money laundering. It specifies a Money Laundering Reporting 
Officer for the bank, emphasizes the bank's need to ``know its 
customers,'' and provides useful guidance on how to recognize 
and respond to signs of possible money laundering. The Handbook 
provides employee instruction on account opening and monitoring 
procedures, conducting due diligence, and reporting suspicious 
activity. It does not provide any specific guidance or 
instruction on correspondent banking. Because Standard Bank did 
not respond to requests for information, it is not clear if the 
same due diligence procedures were in place in 1998, or how the 
bank applies its anti-money laundering policies and procedures 
to correspondent bank clients.
    Harris Bank International said that it has correspondent 
relationship managers in New York and London who oversee the 
Standard Bank account. It indicated that it monitors all of its 
accounts, including the Standard Bank account, by ``regularly 
review[ing] transaction volumes, value and payment content.'' 
Harris Bank International indicated that its monitoring efforts 
have relied on manual reviews of this information, but after a 
recent Federal Reserve audit recommended strengthening its 
monitoring program, it has allocated funds and is in the 
process of selecting an electronic monitoring system. It 
indicated that its manual monitoring program did not and could 
not have identified the Hanover Bank transactions as a problem, 
because the total dollar volume involved represented such a 
small portion of the Standard Bank account activity. As it 
stated in its letter to the Subcommittee, the Hanover 
transactions ``were not and would not be considered suspicious 
from our intermediary bank perspective. These transaction types 
are typical of Standard Bank.''
    Harris Bank International said that it had relied on 
Standard Bank to comply with its Anti-Money Laundering Handbook 
and exercise due diligence in opening and monitoring all of its 
accounts, including the Hanover Bank account. Harris Bank 
International indicated that, it was only after the Minority 
Staff inquiry about the account, that it learned Jersey 
regulators had censured Standard Bank for failing to conduct 
adequate due diligence in initiating a correspondent 
relationship with Hanover Bank.
    As described earlier, in July 2000, the Jersey Financial 
Services Commission issued a statement finding that senior 
officials at Standard Bank had ``failed to follow proper 
procedures,'' and the bank had fallen ``well short of the 
standards expected'' with respect to due diligence. The 
statement commended the bank for making changes in its senior 
management, including dismissing the chairman of the bank, 
Berkeley. Because Jersey officials declined to provide copies 
of their investigative report or the supporting bank 
documentation, it is unclear whether they made assessments or 
issued findings regarding Standard Bank's overall anti-money 
laundering efforts in correspondent banking.

B. THE ISSUES

    Hanover Bank is a little known, offshore shell bank, 
licensed by a small bank secrecy jurisdiction. It is 
essentially a one-man operation, taking deposits, wiring funds 
and dabbling in credit transactions, with virtually no controls 
and minimal outside oversight. On two occasions it opened a 
correspondent account at Standard Bank in Jersey and conducted 
transactions through Standard Bank's U.S. correspondent account 
at Harris Bank International in New York, unbeknownst to Harris 
Bank International. In 3 months in 1998, Hanover Bank moved 
over $17 million through the New York account, virtually all of 
which were likely illicit proceeds from the Koop and Casio 
frauds. The U.S. bank responsible for accepting and wire 
transferring the $17 million had no idea it was providing 
correspondent services to an offshore shell bank with no 
office, no trained staff, few operational controls, and past 
associations with fraud and criminal money laundering.

  Offshore Shell Bank Operations

    Because Hanover Bank's owner, GOAB authorities, and Harris 
Bank International cooperated with the investigation, and 
supporting documents and interviews were obtained from several 
sources, the Hanover Bank case history provides a rare 
opportunity to take a close look at how one offshore shell bank 
operated on a day-to-day basis. The view is not an inspiring 
one.
    Hanover Bank operated well outside the parameters of normal 
banking practice, without the most basic administrative 
controls that U.S. banks expect in a regulated financial 
institution. It did not have a single trained banker or 
accountant on staff. It had no full time staff at all. It had 
no electronic ledger, and stored its records at the bank 
owner's personal residence. It opened accounts with little or 
no account opening documentation. It drew up a one-page set of 
due diligence requirements for new accounts and then ignored 
them. It accepted incoming funds for persons who were not 
accountholders at the bank. It kept all of its funds in its 
correspondent accounts and tracked client deposits by reviewing 
monthly correspondent account bank statements. It authorized 
outgoing wire transfers, without documenting who had authority 
to withdraw funds from particular client accounts. It operated 
without compiling or issuing regular client account statements. 
It certified one client account as having $16.5 million, when 
the account balance never exceeded $2.4 million. It incurred an 
$800,000 overdraft after failing to check a client's account 
balance before approving a requested wire transfer. It watched 
$17 million move through its accounts without asking any hard 
questions about the source of the funds. It operated for 8 
years without a single on-site visit from its primary 
government regulator.
    Hanover Bank was able to avoid regulatory oversight in part 
because it was a shell operation without a permanent office or 
staff. GOAB authorities could not simply walk in the bank's 
doors, ask questions and inspect documents. The bank owner was 
literally thousands of miles away from routine oversight. At 
the same time, due to its low profile, the bank never drew the 
attention of bank regulators in Ireland. Even after learning of 
its existence in the jurisdiction, Irish regulators were 
hesitant to exercise oversight of a bank that was licensed in 
the Caribbean, accepted deposits in the Channel Islands, and 
limited its day-to-day activities in Ireland to making 
telephone calls and faxing wire instructions.
    The result was a bank that experienced minimal oversight 
and accumulated a track record of operational problems and 
suspect conduct, including handling funds associated with money 
laundering and frauds that are the subject of ongoing criminal 
prosecutions and civil litigation in New Jersey, New York, 
South Carolina, Florida, and Illinois in the United States, as 
well as other countries around the world.
    Interviews conducted with bankers and bank regulators in 
the United States and elsewhere indicate that the international 
banking community has little awareness and no specific 
information on how offshore shell banks conduct business. Many 
expressed surprise when told of the weak recordkeeping 
practices and loose operating procedures at Hanover Bank. Some 
expressed surprise that a small, offshore shell operation 
gained access to a U.S. bank. Some expressed surprise at the 
amount of trouble that this one-man bank caused in the United 
States alone, apparently becoming a magnet for financial fraud 
and suspect funds.

  Lack of Due Diligence by U.S. Bank

    Although Hanover Bank never opened its own U.S. 
correspondent account, it managed in 3 months to use Standard 
Bank's U.S. account to move millions of dollars associated with 
financial fraud and money laundering. The Hanover Bank case 
history demonstrates the money laundering vulnerability of U.S. 
banks that fail to ask questions about the correspondent 
practices of their foreign bank clients.
    Harris Bank International's core business is international 
correspondent banking and its primary activity is providing 
international wire transfer services to foreign banks. Yet 
Harris Bank International did not ask its respondent banks 
about their correspondent banking activities. It did not ask 
its foreign bank client whether they provided correspondent 
banking services to other banks. It did not ask how many banks 
might be using the foreign bank's U.S. correspondent account, 
what types of banks might be using it, or the names of those 
banks.
    The practical result is that Harris Bank International 
never knew it was providing correspondent services to an 
offshore shell bank licensed by a bank secrecy jurisdiction. 
Because Hanover Bank's transactions comprised just 1% of 
Standard Bank's total account activity, Harris Bank 
International's monitoring systems could not reasonably be 
expected to isolate and evaluate these transactions. The result 
is that Hanover Bank got a free pass into the U.S. banking 
system and carried out its transactions without triggering any 
anti-money laundering oversight in the United States.
    That free pass would not have been issued if Harris Bank 
International had required its respondent banks to identify 
their bank clients and to refuse to give offshore shell banks 
access to their U.S. correspondent accounts.
    In December 2000, Harris Bank International personnel 
indicated that, in light of the Bank of New York scandal, the 
Minority Staff investigation, and a recent Federal Reserve Bank 
audit, the bank had decided to strengthen its anti-money 
laundering controls in the correspondent banking field. Harris 
Bank International personnel indicated that, among other 
measures, funds had been allocated to develop better risk 
assessments of its existing correspondent bank clients, better 
client profiles, and better monitoring systems, including the 
bank's first electronic monitoring software. Harris Bank 
International personnel also indicated that the bank had 
decided to ask new applicants to identify their bank clients 
and correspondent banking practices, although it had not yet 
been decided whether the bank would ask the same questions of 
its existing clients.
    Harris Bank International's recent commitment to improving 
its anti-money laundering controls is welcome. But the bank's 
hesitancy to ask its existing bank clients about their 
correspondent practices--including whether they allow offshore 
shell banks to use their U.S. accounts--continues a limited due 
diligence approach that is easy to administer, but hard to 
justify in light of the money laundering risks illustrated by 
the Hanover Bank case history.

                                            HANOVER BANK TRANSACTIONS
                                USING STANDARD BANK'S U.S. CORRESPONDENT ACCOUNT
                                          AT HARRIS BANK INTERNATIONAL
                                                 April-July 1998
----------------------------------------------------------------------------------------------------------------
                                                   OPENING                                            CLOSING
                    MONTH                          BALANCE        DEPOSITS        WITHDRAWALS         BALANCE
----------------------------------------------------------------------------------------------------------------
APRIL                                                      $0      $6,781,409         $3,265,545      $3,515,864
----------------------------------------------------------------------------------------------------------------
MAY                                                $3,515,864        $431,800           $525,000      $3,422,664
----------------------------------------------------------------------------------------------------------------
JUNE                                               $3,422,664     $10,180,635        $10,099,985      $3,503,314
----------------------------------------------------------------------------------------------------------------
JULY                                               $3,503,314         $30,925                 $0      $3,534,239
----------------------------------------------------------------------------------------------------------------
TOTAL                                                             $17,424,769        $13,890,530
----------------------------------------------------------------------------------------------------------------
Data based upon information provided by Standard Bank Jersey Ltd. and attached to 6/14/00 letter to Harris Bank
  International Corporation from Jonathan Speck of Mourant de Feu & Jeune.
 
Prepared by U.S. Senate Permanent Subcommittee of Investigations, Minority Staff, November 2000.

                           Case History No. 6


                     BRITISH BANK OF LATIN AMERICA

    British Bank of Latin America, Ltd. (BBLA) is a small 
offshore bank that obtained a license in the Bahamas, sought 
clients in Colombia, kept its money in the United States, and 
closed its doors in 2000 after being named in two separate U.S. 
money laundering stings. This case history examines the failure 
of BBLA and its major U.S. correspondent bank, the Bank of New 
York, to guard against money laundering through the Colombian 
black market peso exchange, the largest money laundering system 
in the Western Hemisphere.
    The following information was obtained from court 
pleadings; documents provided by BBLA, Lloyds TSB Bank 
(``Lloyds''), and the Bank of New York (``BNY''); interviews; 
and other materials. Key sources of information included a 
March 9, 2000 written submission by BBLA to the Subcommittee; a 
March 31, 2000 interview of BBLA and Lloyds personnel; and an 
August 17, 2000 interview of BNY personnel. All three banks 
voluntarily cooperated with the investigation.

A. THE FACTS

    The British Bank of Latin America, Ltd. (``BBLA'') began 
operations in 1981. From its inception to its closure in 2000, 
BBLA maintained an administrative office in the Bahamas and a 
representative office in Colombia. In the Bahamas, the bank 
held an official offshore banking license; in Colombia, it held 
an official certificate, first issued in 1983, authorizing it 
to operate a representative office. All of BBLA's clients were 
Colombian. At its height, BBLA had 8 employees, about 200 
clients, and about $135 million in assets. Throughout its 
existence, BBLA was affiliated with a large Colombian bank, 
Banco Anglo, and a major international bank based in London, 
Lloyds TSB Bank.

  (1) BBLA Ownership

    BBLA is a longtime Lloyds affiliate. Lloyds TSB Bank is a 
decades-old financial conglomerate with, according to the 
Bankers Almanac, about 77,000 employees and $280 billion in 
assets worldwide. The Lloyds TSB Group includes not only Lloyds 
TSB Bank in London, with its 1,800 branches and numerous 
affiliated banks, securities firms and other companies, but it 
is also associated with one of the world's most prominent 
insurance companies, Lloyd's of London.
    BBLA was first established and licensed in the Bahamas in 
1981, under the name Banco Anglo Colombiano (Nassau) Ltd. It 
began its existence and continued for more than a decade, from 
1981 until 1993, as a wholly owned subsidiary of a Colombian 
bank, originally called Banco Anglo Colombiano S.A., then 
renamed Banco Anglo S.A. (``Banco Anglo''). Banco Anglo is a 
well established Colombian bank with over 1,000 employees and 
50 branches throughout the country. It, too, is a longtime 
Lloyds affiliate.\238\
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    \238\ Banco Anglo operated as a wholly owned subsidiary of Lloyds 
until 1976, when Colombian law changed to require local ownership of 
Colombian banks, and Lloyds sold 51% of Banco Anglo's shares to local 
Colombian investors. In 1991, after Colombian law reversed course to 
again permit foreign ownership of Colombian banks, Lloyds re-purchased 
Banco Anglo stock and eventually regained its position as the bank's 
majority shareholder.
---------------------------------------------------------------------------
    In 1993, Colombian law was changed to prohibit Colombian 
banks from owning foreign bank subsidiaries, and Banco Anglo 
was required to sell its bank in the Bahamas. On June 29, 1993, 
it sold the bank to a newly-formed holding company, Sociedad 
Inversionista Anglo Colombiano S.A. (``SIAC''), which was 
incorporated in Colombia. SIAC's largest stockholder was a 
company in the Lloyds group, Lloyds Bank (BLSA) Ltd., which 
owned 49% of the shares.\239\ Because a Lloyds company was the 
largest stockholder of both Banco Anglo and SIAC, the transfer 
of BBLA from one to the other in 1993 essentially kept the bank 
within the Lloyds group. In 1994, SIAC changed the bank's name 
from Banco Anglo Colombiano (Nassau) Ltd. to British Bank of 
Latin America, presumably to stress the bank's affiliation with 
Lloyds, a leading British bank.\240\
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    \239\ The remaining 51% of SIAC shares were held by a number of 
local Colombian investors.
    \240\ From 1993 to 2000, Lloyds steadily increased its ownership of 
the shares of both Banco Anglo and SIAC. By December 1999, Lloyds owned 
about 97% of Banco Anglo and about 98% of SIAC. Lloyds did not become a 
100% owner of BBLA, because Bahamian law had long required its banks to 
have more than one shareholder. For example, when Bahamian law required 
its banks to have a minimum of five shareholders, BBLA's shareholders 
included SIAC and four Lloyds employees in the Bahamas, each of whom 
owned one share of BBLA. In 1997, when Bahamian law changed to permit a 
minimum of two bank shareholders, BBLA's shareholders became SIAC and 
Lloyds TSB Nominees Ltd., another company in the Lloyds group.
---------------------------------------------------------------------------
    Throughout its 19 years, despite multiple technical 
ownership changes to comply with changes in Colombian and 
Bahamian laws, BBLA remained a Lloyds affiliate, through either 
Banco Anglo or SIAC. BBLA continually advertised its Lloyds 
affiliation as a key aspect of its ownership, organization and 
operation.

  (2) BBLA Principal Lines of Business

    When asked about BBLA's major business activities, BBLA and 
Lloyds personnel explained that, because Colombian law used to 
severely restrict the ability of Colombian banks to offer U.S. 
dollar loans to their clients, many Colombian banks established 
offshore subsidiaries to provide the U.S. dollar loans they 
could not. According to them, BBLA was established by Banco 
Anglo for that purpose. As one BNY analysis put it, ``BBLA 
exist[ed] to book dollar loans for [Banco Anglo] customers.'' 
\241\
---------------------------------------------------------------------------
    \241\ Internal credit analysis of BBLA by BNY Credit Division (10/
17/95) at 4, BNYSEN 676.
---------------------------------------------------------------------------
    Over time, BBLA took on additional lines of business, but 
continued to work closely with Banco Anglo. In simplest terms, 
Banco Anglo provided banking services to its clients in 
Colombian pesos, and referred them to BBLA if they needed 
banking services in U.S. dollars.
    BBLA stated, and the documentation substantiated, that the 
bank eventually had two basic groups of clients. The first 
consisted of Colombian companies that needed U.S. dollars to 
engage in foreign trade or other business transactions. BBLA 
provided these clients with U.S. dollar loans and trade 
financing, BNY stated in one memorandum, ``[BBLA] takes dollar 
funds and makes dollar loans to Colombian borrowers to finance 
imports, working capital, and equipment.'' \242\ BBLA explained 
that it financed its U.S. dollar loans primarily through credit 
lines granted to the bank by its U.S. correspondents or Lloyds 
affiliates. BBLA indicated that its company clients were not 
shell investment vehicles, but manufacturers, coffee growers 
and other Colombian businesses with tangible assets and active 
import and export sales.
---------------------------------------------------------------------------
    \242\ Internal BNY document by ``BNY Credit Division'' (10/18/95), 
BNYSEN 351.
---------------------------------------------------------------------------
    BBLA's second category of clients consisted of wealthy 
Colombian individuals seeking private banking services in U.S. 
dollars. Among other services, BBLA accepted deposits from 
these clients and placed them in U.S. dollar investment funds 
and higher interest bearing accounts, primarily through 
accounts made available to BBLA by its U.S. correspondents or 
Lloyds affiliates. BBLA earned revenue from these placements, 
not only by assessing fees for its services, but also by 
sharing in the higher interest earnings paid on the deposits. 
BNY stated that BBLA was also used as a vehicle to allow its 
individual shareholders to ``receive dividends offshore.'' 
\243\
---------------------------------------------------------------------------
    \243\ Internal BNY ``Call Report'' on BBLA (3/24/00) at 1, BNYSEN 
333.
---------------------------------------------------------------------------
    During its interview, BBLA stated that, at its height, it 
had about 140 depositing clients and about 60 borrowing 
clients. The borrowing clients were all companies. Of the 140 
depositors, BBLA estimated that 90% were individuals holding 
accounts in their own names, and about 10% were corporations. 
At its height, BBLA indicated that it had about $50 million in 
client deposits, all of which were held in its correspondent 
accounts. Part of BBLA's attraction for Banco Anglo clients 
seeking private banking services included BBLA's location in a 
bank secrecy jurisdiction with no personal or corporate taxes, 
and its ready access through its correspondents to U.S. dollar 
time deposits, investment accounts and wire transfer 
capabilities.
    In addition to serving its two groups of clients, BBLA's 
account statements show a constant stream of large money 
transfers among BBLA and a handful of Lloyds affiliates, 
including Lloyds banks in Belgium, Colombia, Panama, the United 
Kingdom and the United States. These transfers, involving 
millions of dollars moving on almost a daily basis among the 
Lloyds group, were the most significant category of 
transactions on BBLA's account statements. They depict an 
offshore affiliate well-integrated into the Lloyds banking 
network.
    BBLA stated that it did not act as a correspondent for 
other banks or allow other foreign banks to transact business 
through its U.S. account. It indicated that it did not offer 
its clients foreign exchange services, instead offering them 
banking services solely in U.S. dollars. BBLA stated that it 
did not engage in high yield investment programs, Internet 
gambling, or other high risk activities described in some of 
the other case histories. BBLA also indicated that it did not 
establish shell corporations for its clients, although any 
clients needing such services would be able to obtain them 
through other Lloyds banks.
    BBLA's financial statements were audited by KPMG Chartered 
Accountants in the Bahamas. The 1998 audited statement 
indicated that the bank was thinly capitalized but profitable, 
primarily due to an active lending portfolio exceeding $120 
million, and earnings from about $70 million in client and bank 
deposits. BBLA indicated that it was highly reliant on Banco 
Anglo for virtually all of its client referrals. BNY apparently 
agreed, stating in one credit analysis, ``[BBLA] exists as a 
going concern only by virtue of its tie to [Banco Anglo].'' 
\244\
---------------------------------------------------------------------------
    \244\ BNY Credit Division's internal credit analysis of BBLA (10/
17/95) at 2, BNYSEN 674.
---------------------------------------------------------------------------

  (3) BBLA Correspondents

    BBLA indicated that, because it specialized in offering 
U.S. dollar services to its clients, it kept virtually 100% of 
its funds in U.S. correspondent accounts and carried out almost 
all of its transactions in that currency. BBLA stated that its 
primary U.S. correspondent had long been the Bank of New York, 
where it opened an account in 1985, in part because Banco 
Anglo, already had a correspondent relationship there. BBLA 
indicated that it also had correspondent relationships with a 
number of other banks, including Bank of America, Bankers 
Trust, Barclays Bank, Chemical Bank, Citibank and Lloyds banks 
in Panama and the United States.
    BBLA indicated that it had not encountered difficulty in 
obtaining U.S. correspondent accounts, because it had a good 
reputation, sound financial statements, and a close association 
with Lloyds. It said that, when applying to open a new account 
or to obtain a new credit line, it usually cited its Lloyds 
affiliation and indicated that it had the ``backing of the 
Lloyds balance sheets.'' It said that the correspondent 
services it used most often were deposits made to higher 
interest bearing accounts and wire transfer capabilities, while 
also using to a lesser extent checking clearing and trade 
financing or other credit arrangements.

  (4) BBLA Management and Operations

    BBLA Management. During the 1990s, BBLA's senior officers 
were all employees of other Lloyds affiliated banks in the 
Bahamas and Colombia. BBLA also shared personnel, office space, 
and administrative operations with Lloyds affiliates.
    In 1998 and 1999, the years focused on in the Minority 
Staff investigation, BBLA did not have a single senior 
executive who worked solely for BBLA; all of its senior 
management personnel also worked for other Lloyds banks. In the 
Bahamas, BBLA's most senior executive was David Nicoll, who was 
the ``managing director'' and head of the bank. At the same 
time, Nicoll was the head of Lloyds' flagship bank in the 
Caribbean, Lloyds TSB Bank & Trust (Bahamas) Ltd. (``Lloyds 
Bahamas'') and an ``international executive'' with the Lloyds 
TSB Group. Three other senior managers who provided services to 
BBLA also worked for Lloyds Bahamas.\245\ BBLA's board of 
directors was also dominated by Lloyds employees.\246\ In 
Colombia, BBLA's most senior executive was J. Scott Donald, who 
also worked for Lloyds TSB Bank and served as the president of 
Banco Anglo.
---------------------------------------------------------------------------
    \245\ These senior bank officials were Abraham Butler, Peter Snell 
and Peter Bridgewater.
    \246\ BBLA's board members were Nicoll, Butler and Bridgewater.
---------------------------------------------------------------------------
    At its height, BBLA employed eight individuals who worked 
solely for BBLA. Four were clerical staff in the Bahamas, who 
performed back office and administrative operations for the 
bank. The other four worked in Colombia, serving as the bank's 
sales representative, an account manager, secretary and 
assistant. All eight BBLA employees worked closely with staff 
from other Lloyds affiliates, including Banco Anglo and Lloyds 
Bahamas.
    BBLA also shared office space and equipment with Lloyds 
affiliates. In the Bahamas, BBLA occupied a single room on the 
second floor of Lloyds Bahamas. As Lloyds' flagship bank in the 
Caribbean, Lloyds Bahamas maintained a sizeable facility in 
Nassau, the Bahamas' capital city, with three floors of 
offices, bank teller services in a lobby open to the public, 
about 70 employees, and a large sign on the building announcing 
the presence of the bank. BBLA's name did not appear on the 
outside of the building. In Colombia, in compliance with 
requirements for separate office space, BBLA rented an office 
in the same building in Bogota as Banco Anglo, but on a 
different floor. BNY documents suggest that the Colombian 
office may have closed in October 1998, even though BBLA 
continued to offer client services in Colombia.
    BBLA Operations. With respect to day-to-day operations, 
BBLA explained that its Colombian representative office acted 
as the bank's front office responsible for developing new 
business and servicing existing clients, while its Bahamas 
office acted as the bank's back office responsible for 
technical and administrative matters. BBLA said that the 
Colombian office received virtually all of its client referrals 
from Banco Anglo and worked closely with Banco Anglo to open 
new accounts, evaluate client needs, approve loans, provide 
investment advice, and resolve client problems. The Colombian 
office did not take deposits or handle cash transactions, since 
it was not licensed to conduct banking activities in Colombia. 
It would accept client requests for wire transfers, which the 
Colombian staff would then communicate to the appropriate 
banking personnel for completion.
    BBLA said that its Bahamas office handled specific bank 
transactions and the bank's administrative needs, utilizing 
Lloyds Bahamas' equipment, electronic data systems, and staff 
under a management agreement that paid Lloyds Bahamas a large 
annual fee to manage the bank. For example, among other 
services, Lloyds Bahamas helped keep BBLA's books, track client 
account activity, maintain the bank's records, handle its 
correspondent accounts, file required forms in the Bahamas and 
Colombia, and pay BBLA's bills. BBLA said that it typically 
handled about 20 to 30 transactions per day, including 
deposits, loan payments and wire transfers.
    BBLA was not the only Lloyds affiliate operating out of the 
Bahamas under a management agreement with Lloyds Bahamas. 
Another was Lloyds TSB Bank & Trust (Cayman) Ltd. (``Lloyds 
Cayman''). For many years, Lloyds Cayman had a physical 
presence in the Cayman Islands and held a banking license that 
permitted it to conduct onshore as well as offshore business. 
In 1995, however, Lloyds closed the Cayman office, surrendered 
the bank's onshore license, and obtained a less expensive 
offshore license that permitted the Cayman bank to conduct its 
banking operations outside the jurisdiction. Lloyds then moved 
the Cayman bank's operations to the Bahamas. Like BBLA, Lloyds 
Cayman operated under a management agreement with Lloyds 
Bahamas, utilizing Lloyds Bahamas equipment, electronic data 
systems and staff. Unlike BBLA, the Caymans bank did not have a 
single employee of its own. Still another Lloyds affiliate 
operating out of the Bahamas location was Lloyds TSB Bank & 
Trust (British Virgin Islands) Ltd., a bank that Lloyds 
indicated was dormant but could be revived at a later time. In 
short, then, four Lloyds affiliated banks--two licensed by the 
Bahamas, one licensed by the Cayman Islands, and one licensed 
by the British Virgin Islands--were co-located at the same 
Bahamas location.
    BBLA's Anti-Money Laundering Efforts. When asked about its 
anti-money laundering efforts, BBLA disclosed that it did not 
have one set of written procedures or one person responsible 
for overseeing anti-money laundering efforts at both its 
Colombian and Bahamian offices. Instead, each BBLA office had 
its own anti-money laundering approach.
    BBLA's Colombian office produced a copy of written anti-
money laundering procedures for that office which conformed 
with Colombian requirements, and said that its account manager 
and sales representative in Colombia were well versed in the 
due diligence requirements for opening new accounts. BBLA's 
Bahamian office, on the other hand, did not have any written 
anti-money laundering procedures, despite Bahamian requirements 
for them, but later produced a copy of the anti-money 
laundering procedures used by Lloyds Bahamas. A December 1997 
anti-money laundering audit checklist provided by BBLA also 
indicated that BBLA was ``going to'' appoint a ``money 
laundering reporting officer,'' another requirement under 
Bahamas law, but it apparently never did. Instead, BBLA 
indicated that in the Bahamas, under its management agreement, 
Lloyds Bahamas staff was responsible for managing its anti-
money laundering efforts and provided the services of its own 
money laundering reporting officer.\247\ BBLA said it also used 
the services of Lloyds' ``money laundering prevention 
officer,'' Peter Snell.\248\ Snell, a senior vice president of 
Lloyds Bahamas, was not assigned exclusively to anti-money 
laundering duties, but had many other responsibilities. The end 
result was that BBLA's Bahamas office had neither written 
procedures nor a particular person charged with reporting 
suspicious activity, as required by Bahamian law, but relied on 
Lloyds Bahamas procedures and personnel instead.
---------------------------------------------------------------------------
    \247\ Under Bahamian law, every bank is required to have money 
laundering reporting officer whose duty is to report any suspicious 
activity to the Bahamas Government.
    \248\ This position, which is recommended but not required under 
Bahamian law, is supposed to have overall responsibility for a bank's 
money laundering program.
---------------------------------------------------------------------------
    BBLA's anti-money laundering efforts were further 
disjointed by the geographical separation of its front and back 
office operations, which operated without the benefit of a 
bank-wide policy or an overall manager. BBLA's Colombian staff 
conducted the initial due diligence reviews for new customers 
and handled client requests for existing accounts, but did not 
otherwise monitor account activity, since all account paperwork 
and activity reports were generated in the Bahamas. In 
contrast, BBLA's Bahamian staff were not involved in the 
account opening process and were not familiar with BBLA's 
clients, but were expected to monitor day-to-day account 
transactions and overall account activity. It is unclear who, 
if anyone was reviewing client accounts statements or wire 
transactions for suspicious activity. It is also unclear how 
BBLA's staff coordinated their efforts with Lloyds Bahamas.
    BBLA was asked, due to its provision of U.S. dollar 
services to its Colombian clientele, what steps the bank had 
taken to ensure that it was not a recipient of laundered funds 
from the black market peso exchange.\249\ BBLA and Lloyds 
personnel expressed unfamiliarity with both the term and the 
money laundering risks posed by that method of foreign currency 
exchange. BBLA said that it had no specific policies, 
procedures or systems in place to detect or deter money 
laundering through the black market peso exchange.
---------------------------------------------------------------------------
    \249\ For a description of the black market peso exchange, see 
below.
---------------------------------------------------------------------------
    BBLA Oversight by Banking Regulators. Despite operating in 
two countries at high risk for money laundering, BBLA never 
underwent a bank examination or on-site visit by bank 
regulators in either jurisdiction and there is no evidence that 
any regulatory body ever took a close look at the bank's 
operations in 19 years of operation.
    Both the Bahamas and Colombia have been identified as 
presenting higher than average money laundering risks. In June 
2000, the Bahamas was one of 15 countries named by FATF for 
weak anti-money laundering controls and inadequate cooperation 
with international anti-money laundering efforts. The U.S. 
State Department's most recent International Narcotics Control 
Strategy Report (``INCSR 2000'') describes the Bahamas as a 
country of ``primary'' money laundering concern, due to bank 
secrecy laws and [a] liberal international business company 
(IBC) regime [which] make[s] it vulnerable to money laundering 
and other financial crimes.'' \250\ While banking and money 
laundering experts interviewed by the Minority Staff described 
the Bahamas as having good intentions and making important 
improvements, during the 1990's, it provided weak oversight and 
inadequate resources to regulate its more than 400 offshore 
banks.
---------------------------------------------------------------------------
    \250\ International Narcotics Control Strategy Report (March 
2000)(``INCSR 2000'') at 637.
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    Colombia is considered an even greater money laundering 
risk than the Bahamas due to ongoing problems with narcotics 
trafficking. The INCSR 2000 report, which identifies Colombia 
as another country of ``primary'' money laundering concern, 
provides the following information:

      Colombia produces and distributes more cocaine than any 
other country in the world and is also an important supplier of 
heroin. . . . Columbia is the center of the international 
cocaine trade, with drugs flowing out of the country at a 
stable and constant rate. . . . Recent statistics indicate that 
approximately 85 percent of the heroin seized by federal 
authorities in the northeastern United States is of Colombian 
origin. . . . Colombia has financial institutions which engage 
in currency transactions involving international narcotics 
proceeds that include significant amounts of U.S. dollars. . . 
. Colombia criminalized the laundering of the proceeds of all 
illegal activities in 1995 . . . but there still has not been a 
single money laundering conviction. . . . Even though progress 
has been made with respect to fighting money laundering, 
Colombia has fallen short in its implementation of the money 
laundering and asset forfeiture laws.\251\
---------------------------------------------------------------------------
    \251\ INCSR 2000 at 115-16; 657-58.

    One of the key money laundering systems in Colombian drug 
trafficking, the black market peso exchange, has been targeted 
by the United States as a top law enforcement priority for the 
last 2 years. The 1999 U.S. National Money Laundering Strategy 
---------------------------------------------------------------------------
stated:

      The Black Market Peso Exchange is the largest known 
money laundering system for drug money in the Western 
Hemisphere. It may be responsible for the laundering of as much 
as $5 billion of narcotics proceeds each year. . . . The Black 
Market Peso Exchange lets Colombian narcotics traffickers 
transform large quantities of drug dollars from the streets of 
American cities into pesos in their Colombian bank 
accounts.\252\
---------------------------------------------------------------------------
    \252\ The National Money Laundering Strategy for 1999 (September 
1999) at 21-22.

    The 2000 U.S. National Money Laundering Strategy explains 
---------------------------------------------------------------------------
how the system launders funds:

      First, a Colombian drug cartel arranges the shipment of 
drugs to the United States. The drugs are sold in the U.S. for 
U.S. currency which is then sold to a Colombian black market 
peso broker's agent in the United States. The U.S. currency is 
sold at a discount because the broker and his agent must assume 
the risk of . . . placing the U.S. dollars into the U.S. 
financial system. Once the dollars are delivered to the U.S.-
based agent of the peso broker, the peso broker in Colombia 
deposits the agreed upon equivalent in Colombian pesos into the 
cartel's account in Colombia. At this point, the cartel has 
laundered its money because it has successfully converted its 
drug dollars into pesos, and the Colombian broker and his agent 
now assume the risk for integrating the laundered drug dollars 
into the U.S. banking system. . . . [T]he Colombian black 
market peso broker now has access to a pool of laundered U.S. 
dollars to sell to Colombian importers [who] use the dollars to 
purchase goods. . . .\253\
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    \253\ The National Money Laundering Strategy for 2000 (March 2000) 
at 24-25.

    U.S. and Colombian law enforcement and banking authorities 
have spent significant resources tracking the black market peso 
exchange, educating U.S. and Colombian banks about it, and 
seizing laundered funds. Despite their joint efforts, the black 
market peso exchange continues to be the most prolific money 
laundering system in the United States, successfully using U.S. 
and Colombian banks to launder billions of dollars each year in 
cocaine and heroin drug proceeds.
    Banking and money laundering experts indicated to Minority 
Staff investigators that, despite the magnitude of the money 
laundering problem in Colombia, Colombia's banking regulation 
is sound, with some of the better money laundering controls in 
Latin America. They indicated that Colombian authorities are 
actively engaged in bank oversight, including enforcing 
requirements for detecting and reporting suspicious 
transactions. The INCSR 2000 report noted: ``Colombia's banks 
continue to comply with the reporting requirements designed to 
flag suspicious transactions and have been very cooperative 
with U.S. efforts to curtail financial transactions by 
individuals and entities designated as involved with narcotics 
trafficking.'' \254\ This bright spot in Colombian anti-money 
laundering efforts, however, did not apply to BBLA, which 
remained outside Colombian banking oversight and unfamiliar 
with Colombian and U.S. efforts to stop money laundering 
through the black market peso exchange.
---------------------------------------------------------------------------
    \254\ INCSR 2000 at 657.
---------------------------------------------------------------------------
    No Bank Examination in 19 Years. In 1995, Banco Anglo sent 
a memorandum on behalf of BBLA to Barclays Bank which stated 
that, ``BBLA is subject to the supervision in varying degrees 
of Bahamas, Colombia and the Bank of England.'' \255\ A copy of 
this memorandum was provided to BNY which began to incorporate 
variations of that sentence in internal reports to indicate 
that BBLA was a well regulated bank.\256\ In 1997, a BNY 
memorandum indicated that BBLA had agreed in writing to 
``conform to all significant prudential regulations mandated by 
the Colombian Superintendent of Banks'' and had given the 
Superintendent ``full supervisory power'' over the bank.\257\ 
In fact, however, BBLA disclosed to the Minority Staff 
investigation that it had never undergone a bank examination or 
even a site visit by bank regulators in Colombia or any other 
country.
---------------------------------------------------------------------------
    \255\ This memorandum has a bates designation of BNYSEN 648.
    \256\ See, for example, internal BNY memorandum to the 
International Credit Committee (12/1/95) at 2, BNYSEN 657; internal BNY 
credit proposal for BBLA to International Credit Committee (4/21/97) at 
1, BNYSEN 691.
    \257\ Internal BNY credit proposal for BBLA to International Credit 
Committee (4/21/97) at 1-2, BNYSEN 691-92.
---------------------------------------------------------------------------
    BBLA explained that its primary regulator, the Central Bank 
of the Bahamas, did not conduct examinations of licensed banks, 
instead reviewing annual reports submitted by each bank.\258\ 
BBLA stated that it had submitted all required filings and had 
no history of problems with Bahamian bank regulators. BBLA 
noted that it was also not subject to examination in Colombia, 
since that country did not conduct bank examinations of 
representative offices that did not transact banking activities 
within the jurisdiction. BBLA noted that it had never taken 
deposits or handled cash transactions for its clients in 
Colombia, instead working with Banco Anglo, its Bahamas office, 
Lloyds Bahamas and its correspondent banks, to meet its 
clients' banking needs. When asked if it had ever been examined 
by regulators from the Bank of England or the United Kingdom's 
Financial Services Authority, BBLA indicated that it had not.
---------------------------------------------------------------------------
    \258\ The INCSR 2000 report noted, at page 637, that offshore banks 
in the Bahamas ``must submit annual statements that do not have to 
include financial statements,'' and their ``records can be maintained 
anywhere,'' which makes regular bank oversight more difficult. in 2001, 
the Bahamas plans, for the first time, to begin conducting its own bank 
examinations.
---------------------------------------------------------------------------

  (5) Money Laundering Involving BBLA

    In 1998 and 1999, U.S. civil forfeiture actions arising 
from two separate money laundering undercover operations, 
Operation Casablanca and Operation Juno, cited BBLA as a 
repository of illegal drug proceeds. In two separate court 
actions, the United States sought forfeiture of a total of 
about $2.7 million in illegal drug proceeds deposited into 
BBLA's correspondent account at BNY. A subsequent BBLA audit 
identified about 85 additional account transactions in 1998 and 
1999, that appeared to involved suspicious activity, and also 
fired an employee suspected of being involved in money 
laundering and other wrongdoing.

  (a) Operation Casablanca

    Operation Casablanca was a 3-year money laundering sting 
conducted from 1995 until 1998 by the U.S. Customs 
Service.\259\ A related money laundering undercover operation 
was code named Operation Check Mark. These undercover 
operations traced the laundering of more than $84 million in 
illegal narcotics proceeds under the control of professional 
money launderers for the Cali drug cartel in Colombia, and the 
Juarez drug cartel in Mexico. A significant portion of the $84 
million consisted of illegal drug proceeds picked up in cash 
from various U.S. city locations by U.S. undercover agents 
acting at the direction of the alleged money launderers, 
deposited at a U.S. bank cooperating with U.S. law enforcement, 
and then transferred as part of the money laundering sting 
operation to still other bank accounts. Other funds identified 
or provided by the alleged money launderers were, at their 
direction, wire transferred by the U.S. undercover agents to 
other bank accounts in an attempt to launder the funds.
---------------------------------------------------------------------------
    \259\ See United States v. Proceeds of Drug Trafficking Transferred 
to Certain Foreign Bank Accounts (U.S. District Court for the District 
of Columbia Case No. 1:98-CV-0434 (NHJ)) (hereinafter ``Casablanca 
forfeiture action''), memorandum order by the court (4/11/00), and 
first amended complaint for forfeiture (5/18/98).
---------------------------------------------------------------------------
    In February 1998, the U.S. Department of Justice seized and 
sought civil forfeiture under seal of funds in various bank 
accounts in the United States and foreign countries related to 
the money laundering stings. In May 1998, criminal indictments 
were unsealed against individuals and banks involved in the 
money laundering operations. Also in May, the United States 
filed an amended complaint in the civil forfeiture actions to 
correct errors and seek forfeiture of additional funds. A 
second amended complaint was filed in March 1999. Altogether, 
the United States sought forfeiture of funds from almost 100 
bank accounts in the United States and 16 foreign countries.
    The United States did not indict BBLA or allege that BBLA 
or its employees were directly engaged in narcotics trafficking 
or money laundering. However, the United States did name BBLA 
in the first and second amended forfeiture complaints as the 
recipient of about $1.57 million in illegal drug proceeds that, 
during the sting operations, on the instruction of drug 
traffickers, had been wire transferred by U.S. undercover 
agents to BBLA's correspondent account at the Bank of New York 
(BNY).\260\ The wire transfers had directed the funds to be 
credited to specific clients or accounts at BBLA.\261\
---------------------------------------------------------------------------
    \260\ See Casablanca forfeiture action, motion to file second 
amended complaint (3/30/99).
    \261\ The wire transfer instructions named the following clients 
and accounts at BBLA:

      --$800,000 transferred on 12/3/97 and 12/15/97 to BBLA's 
correspondent account for two related companies, Proenfar S.A. and 
Parowan Group, Inc.;
      --$350,000 transferred on 12/3/97 and 3/12/98 to BBLA's 
correspondent account for Jaime Trujillo;
      --$190,000 transferred on 12/4/95 to BBLA's correspondent 
account for a BBLA account numbered 0019107928;
      --$150,000 transferred on 12/3/97 to BBLA's correspondent 
account for Piedad de Hoyos; and
      --$80,000 transferred on 12/15/97 to BBLA's correspondent 
account for two related companies, Amarey Ltd. and Nova Medical.
---------------------------------------------------------------------------
    When asked for more information by the Minority Staff 
investigation, BBLA indicated that Bahamian bank secrecy laws 
and the pending litigation prevented it from discussing either 
the transfers, the bank's conduct, or the named accountholders. 
Pleadings filed by three of the accountholders provided the 
minimal additional information that Proenfar S.A. was a 
manufacturing company established in Colombia, Parowan Group 
was a Panamanian investment company, and Piedad de Hoyos was a 
wealthy woman who had placed $130,000 in a certificate of 
deposit at BBLA.\262\ BBLA accounts statements, subpoenaed from 
BNY, indicate that several of the wire transfer recipients 
conducted numerous transactions through BBLA's correspondent 
account in New York.
---------------------------------------------------------------------------
    \262\ See Casablanca forfeiture action, claim filed by Proenfar 
S.A. and Parowan Group, Inc. (7/29/99) and claim filed by Piedad de 
Hoyos (7/21/99).
---------------------------------------------------------------------------
    In 1999, BBLA filed legal pleadings opposing forfeiture of 
the $1.57 million in drug proceeds to the United States.\263\ 
When asked why, among other reasons, BBLA stated that the bank 
``could be subject to double liability'' because the suspect 
funds had been frozen in both the United States and the Bahamas 
and, if the courts ruled inconsistently, it could be required 
to pay the $1.57 million twice--once to the U.S. Government and 
once to the accountholders.\264\ In its pleadings in the United 
States, the bank also seemed to be contending that, because the 
bank itself was innocent of any wrongdoing, funds could not be 
seized under U.S. law from its correspondent account, even in 
the event of misconduct by a BBLA client or by a third party.
---------------------------------------------------------------------------
    \263\ See Casablanca forfeiture action, claim filed by BBLA (7/1/
99).
    \264\ See BBLA letter to the Subcommittee (3/9/00) at 8-9.
---------------------------------------------------------------------------
    In explaining its decision to accept the illegal drug 
proceeds in the first instance, BBLA stated: BBLA assumed that 
the U.S. institutions transferring the dollars would have 
conducted adequate investigations to ensure the legitimacy of 
the source of the funds that they held and transferred to BBLA. 
Thus, the deposits did not raise any suspicions at the time 
they were made.'' \265\ This explanation seems to suggest that 
BBLA considered any funds transferred by a U.S. bank to be 
beyond suspicion and in no need of anti-money laundering 
oversight, but when asked, BBLA stated that its anti-money 
laundering controls also applied to funds transferred from U.S. 
banks. In light of the pending litigation, however, BBLA 
declined to provide additional information about the actions it 
took with respect to the $1.57 million.
---------------------------------------------------------------------------
    \265\ Id. at 8.
---------------------------------------------------------------------------
    The United States' position, in contrast, was that BBLA was 
not an innocent bank, should not have accepted the drug 
proceeds as deposits, and was not entitled to protection from 
forfeiture under U.S. law. When asked by the Minority Staff 
investigation to elaborate, the U.S. Department of Justice 
declined to provide further information. The Casablanca civil 
forfeiture proceedings are ongoing.

  (b) Operation Juno

    Operation Juno was a 3-year money laundering sting 
conducted from 1996 until 1999 by the U.S. Drug Enforcement 
Administration and Internal Revenue Service Criminal 
Investigation Division.\266\ The undercover operation laundered 
over $26 million in drug proceeds, in part using a stock 
brokerage firm established by U.S. undercover agents. In 
December 1999, the United States indicted five Colombian 
nationals for narcotics trafficking and money laundering in 
connection with the sting operation, accusing them of being 
major players in the Colombian drug trade. The United States 
also seized and filed civil forfeiture actions involving $26 
million in over 340 bank accounts at 34 U.S. banks and 52 
foreign banks.
---------------------------------------------------------------------------
    \266\ See `` `Operation Juno' Indictment Targets Five Major 
Traffickers and $26 Million worth of Laundered Drug Proceeds,'' press 
release issued by the office of the U.S. Attorney for the Northern 
District of Georgia (12/9/99)(hereinafter ``Juno press release'').
---------------------------------------------------------------------------
    Again, the United States indicted neither BBLA nor its 
employees for narcotics trafficking or money laundering. 
However, several of the Operation Juno indictments referred to 
drug proceeds being sent to BBLA.\267\ The United States also 
named BBLA in the related civil forfeiture action, this time 
seeking forfeiture of $1.1 million in drug proceeds that, 
during the sting operation, at the direction of the alleged 
money launderers, had been wire transferred to BBLA's 
correspondent account at the Bank of New York (BNY).\268\ The 
$1.1 million had been deposited over a 2-year period, from July 
1997 until July 1999, in nine wire transfers. All were 
transfers to BBLA's U.S. account for further credit to Andes 
Trading, a BBLA client.\269\ BBLA account statements show 
numerous transactions through its BNY account on behalf of 
Andes Trading. When asked, BBLA declined to provide any 
additional information about these transfers, the bank's 
conduct, or Andes Trading.
---------------------------------------------------------------------------
    \267\ See, for example, United States v. Monto (U.S. District Court 
for the Northern District of Georgia Case No. 1:99-CR-438), criminal 
indictment (8/25/99); and United States v. Botero (U.S. District Court 
for the Northern District of Georgia Case No. 1:99-CR-439), criminal 
indictment (8/25/99).
    \268\ See United States v. All Funds in Certain Foreign Bank 
Accounts Representing Proceeds of Narcotics Trafficking and Money 
Laundering (USDC DC Case No. 1:99-CV-03112), verified complaint for 
forfeiture in rem (11/23/99). The complaint also seeks forfeiture of 
about $295,000 in drug proceeds sent to Lloyds TSB Bank & Trust 
(Panama) Ltd.
    \269\ The transfers took place, as follows:

      --$250,000 transferred to BBLA's correspondent account on 7/18/97.
      --$250,000 transferred to BBLA's correspondent account on 9/18/97;
      --$126,127 transferred to BBLA's correspondent account on 1/22/98;
      --$100,000 transferred to BBLA's correspondent account on 5/28/98;
      --$100,000 transferred to BBLA's correspondent account on 10/7/98;
      --$89,795 transferred to BBLA's correspondent account on 3/18/99;
      --$17,185 transferred to BBLA's correspondent account on 4/13/99;
      --$100,000 transferred to BBLA's correspondent account on 4/29/99; and
      --$143,245 transferred to BBLA's correspondent account on 7/7/99.
---------------------------------------------------------------------------
    BBLA opposes forfeiture of the $1.1 million in drug 
proceeds to the United States, for many of the same reasons 
given in the Operation Casablanca matter. Although BBLA ceased 
to conduct business by mid 2000, its attorneys are continuing 
to press its claim to the $1.1 million. The United States has 
taken the same position as it has in the Operation Casablanca 
matter, that BBLA is not an innocent bank, should not have 
accepted the drug proceeds, and should forfeit the funds to law 
enforcement. Like the Casablanca forfeiture action, the Juno 
forfeiture action is ongoing.
    Together, the Casablanca and Juno civil forfeiture 
proceedings indicate that, over a 3-year period, BBLA became a 
repository for about $2.7 million in drug proceeds. Both cases 
indicate that the funds were the product of money laundering 
through the Colombian black market peso exchange. For example, 
when asked about the Operation Casablanca deposits, BBLA 
described them as U.S. dollars transferred from a U.S. bank, 
and noted that Colombian law ``permitted Colombian nationals to 
make those investments with foreign currency that had not been 
obtained through the country's foreign exchange markets.'' 
\270\ The Operation Juno deposits are explicitly linked to the 
black market peso exchange, and the indictments are 
characterized by the Drug Enforcement Agency as ``a significant 
first step in striking out against the black market peso system 
that launders billions of drug dollars every year.'' \271\ The 
implied fact pattern in both instances seems to be that, in 
order to take advantage of a better exchange rate or perhaps to 
avoid Colombian legal restrictions, tariffs or taxes, BBLA 
clients provided Colombian pesos to a Colombian money broker 
who exchanged them for U.S. dollars that were, in fact, the 
illegal drug proceeds sent to BBLA's U.S. account for the 
specified clients.
---------------------------------------------------------------------------
    \270\ BBLA letter to the Subcommittee (3/9/00) at 8.
    \271\ See Operation Juno press release at pp. 3-4, citing 
involvement of ``money exchanger in Colombia, who typically would sell 
the U.S. dollars for pesos on the Colombian Black Market [P]eso 
Exchange.'' The press release also quotes James T. Martin, Chief of the 
Drug Division of the U.S. Attorney's Office stating that, in the Juno 
case, ``the defendants took millions of dollars in drug money in the 
U.S., and millions in pesos in Colombia, and laundered them both with 
the money physically leaving either country.''
---------------------------------------------------------------------------

  (c) Other Suspicious Activity

    During the interview with Minority staff investigators, 
BBLA and Lloyds indicated that after the bank was named in the 
two U.S. forfeiture actions, Lloyds decided to have BBLA's 
accounts and transactions audited to determine if there were 
other suspicious transactions. Although it declined to provide 
a copy of the audit report, BBLA and Lloyds indicated that 
approximately 85 additional suspicious transactions were 
identified during 1998 and 1999, which led the bank to file 
about a dozen additional reports with law enforcement. BBLA and 
Lloyds declined to provide additional information about the 
nature of these transactions, their reports, or other aspects 
of the BBLA audit.
    A January 2000 memorandum produced under subpoena by the 
Bank of New York describes a BBLA employee who was allegedly 
engaged in money laundering and other misconduct from 1997 
until her employment was terminated by the bank in 1999.\272\ 
The BNY memorandum, prepared after a telephone conversation 
with BBLA personnel, stated in part:
---------------------------------------------------------------------------
    \272\ Internal BNY ``Call Report'' on Banco Anglo (1/27/00), BNYSEN 
335.

      It turns out that beginning in 1997, a BBLA employee 
began to experience personal financial difficulties. This led 
to her involvement in criminal activity for personal financial 
gain, including skimming profits and laundering money. Her 
activities were finally discovered in 1999 and she was 
immediately terminated.

    BNY did not have any additional information about this 
matter, and BBLA declined to discuss it, so it is unclear how 
this employee's misconduct related to the Casablanca and Juno 
deposits or the 85 suspicious transactions identified in the 
BBLA audit. The evidence suggests, however, that BBLA's 
involvement with money laundering was not limited to the $2.7 
million identified in the two U.S. money laundering stings.

  (6) Closure of BBLA

    In late 1999 or early 2000, Lloyds made the decision to 
close BBLA, and most BBLA transactions ceased at the end of 
March 2000. Lloyds explained that, during 1998 and 1999, it had 
been able to buy out SIAC's other shareholders and evaluate 
whether the bank should be continued or folded into Lloyds' 
other banking operations. Lloyds decided to terminate BBLA as a 
going concern and re-distribute its clients, assets and loans 
to other Lloyds banks in the Bahamas, Colombia, Panama, and 
United States. Lloyds denied that the two money laundering 
forfeiture actions were the primary reason behind closing the 
bank, but indicated the litigation did not encourage the bank's 
continuation. Lloyds indicated that legal counsel would 
continue to press BBLA's claims in both the Casablanca and Juno 
forfeiture actions. Because Lloyds is not surrendering BBLA's 
license, but merely discontinuing its operations, it is 
possible the bank could be revived at a later time.

  (7) Correspondent Account at Bank of New York

    The Bank of New York (BNY) began its correspondent 
relationship with BBLA in 1985. While the Minority Staff 
investigation did not examine the bank's initial decision to 
open the BBLA correspondent account, it did examine BNY's due 
diligence efforts during the latter half of the 1990s with 
respect to the BBLA relationship. The evidence indicates that, 
while BNY was diligent in its efforts to monitor the BBLA 
account, its anti-money laundering efforts suffered several 
serious deficiencies. Perhaps the most significant deficiency 
was BNY's failure to exercise any anti-money laundering 
controls related to the Colombian black market peso exchange.
    Bank of New York. The Bank of New York is a major financial 
institution in the United States with, according to the Bankers 
Almanac, over 17,000 employees and $60 billion in assets. BNY 
has a substantial international correspondent banking 
portfolio, with over 2,000 international correspondent accounts 
and 150 correspondent banking relationship managers around the 
world. Its international correspondent accounts are handled 
primarily by its International Banking Sector which is 
organized into five geographic regions, including a Latin 
American Division that also handles banks in the Caribbean. BNY 
has a long history of correspondent banking in Latin America 
and the Caribbean, including more than a dozen relationships in 
Colombia and almost as many in the Bahamas.
    In responding to the Minority Staff's survey of 
correspondent banking practices, BNY initially stated that, as 
a policy matter, it did not open correspondent accounts for 
offshore banks. When asked about its longstanding correspondent 
relationships with offshore banks like BBLA and Swiss American 
Bank, however, BNY submitted a revised form of its policy 
indicating that the bank did sometimes open correspondent 
accounts for offshore banks.\273\ The Minority Staff 
investigation indicated that BNY has, in fact, had numerous 
correspondent relationships with offshore banks. In deciding 
whether to initiate such relationships, BNY indicated that its 
policy was to ``evaluate the ownership, management, and 
reputation of the bank in question, as well as the regulatory 
environment of the licensing country.''
---------------------------------------------------------------------------
    \273\ See BNY letter to the Subcommittee (10/13/00) at 4, response 
to question (7).
---------------------------------------------------------------------------
    When asked about its correspondent banking practices in 
Colombia, BNY indicated that while it was cognizant of the 
money laundering risks in Colombia and designated Colombia as a 
high risk area, the Latin American Division's experience had 
been generally positive. As stated in several BNY memorandum on 
BBLA, ``We are very comfortable with the country risk of 
Colombia due to very sound government management and the 
continuing positive trends in this country.'' \274\ Another BNY 
memorandum states, ``Colombia has one of the strictest and 
[most] vigilant bank regulatory systems in the developing 
world.'' \275\
---------------------------------------------------------------------------
    \274\ Internal BNY memorandum from Latin American Division to 
International Credit Committee (10/25/94) at 2; (5/5/95) at 2; (6/20/
95) at 2.
    \275\ Internal BNY credit proposal for Banco Anglo to International 
Credit Committee (12/8/95) at 2, BNYSEN 697.
---------------------------------------------------------------------------
    BNY also indicated, in response to questions, that it was 
not unusual for Colombian banks to have offshore subsidiaries 
and stated that BNY had correspondent relationships with 
several of them. BNY later identified six respondent 
relationships with offshore banks that were subsidiaries of 
Colombian banks, in addition to BBLA. BNY indicated that all 
six were licensed in Panama. It said that BBLA was the only 
Colombian offshore affiliate in BNY's portfolio that was 
licensed in the Bahamas, rather than Panama.
    When asked about the black market peso exchange, the head 
of BNY's Latin American Division indicated that she had 
recently heard the term in an advanced money laundering 
training course, but was unfamiliar with the issue and had been 
unaware of its importance in U.S. law enforcement's anti-money 
laundering efforts. BNY indicated that it had no specific 
policies, procedures or systems of any kind related to the 
Colombian black market peso exchange, even for its Colombian 
respondent banks or their offshore affiliates.
    BBLA. BNY documentation indicates that BNY viewed BBLA as 
part of its correspondent relationships with Lloyds and Banco 
Anglo, two important BNY clients. BNY stated in a letter to the 
Subcommittee that, ``The Bank viewed BBLA as part of its 
overall relationship with the Lloyds Bank group.'' \276\ The 
documentation indicates that BNY took on BBLA when it was a 
subsidiary of Banco Anglo, one of BNY's oldest and most 
profitable clients in Colombia; and BNY had considered the two 
banks in tandem ever since. BNY stated that it had often paid 
``[j]oint visits'' to the two banks,\277\ and most of BNY's 
internal memoranda discuss both banks jointly.
---------------------------------------------------------------------------
    \276\ BNY letter to the Subcommittee (10/13/00) at 5, in answer to 
question (9).
    \277\ Id. at 5, in answer to question (12).
---------------------------------------------------------------------------
    BNY provided a range of credit and non-credit correspondent 
services to BBLA, all in U.S. dollars. They included wire 
transfers, check clearing, placements of funds in higher 
interest bearing accounts, trade financing, and several lines 
of credit. BBLA made full use of these services and, despite 
its small size, moved tens of millions of dollars through its 
BNY account each month. BBLA's dollar volume, in fact, far 
exceeds any other case history in the Minority Staff 
investigation. In 1998 and 1999 alone, BBLA's deposits and 
withdrawals from its U.S. correspondent account at BNY totaled 
more than $1.5 billion.\278\
---------------------------------------------------------------------------
    \278\ See chart, ``British Bank of Latin America Monthly Account 
Activity at Bank of New York; January 1998-December 1999.''
---------------------------------------------------------------------------
    BNY said that, although BBLA held a Bahamian banking 
license, BNY classified it as a Colombian bank because it 
worked closely with Banco Anglo, had Colombian clients, and 
BNY's rating systems assigned Colombian banks a higher risk 
rating than Bahamian banks, which ensured a more conservative 
and careful approach to BBLA's monitoring.
    The documentation indicates that BNY regularly monitored 
BBLA and, at times, compiled detailed credit analyses of BBLA's 
finances and business activities. For example, among other 
measures, BNY took the following steps:

      --BNY correspondent bankers regularly traveled to Bogota 
to visit BBLA's offices and meet with the bank's senior 
management; these trips were combined with BNY visits to Banco 
Anglo. BNY staff also spoke regularly with BBLA staff in 
Bahamas and visited the Bahamas office occasionally.

      --BNY staff regularly prepared memoranda summarizing 
contacts with the bank and information about its staff and 
operations.

      --BNY obtained copies of BBLA's audited financial 
statements and other key bank documentation. It inquired about 
and analyzed BBLA's finances and primary lines of business, and 
developed detailed credit analyses of the bank. It also 
inquired about and analyzed BBLA's client base.

      --BNY inquired about BBLA's reputation and operations 
with Banco Anglo and Lloyds, and placed great weight on 
representations that Lloyds and Banco Anglo controlled BBLA's 
management, exerted ``quality control'' over its procedures, 
and approved its extensions of credit to clients.\279\ BNY also 
inquired about BBLA's reputation in Colombian banking circles.
---------------------------------------------------------------------------
    \279\ See, for example, BNY internal memorandum to International 
Credit Committee (12/1/95), BNYSEN 657-60.

      --LOn at least two occasions, BNY studied BBLA's 
transactions and clearing activities to identify suspicious 
transactions, and found nothing of concern. There was no 
evidence, however, that BNY regularly monitored BBLA's account 
activity for possible money laundering.

    BNY's due diligence efforts, while significant, also had 
several serious deficiencies. For example, BNY apparently did 
not request a copy of BBLA's anti-money laundering procedures 
and never realized that the Bahamas office had none and there 
was no BBLA employee assigned to anti-money laundering duties. 
BNY also never realized that BBLA had never undergone a bank 
examination or site visit by any government bank regulator. BNY 
indicated, to the contrary, that it had believed BBLA was 
subject to more oversight than was usual for an offshore bank, 
with supervision provided by the Bahamas, Colombia and the 
United Kingdom. BNY's Latin American Division head indicated 
that she thought BBLA was, in fact, examined by Colombian bank 
regulators and was surprised and disturbed to learn that no 
such examination had ever actually taken place.
    BNY indicated that a major factor in its analysis of BBLA 
was its affiliation with Lloyds and Banco Anglo, two 
established banks with good reputations, sophisticated banking 
operations, and a history of involvement with the offshore 
bank. Lloyds, in fact, exercised significant BBLA oversight, 
through its control of BBLA's board and senior management and 
day-to-day involvement with the bank's operations under the 
agreement assigning Lloyds Bahamas responsibility for managing 
BBLA's affairs. BNY indicated that it had assumed Lloyds would 
ensure that BBLA had adequate anti-money laundering policies 
and procedures in place, but there was no evidence that BNY had 
ever actually questioned either BBLA or Lloyds about BBLA's 
specific anti-money laundering efforts.
    When asked about the Casablanca and Juno forfeiture 
actions, BNY indicated that it did not learn of the Casablanca 
forfeiture action, filed in May 1998, until more than a year 
later when, on June 25, 1999, U.S. law enforcement seized the 
disputed funds from BBLA's account in New York. BNY indicated 
that, until informed by Minority staff investigators, it had 
not known that the forfeiture action was filed in 1998. BNY was 
also unaware, until informed by Minority staff investigators, 
of the audit of BBLA's 1998 and 1999 transactions that 
identified 85 additional suspicious transactions. Nor did it 
have details about the BBLA employee who was fired in 1999 for 
2 years of misconduct including possible money laundering.
    After BNY learned of the Casablanca forfeiture action in 
June 1999, and the Juno forfeiture action 6 months later, BNY 
personnel met and spoke with BBLA, Lloyds and Banco Anglo 
personnel and completed several additional memoranda. But the 
written materials do not mention either of the U.S. law 
enforcement actions nor do they discuss any of the issues 
raised by the two seizures of illegal drug proceeds. When asked 
why not a single BNY analysis of BBLA ever mentions either 
matter or any money laundering concerns, the Latin American 
Division head stated that was ``a good question'' to which she 
did not have an answer.

B. THE ISSUES

  Black Market Peso Exchange

    The BBLA case history demonstrates how an offshore bank can 
increase the vulnerability of a U.S. correspondent bank to 
money laundering through the black market peso exchange, when 
neither takes any steps to minimize this money laundering risk.
    The black market peso exchange risks posed by BBLA were 
clear. BBLA had $50 million in client deposits, all in U.S. 
dollars, and regularly accepted U.S. dollar deposits from its 
clients. It did not provide foreign exchange services itself, 
but accepted U.S. dollars sent by its clients to its U.S. 
account. Its clients were all from Colombia. As an offshore 
bank subject to strict secrecy laws and weak bank oversight, 
BBLA was attractive to money launderers. It took no steps to 
detect when a Colombian money broker might be exchanging a BBLA 
client's pesos for U.S. dollars obtained from drug trafficking. 
The result was that BBLA's U.S. account became a conduit for 
illegal drug money.
    Despite a long history in Colombia and relationships with 
seven offshore banks affiliated with Colombian banks, BNY's 
most senior Latin American correspondent banker had received 
little training about the Colombian black market peso exchange. 
BNY used none of the strategies developed to combat this form 
of money laundering and had failed even to initiate discussions 
with its Colombian respondent banks about the need to identify 
and refuse U.S. dollars coming from the Colombian black market.
    Like most correspondent accounts for foreign banks, the 
majority of deposits to BBLA's U.S. account were made by wire 
transfer, which meant that electronic software had 
automatically accepted the funds and directed them to BBLA's 
account. No human intervention or anti-money laundering 
oversight took place until later. BNY was necessarily dependent 
upon BBLA to ensure the legitimacy of the funds sent to its 
U.S. account, yet BNY failed to acquire an accurate 
understanding of BBLA's anti-money laundering efforts.
    BNY's experience is unlikely to be unique. The Minority 
Staff survey of just 20 U.S. banks found over 200 correspondent 
relationships with Colombian banks; these banks have additional 
relationships with Colombian offshore affiliates. The BBLA case 
history illustrates the money laundering risks associated with 
these relationships and the need for U.S. correspondent banks 
active in Colombia to focus on the black market peso exchange.

  Offshore Affiliate Issues

    A second set of issues in the BBLA case history involves 
how a U.S. correspondent bank should view an offshore bank that 
is affiliated with an established bank in another jurisdiction. 
BNY began the BBLA relationship in part as a courtesy to an 
existing customer and in part on the expectation that it could 
rely on the established bank to oversee its offshore affiliate. 
BBLA's affiliates, Lloyds and Banco Anglo, did exercise 
oversight of BBLA; and the evidence reviewed by the 
investigation suggests that an affiliated offshore bank often 
poses less of a money laundering risk than an unaffiliated 
offshore bank. At the same time, the BBLA case history suggests 
that an affiliated status is no guaranty against anti-money 
laundering deficiencies.
    One issue involves the effectiveness of the oversight 
exercised by Lloyds. Lloyds was intimately involved with BBLA, 
through its control of BBLA's board, senior management, client 
referrals and management agreement. But BBLA was not an easy 
bank to oversee. It operated in two jurisdictions, with offices 
that had completely different functions, employees and 
regulatory environments. BBLA did not have a single employee 
overseeing both offices, and the senior Lloyds managers 
assigned to the bank had many other responsibilities. BBLA was, 
in fact, one of four offshore banks that Lloyds was operating 
from the same Bahamas location, and it is far from clear how 
much attention Lloyds Bahamas actually paid to BBLA. For 
example, Lloyds never ensured that BBLA had a fully functioning 
anti-money laundering program that met the requirements of 
Bahamian law.
    A second issue is whether BBLA's affiliated status lulled 
BNY's into paying less attention to the bank. The evidence 
indicates that BNY did actively monitor the BBLA account and 
evaluated both its operations and interactions with Lloyds and 
Banco Anglo. However, because it viewed the banks as working in 
tandem, BNY treated BBLA in the same way that it treated its 
affiliates, with little sensitivity to the fact that BBLA, as 
an offshore operation, posed increased anti-money laundering 
risks. For example, BNY failed to realize that BBLA's primary 
regulator remained the Bahamas, and the tougher oversight 
theoretically available in Colombia and the United Kingdom 
never actually took place. In the end, BNY failed to obtain an 
accurate understanding of BBLA's regulatory oversight.
    A third issue is that, while BBLA's affiliation with Lloyds 
provided added oversight, the banks' close association may have 
also made Lloyds reluctant to disclose BBLA's deficiencies and 
problems. The evidence indicates, for example, that Lloyds 
failed to alert BNY to BBLA's involvement in the Operation 
Casablanca forfeiture or the Lloyds-ordered audit which found 
85 additional suspicious transactions. No one wants to be 
associated with money laundering, and Lloyds' self-interest 
apparently dictated against its reporting BBLA's failings to 
BNY. The BBLA case history shows a U.S. correspondent bank 
cannot always rely on an affiliated bank for negative 
information about its offshore affiliate.
    One lesson of the BBLA case history, then, is that while 
BBLA's affiliation with Lloyds and Banco Anglo was a positive 
factor which the Bank of New York reasonably relied on, it also 
had hidden drawbacks that contributed to BNY's missing 
important anti-money laundering deficiencies in BBLA's 
policies, procedures, personnel and regulatory oversight.

  Difficulties in Seizing Illegal Drug Proceeds

    Finally, the BBLA case history demonstrates the 
difficulties faced by U.S. law enforcement in confiscating 
known drug proceeds from a U.S. correspondent account belonging 
to an offshore bank.
    Due to the Operation Casablanca and Operation Juno money 
laundering stings, it is undisputed that $2.7 million in 
illegal drug proceeds were sent by wire transfer to BBLA's 
account in New York. Yet BBLA is opposing forfeiture of the 
funds, citing a variety of defenses. The ongoing litigation 
continues to consume U.S. law enforcement and prosecution 
resources, with the Casablanca forfeiture action exceeding 2\1/
2\ years so far, and the Juno forfeiture action hitting the 1-
year mark.
    BBLA's argument that it was an innocent bystander to the 
drug deposits cannot be evaluated here, since neither BBLA nor 
the United States provided information about BBLA's role in 
accepting the $2.7 million. On the other hand, BBLA's argument 
that it should not be forced to bear any loss in the event of 
inconsistent court decisions in the Bahamas and United States 
focuses attention on the legal issue of who, under U.S. law, 
bears the risk of loss in this situation. BBLA was an offshore 
bank that, by design, operated in multiple jurisdictions. It 
chose to get its license in the Bahamas, obtain its clients in 
Colombia and keep its dollars in the United States. It profited 
from that arrangement. Yet it claims that it should be 
protected from any risk of loss when faced with forfeiture 
proceedings in two jurisdictions over the same illegal funds. 
But BBLA accepted the risk of inconsistent rulings when it 
chose to operate in both jurisdictions at once. Even more, as a 
policy matter, forcing an offshore bank like BBLA to bear some 
risk of loss would provide an incentive for it to screen its 
U.S. deposits more carefully in the future. At the moment, 
however, how U.S. courts will treat BBLA's legal argument 
remains unclear.
    If BBLA were to prevail in court, the $2.7 million in drug 
proceeds would be returned to the bank, which would presumably 
release the funds to the relevant accountholders. The 
accountholders would then be made whole and suffer no legal 
consequences for having exchanged currency on the black market 
peso exchange. Such a conclusion to the BBLA forfeiture actions 
would make it that much more difficult for U.S. and Colombian 
law enforcement to discourage use of a black market that is 
financing much of the illegal drug trade plaguing both our 
countries.

                   BRITISH BANK OF LATIN AMERICA MONTHLY ACCOUNT ACTIVITY AT BANK OF NEW YORK
                                           January 1998-December 1999
----------------------------------------------------------------------------------------------------------------
                                                OPENING                                               CLOSING
                   MONTH                        BALANCE          DEPOSITS         WITHDRAWALS         BALANCE
----------------------------------------------------------------------------------------------------------------
January 1998                                      $213,454        $40,133,745        $43,583,173        $283,057
----------------------------------------------------------------------------------------------------------------
February 1998                                     $283,057        $78,285,586        $81,851,437        $223,083
----------------------------------------------------------------------------------------------------------------
March 1998                                        $223,083        $67,867,385        $69,162,634        $330,289
----------------------------------------------------------------------------------------------------------------
April 1998                                        $330,289        $87,244,132        $85,318,591        $263,158
----------------------------------------------------------------------------------------------------------------
May 1998                                          $263,158        $59,968,296        $62,207,011        $428,085
----------------------------------------------------------------------------------------------------------------
June 1998                                         $428,085        $61,986,395        $57,747,511        $467,901
----------------------------------------------------------------------------------------------------------------
July 1998                                         $467,901        $24,912,043        $25,147,687        $636,209
----------------------------------------------------------------------------------------------------------------
August 1998                                       $636,206        $57,963,111        $56,101,057        $501,208
----------------------------------------------------------------------------------------------------------------
September 1998                                    $501,208       $109,213,034       $115,092,113        $222,904
----------------------------------------------------------------------------------------------------------------
October 1998                                      $222,904        $93,251,230        $91,634,632        $340,490
----------------------------------------------------------------------------------------------------------------
November 1998                                     $340,490        $66,367,458        $67,654,369        $355,848
----------------------------------------------------------------------------------------------------------------
December 1998                                     $355,848        $52,557,413        $51,912,424        $201,892
----------------------------------------------------------------------------------------------------------------
January 1999                                      $201,892        $25,841,407        $26,426,143        $417,358
----------------------------------------------------------------------------------------------------------------
February 1999                                     $417,358        $21,556,062        $22,400,269        $783,988
----------------------------------------------------------------------------------------------------------------
March 1999                                        $783,988        $77,097,833        $83,362,990        $270,128
----------------------------------------------------------------------------------------------------------------
April 1999                                        $270,128        $48,230,657        $47,260,612        $243,138
----------------------------------------------------------------------------------------------------------------
May 1999                                          $243,138        $42,193,127        $42,107,758        $128,750
----------------------------------------------------------------------------------------------------------------
June 1999                                         $128,750       $101,889,005       $104,288,218        $234,941
----------------------------------------------------------------------------------------------------------------
July 1999                                         $234,941        $48,646,448        $53,890,943        $190,446
----------------------------------------------------------------------------------------------------------------
August 1999                                       $190,446        $20,524,495        $18,958,590        $356,352
----------------------------------------------------------------------------------------------------------------
September 1999                                    $356,352        $71,930,300        $70,778,186        $209,060
----------------------------------------------------------------------------------------------------------------
October 1999                                      $209,060        $61,404,775        $65,395,808        $219,542
----------------------------------------------------------------------------------------------------------------
November 1999                                     $219,542       $151,528,274       $150,150,064        $204,778
----------------------------------------------------------------------------------------------------------------
December 1999                                     $204,778        $41,043,494        $42,785,700        $265,607
----------------------------------------------------------------------------------------------------------------
TOTAL                                                          $1,511,635,705     $1,535,217,920
----------------------------------------------------------------------------------------------------------------
Prepared by the U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, January 2001.

                           Case History No. 7


                             EUROPEAN BANK

    European Bank is a small onshore bank licensed by the 
Government of Vanuatu, an island nation in the South Pacific. 
In 1999, European Bank opened an account and accepted $7.5 
million in deposits that turned out to be the proceeds of a 
massive credit card fraud in the United States. This case 
history looks at how this bank deposited the $7.5 million in a 
U.S. correspondent account at Citibank and fought for over 1 
year to prevent U.S. seizure of the funds. It also looks at the 
practical difficulties of Citibank's monitoring a correspondent 
account in a remote jurisdiction with a tradition of bank 
secrecy and weak banking and anti-money laundering controls.
    The following information was obtained from documents 
provided by European Bank and Citibank; court pleadings; 
interviews of persons in Australia, the Cayman Islands, the 
United States and Vanuatu; and other materials. Key information 
came from interviews with two bank officials, an August 7, 2000 
interview of Thomas Montgomery Bayer, chairman and part owner 
of European Bank; and a June 22, 2000 interview of Christopher 
Schofield Moore, a financial institutions group vice president 
at Citibank in Sydney, Australia. Both European Bank and 
Citibank voluntarily cooperated with the investigation. The 
investigation also benefited from assistance provided by the 
Australian, Cayman and Vanuatu Governments.

A. THE FACTS

  (1) European Bank Ownership and Management

    European Bank is the only indigenous bank in Vanuatu that 
is privately owned. It is licensed to do business with both 
Vanuatu citizens and foreign clients. Its offices are located 
in Port Vila, Vanuatu's capital city. In 1999, European Bank 
had about $29 million in total assets, handled about 90 clients 
with 250 accounts, and managed about $62 million in client 
funds.
    European Bank Formation. European Bank Ltd. was first 
established in 1972. By 1986, it was owned by a consortium of 
banks that included Bank of America, Union Bank of Switzerland, 
and others. In 1986, the consortium sold the bank to a Delaware 
corporation called European Capital Corporation, a holding 
company which is, in turn, owned by a trust beneficially owned 
by members of the Bayer family. The bank's name was changed in 
1986 to European Bank because, according to Thomas Bayer, the 
bank hoped to attract European clients doing business in the 
South Pacific. Thomas Bayer became the bank's chairman. In his 
interview, Bayer said that, after changing hands, the bank went 
essentially dormant for 10 years, handling only a few 
investments. He indicated that, in 1995, a decision was made to 
revive the bank. The bank obtained its current license to 
service domestic and international clients in April 1995, hired 
experienced bankers, and in the last 5 years has become an 
active financial institution.
    European Bank Management. European Bank's top executive is 
Bayer, who has held the title of executive chairman since 1986. 
Documentation and interviews indicate he is actively involved 
in the management of the bank and serves as its most senior 
decisionmaker.\280\ European Bank began hiring management 
personnel when the bank came out of its dormancy in 1995. 
European Bank's current president and chief executive officer 
is Robert Murray Bohn. The senior vice president in charge of 
operations is Brenton Terry whose predecessor, Douglas P.M. 
Peters, was instrumental in reviving the bank in 1995. The 
current operations manager is Kely Ihrig. The senior vice 
president in charge of the bank's data systems is Susan Phelps, 
who is also an officer of an affiliated company, European Trust 
Co. Ltd. The senior manager of the bank's corporate and trust 
services is David L. Outhred. Most of the bank's senior 
officers appear to have had solid banking credentials and 
experience.
---------------------------------------------------------------------------
    \280\ Bayer is a former U.S. citizen who worked for the U.S. 
Department of Defense, moved to Australia in 1967, lived in Singapore, 
and eventually settled in Vanuatu in 1974. After leaving the U.S. 
military, Bayer worked in international banking, trust activities and 
investments, including at offshore financial centers. When Vanuatu 
declared independence in 1980, and asked its leading citizens to take 
Vanuatu citizenship, Bayer became a citizen of Vanuatu in 1982, giving 
up his U.S. citizenship. Bayer indicated that he has a business degree 
from the Wharton School of Business in Pennsylvania, took law courses 
at a university in Singapore, and is a member of the International Bar 
Association.
---------------------------------------------------------------------------

  (2) European Bank Financial Information and Primary Activities

    European Bank Financial Statements. Vanuatu law requires 
its banks to submit annual audited financial statements. In 
response to a request by the investigation, European Bank 
voluntarily provided the Subcommittee with a copy of its 1999 
financial statement, which had been audited by the Vanuatu 
office of KPMG Chartered Accountants.
    The 1999 financial statement presented a mixed picture of 
the bank's finances. It indicated that, overall, European 
Bank's 1999 income of $1.7 million was exceeded by operating 
expenses of $1.8 million, resulting in an overall loss of about 
$77,000 for the year. It valued European Bank's total assets at 
almost $29 million. Customer deposits, which totaled $112 
million in 1998, had dropped by almost half to $62 million. 
Note 15 stated that a ``director related party has placed a 
deposit of US$984,238 with the bank . . . as security to cover 
the overdrawn accounts of three clients.'' ``Issued share 
capital'' was $750,000. Despite the overall loss on the year, 
the bank issued a dividend payment of $116,000, double the 1998 
dividend of $83,000, which was paid on profits of more than 
$291,000.
    The financial statement suggests a small, thinly 
capitalized bank that, in 1999, suffered some unexpected 
overdrawn accounts, operating losses and a large drop in 
customer deposits, but nevertheless paid a sizeable dividend.
    European Bank Affiliations. European Bank is part of a 
complex group of companies beneficially owned by the Bayer 
family. These companies are incorporated in Vanuatu, Canada, 
the United Kingdom, and the United States, with offices in 
other countries as well.\281\ European Bank records reflect 
ongoing transactions with a number of these related parties. 
These companies are also a source of new clients for the bank.
---------------------------------------------------------------------------
    \281\ Key companies in the Bayer group include the following:

      --European Investment Corp. Ltd., a Vanuatu company which is 
100% owned by European Bank, functions as an investment holding 
company, and owns one subsidiary, European Trust Co. Ltd.;
      --European Trust Co. Ltd. (``European Trust''), a Vanuatu 
company which is licensed to engage in company and trust formation 
activities in Vanuatu; is 100% owned by European Investment Corp.; 
shares employees and office facilities with European Bank; and operates 
in close cooperation with European Bank;
      --Pacific International Trust Company Ltd. (``PITCO''), a 
Vanuatu company which is the only other trust company in Vanuatu aside 
from European Trust; is owned by PITCO Corp., a Delaware company; has 
offices in Hong Kong, Kuala Lumpur, London, New York and Port Vila; 
shares employees and office facilities with European Bank; and uses 
European Bank as one of its bankers;
      --Pacific Capital Growth Fund Ltd. (PCGF), a Canadian company 
which is wholly owned by PITCO; operates several award-winning mutual 
funds; requires its clients to establish Vanuatu entities; and uses 
European Bank as one of its bankers;
      --Fidelity Pacific Life Insurance Co. Ltd., a Canadian company 
which is one of only two registered life insurance companies in 
Vanuatu; holds preferred shares in European Bank; and uses European 
Bank as one of its bankers;
      --Asian Pacific Finance Ltd., a U.K. company which provides 
financial services and, like European Bank, is owned by European 
Capital Corporation; and
      --Vanuatu Maritime Services Ltd., a Vanuatu company which 
operates Vanuatu's extensive international shipping register, which is 
one of the largest in the world; has registered over 500 vessels; 
maintains ship registration offices in Greece, Hong Kong, Japan, 
Singapore, the United Kingdom, the United States, and Vanuatu; and uses 
European Bank as one of its bankers.
---------------------------------------------------------------------------
    European Bank Primary Lines of Business. When asked to 
identify its major lines of business, European Bank described a 
number of different types of clients and banking activities, 
none of which appear to dominate the bank. Its activities 
included: (1) domestic banking for Vanuatu residents; (2) 
private banking primarily for foreign clients, involving funds 
management and investment activities for wealthy individuals; 
(3) banking activities for companies and trusts formed by the 
bank's affiliated trust companies, European Trust and PITCO; 
(4) banking activities for the bank's affiliates or their 
clients, including the PCGF mutual funds, Fidelity Pacific 
Insurance, and Vanuatu Maritime Services; (5) offshore banking 
activities for Asian clients, such as Hong Kong citizens 
seeking escape from estate duties; (6) merchant credit card 
accounts; and (7) niche banking services for mail order 
companies, telemarketers and lotteries. European Bank indicated 
that it did not engage in regular lending activities, although 
it had a small trade finance portfolio.
    Bayer indicated that, when European Bank first came out of 
its 10-year dormancy in 1995, it concentrated on a banking 
specialty involving services to mail order companies, 
telemarketers and lotteries. These banking services consisted 
primarily of clearing thousands of small checks in various 
currencies from persons buying merchandise or lottery tickets, 
and issuing numerous small checks in various currencies to 
lottery winners or persons returning merchandise or seeking 
refunds. European Bank performed the labor-intensive work of 
gathering and batching the consumer checks, while using 
correspondent banks with international check clearing 
capabilities, such as Citibank, to help it process payments and 
issue checks as needed. Bayer indicated that, at its peak, 
European Bank was clearing about 100,000 checks per month. Both 
Bayer and Moore indicated that it was this check clearing 
business that led to the establishment of European Bank's 
correspondent relationship with Citibank in 1996.
    Another key activity at European Bank involving 
correspondent banks has been the bank's fiduciary placement of 
client funds in various money market or investment accounts at 
other banks to maximize interest earnings. European Bank 
typically makes these placements after a competitive bidding 
process in which its personnel contact the treasury departments 
at several of its correspondent banks and obtain interest rate 
quotations for depositing a specified amount of funds for a 
specified period of time. For example, European Bank might call 
Citibank, ANZ Bank, and Westpac Banking Corp. to find the best 
interest rate offered for a 30-day deposit of $1 million. Once 
the placement terms are settled, European Bank would direct the 
wire transfer of the funds to the appropriate bank and, at the 
end of the agreed upon placement period, collect the promised 
interest payments.
    According to Bayer, these placements are a good source of 
revenue for the bank, which shares in the higher interest rates 
paid on the deposits. For example, if European Bank was able to 
place $1 million for 30 days at a 7% interest rate, it might 
pay its client 5% in interest and keep the remaining 2%. 
Documentation and interviews indicate that European Bank took a 
conservative approach to the placement of client funds, using 
major banks and low-risk investments such as money market 
accounts or U.S. treasury notes. The documentation also 
indicates that European Bank often made these placements in 
U.S. dollars. Documentation and interviews indicate that 
European Bank often made a fiduciary placement soon after 
receiving a substantial deposit from an individual client. 
Bayer indicated that European Bank typically tried to move any 
large deposit exceeding, for example, $1 million, into a higher 
interest-bearing placement by the end of the day. Citibank 
account statements show repeated instances in which European 
Bank withdrew large client deposits later the same day for 
placement into a higher interest-bearing money market account 
either at Citibank or another bank.\282\
---------------------------------------------------------------------------
    \282\ According to Bayer, on some occasions, European Bank would 
combine funds from several client accounts into a single placement in 
order to take advantage of the higher interest rates paid on interbank 
deposits.
---------------------------------------------------------------------------

  (3) European Bank Correspondents

    European Bank told the Minority Staff investigation that 
correspondent banks play a critical role in the bank's 
operations:

      The role that correspondent banks play in our bank's 
operation is . . . a critical one. All banks place deposits 
denominated in foreign currency either directly or indirectly 
with a correspondent that operates in the country of that 
currency. . . . As the Vatu [Vanuatu's domestic currency] is 
not an internationally used currency, virtually all of our 
bank's assets are on deposit with our correspondent banks. Even 
within Vanuatu, residents generally do not hold their 
investments in Vatu, so deposits we received from locally based 
depositors will invariably be denominated in a currency other 
than Vatu. For us to pay interest on that deposit, we must in 
turn deposit it through the interbank system with one of our 
correspondent banks.\283\
---------------------------------------------------------------------------
    \283\ Letter dated 5/22/00 from European Bank to the Subcommittee 
responding to requests for information (``European Bank letter'') at 6.

    In response to requests for information, European Bank 
provided a list of about a dozen banks with which it has had a 
correspondent relationship since 1998. These correspondent 
banks were licensed in Australia, Italy, the Netherlands, the 
United Kingdom, Vanuatu, and elsewhere.
    Bayer indicated that, for 4 years beginning in 1996, 
European Bank's primary correspondent relationship was with 
Citibank. That correspondent relationship was managed by 
Citibank offices in Australia, but European Bank maintained 
seven Citibank accounts, each in a different currency, allowing 
it to transact business in Australia, Canada, Hong Kong, New 
Zealand, the United Kingdom and the United States, among other 
jurisdictions. Bayer indicated that European Bank's preferred 
currency was U.S. dollars and it carried out the bulk of its 
transactions through its U.S. dollar account at Citibank. 
European Bank also completed transactions in such currencies as 
Australian dollars, Canadian dollars, sterling and yen.
    European Bank routinely transacts business in the United 
States, using a variety of U.S. correspondent accounts. While 
its most frequently used U.S. dollar account was at Citibank, 
European Bank also used U.S. dollar accounts belonging to its 
other correspondent banks, such as ANZ Bank (Vanuatu) Ltd. and 
Bank of Hawaii (Vanuatu), both of which have U.S. affiliates. 
ANZ Bank (Vanuatu) Ltd., for example, has a correspondent 
relationship and U.S. dollar account with ANZ Bank (United 
States) which maintains a small office in New York, and 
European Bank routinely transacted business through this U.S. 
account.\284\
---------------------------------------------------------------------------
    \284\ Both ANZ Bank (Vanuatu) Ltd. and ANZ Bank (United States) are 
affiliated with the Australia and New Zealand Banking Group Ltd., a 
large financial services conglomerate with, according to the Bankers 
Almanac, over 30,000 employees and $95 billion in assets worldwide.
---------------------------------------------------------------------------
    While the Minority Staff investigation did not examine all 
of European Bank's U.S. correspondent activities, it did 
conduct an in-depth examination of the bank's primary 
correspondent relationship with Citibank. This correspondent 
relationship lasted 4 years, from May 1996 until May 2000, and 
ended only when Citibank made a decision to reduce its 
correspondent activity involving certain South Pacific island 
nations. Although European Bank's Citibank accounts are now 
closed, it continues to transact business in the United States 
through a variety of other U.S. correspondent accounts.

  (4) European Bank Operations and Anti-Money Laundering Controls

    European Bank operates out of offices in the capital city 
of Vanuatu, Port Vila. Its offices are open to the public, 
since the bank is authorized to take deposits from Vanuatu 
citizens as well as international clients. The bank shares its 
office space and staff with two affiliated companies, European 
Trust and PITCO. According to Bayer, the companies have a 
combined staff of about 60, of which only about 8 persons work 
solely for the bank.
    From 1996 through mid 2000, the bank maintained an 
electronic ledger and had its own wire transfer capability 
using software provided by Citibank. Documentation indicates a 
well developed set of standard internal forms to track client 
accounts and bank transactions. Bank records are kept on site 
in Vanuatu.
    The bank does not have a high volume of daily transactions 
nor does it routinely deal in million-dollar transactions, 
although it occasionally facilitates large transfers of funds. 
In his interview, Bayer estimated that the bank handles only 
about 5 to 10 transactions per day and an even smaller number 
of fiduciary placements. Citibank documentation indicates that 
over a 2-year period, 1998 and 1999, only a small number of 
European Bank's transactions exceeded $2 million. During those 
2 years, for example, only one transaction exceeded $10 
million; two transactions involved amounts between $5 and $10 
million; and less than a dozen involved $2 million or more. 
Nevertheless, European Bank moved significant amounts of funds 
through its Citibank accounts. For example, in 2 years, the 
least active month, at its Citibank U.S. dollar account 
experienced more than $1 million in account activity, while the 
most active month saw $50 million move into and out of the 
account. Overall, European Bank's deposits and withdrawals from 
its U.S. dollar account at Citibank in 1998 and 1999 totaled 
almost $192 million.\285\
---------------------------------------------------------------------------
    \285\ See chart entitled, ``European Bank Monthly Account Activity 
at Citibank.''
---------------------------------------------------------------------------
    European Bank's Anti-Money Laundering Controls. European 
Bank provided the investigation with a copy of its July 1999 
``Money Laundering Prevention Policy.'' In an interview, Bayer 
stated that it was the bank's first formal, written anti-money 
laundering policy statement, although the bank has long worked 
to prevent money laundering by getting to know its customers, 
monitoring accounts and reporting suspicious activities.
    European Bank's policy statement includes sections on the 
definition of money laundering, how to prevent money 
laundering, ``client acceptance criteria,'' and anti-money 
laundering procedures instructing bank employees to ``know your 
customer,'' monitor transactions, and report suspicious 
transactions.\286\ The policy statement also provides standard 
forms for reporting cash transactions and suspicious activity.
---------------------------------------------------------------------------
    \286\ Excerpts include the following:

      --``The purpose of this policy is to ensure that . . . European 
Bank . . . has adequate policies, practices and procedures in place, 
including strict `know your customer' rules that will encourage all 
staff of the Bank to promote high ethical and professional standards in 
the financial and banking sector and prevent the Bank being used, 
intentionally or otherwise, by criminal elements.''
      --``Transactions will only be undertaken for customers of the 
Bank, properly identified individuals or with authorized introductions 
from group associated entities.''
      --``It is mandatory that before an account is opened, the Bank 
Officer is satisfied that he/she `knows the customer', and is satisfied 
with their bona fides. . . . The Bank requires to know . . . where 
appropriate, the `beneficial owner' of the account.''
      --``[T]he following bank documentation must be obtained/
completed: Signature Card. Account Opening Questionnaire[.] Money 
Laundering Prevention Questionnaire[.] Acknowledgment and Agreement 
form. Statutory Declaration. Beneficial Ownership form. . . .''
---------------------------------------------------------------------------
    The person charged with implementing the anti-money 
laundering policy is the bank's operations manager, who also 
serves as European Bank's compliance officer. Bayer indicated 
during his interview that, prior to July 1999, European Bank 
had not assigned anti-money laundering duties to a particular 
bank employee. He said that the policy also led to the 
appointment of the bank's first official compliance officer.
    European Bank's 1999 adoption of a written anti-money 
laundering policy is an overdue, but important advance in its 
anti-money laundering efforts. While the policy has many 
positive features, it has at least two drawbacks. First, it 
assigns all anti-money laundering and compliance duties to the 
bank's operations manager, who already has substantial duties 
in the day-to-day operation of the bank. Bayer indicated in his 
interview that he thought Kely Ihrig, the current operations 
manager, spent a very small percentage of her time on anti-
money laundering responsibilities. Second, while the policy 
statement requires ``ongoing monitoring of transactions,'' it 
appears to limit this monitoring to cash transactions. The 
policy statement does not require, for example, any monitoring 
of wire transfer activity, even though the vast majority of 
European Bank transactions take place through wire transfers. 
The statement also fails to specify any monitoring procedures, 
whether manual or electronic, to be used in analyzing ongoing 
transactions and identifying suspicious activity.

  (5) Regulatory Oversight of European Bank

    Vanuatu has separate regulatory regimes for its onshore and 
offshore banks, with different statutory requirements and 
different regulatory agencies. Onshore, domestic banks are 
regulated by the Reserve Bank of Vanuatu, while offshore banks 
are regulated by the Vanuatu Financial Services Commission. 
European Bank is regulated by the Reserve Bank. Bayer is a 
long-serving member of the Vanuatu Financial Services 
Commission.
    Vanuatu has a mixed reputation with respect to its banking 
and anti-money laundering controls. For example, the State 
Department's International Narcotics Control Strategy Repo 
(``INCSR 2000'') identifies Vanuatu as a country of ``concern'' 
in terms of money laundering, and describes a number of 
deficiencies in its anti-money laundering laws. However, the 
United States has not issued a formal advisory on Vanuatu nor 
is Vanuatu named in FATF's June 2000 list of 15 countries found 
non-cooperative with international anti-money laundering 
efforts. On the other hand, Vanuatu is named in the June 2000 
list of 35 unfair tax havens published by the Organization for 
the Economic Cooperation and Development's Forum on Harmful Tax 
Practices, and in the March 2000 list of offshore jurisdictions 
with relatively weak financial regulation issued by the 
Financial Stability Forum. In late 1999, several major banks, 
including the Bank of New York, Deutsche Bank and Republic 
National Bank of New York, stopped processing wire transfers 
involving certain South Pacific island nations, such as Nauru, 
Palau Niue and Vanuatu. However, in early 2000, Vanuatu was 
able to convince the banks to modify their wire transfer ban as 
applied to Vanuatu so that it was limited, essentially, to 
Vanuatu's offshore banks, while allowing wire transfers 
involving Vanuatu's domestic onshore banks. Later in 2000, when 
Vanuatu underwent its first evaluation by the Asia/Pacific 
Group on Money Laundering (APG), a FATF regional affiliate, the 
evaluation identified both positive and negative features of 
Vanuatu's anti-money laundering controls.
    Vanuatu has five locally licensed, domestic banks which 
together make up the Bankers Association of Vanuatu.\287\ These 
banks are authorized to do business with Vanuatu's residents 
and any foreign citizen, and to complete transactions using the 
local currency, the Vatu, as well as any foreign currency.
---------------------------------------------------------------------------
    \287\ Vanuatu's five onshore banks are: (1) European Bank, the 
island's only privately-owned, indigenous bank, not licensed in any 
other jurisdiction; (2) National Bank of Vanuatu, which is an 
indigenous bank owned by the Vanuatu Government; (3) ANZ Bank (Vanuatu) 
Ltd., which is part of the Australia, and New Zealand Banking Group 
Ltd., a large regional conglomerate; (4) Banque d'Hawaii (Vanuatu) 
Ltd., a wholly owned subsidiary of an established U.S. bank, Bank of 
Hawaii which operates throughout the South Pacific; and (5) Westpac 
Banking Corp., which is part of a large Australian financial 
conglomerate.
---------------------------------------------------------------------------
    Beginning in 1999, the Reserve Bank of Vanuatu was assigned 
responsibility for regulating these onshore banks. This 
regulation is carried out by the Reserve Bank's Bank 
Supervision Department. Bayer indicated in his interview that, 
to date, the Reserve Bank has not issued any bank regulations, 
because the industry has historically been self-regulated under 
rules issued by the Bankers Association of Vanuatu. Each 
onshore bank is required, however, to file monthly reports and 
an annual audited financial statement with the Reserve Bank. 
These filings contain information about the bank's capital, 
balances, major depositors, operations and other information. 
The Reserve Bank is charged with reviewing these reports as 
well as conducting bank examinations. Bayer indicated in his 
interview that European Bank had undergone a number of bank 
examinations over the years.
    In addition to five onshore banks, Vanuatu has licensed 
over 60 ``exempted'' or offshore banks. Apparently, all are 
shell operations run by persons or companies outside of the 
jurisdiction. Bayer indicated during his interview that about 
six were affiliated with banks licensed elsewhere, while the 
remaining--more than 55--were offshore banks licensed only in 
Vanuatu. He indicated that most of the offshore banks operated 
under restricted banking licenses which permit the bank to 
accept deposits only from persons or entities specified on an 
approved list.
    All of Vanuatu's offshore banks are regulated by the 
Vanuatu Financial Services Commission. The current chairman of 
the Commission is Bayer, who serves in an advisory 
capacity.\288\ The Commission participates in both the 
licensing and monitoring of these banks. The Commission also 
oversees much of the rest of Vanuatu's commercial sector, 
including the island's international business corporations, 
trust companies, insurance firms, realtors and other commercial 
enterprises. It used to oversee the island's domestic banks as 
well, until that responsibility was switched in 1999 to the 
Reserve Bank.
---------------------------------------------------------------------------
    \288\ According to Bayer, the Commission operates with three 
members, one of whom is a government employee and serves as the 
official ``Commissioner,'' while the other two serve as commission 
``advisors.'' Bayer indicated in his interview that he has been a 
member of the Commission since its inception in the 1980s and is the 
only member who has continuously served on the agency since it began. 
Bayer indicated in his interview that he perceived his role to be, in 
part, to represent the interests of the private sector. The official 
Commissioner for a number of years was Julian Ala, followed recently by 
Dudley Aru.
---------------------------------------------------------------------------
    According to Bayer, compared to its other duties, the 
Commission has spent only a small fraction of its time on 
matters related to offshore banks. He indicated that, of the 
time spent on offshore bank matters, most of the Commission's 
efforts have involved obtaining required fees and reports from 
the offshore banks, and reviewing submitted filings. He said 
the Commission carried out its offshore banking duties through 
an ``Offshore Banking Supervision Unit.'' He said the 
Commission did not, as a rule, conduct bank examinations. He 
indicated that offshore banks are not required to keep records 
in Vanuatu, and most do not, which means offshore bank 
examiners would have to travel to where the shell bank was 
operating or, alternatively, be limited to reviewing paperwork 
sent to Vanuatu. Bayer said that, due to requests made by the 
international banking community, the Commission recently agreed 
to examine six of its offshore banks suspected of having ties 
to Russian nationals and moving questionable funds. He 
indicated that those examinations were being conducted by a 
retired bank auditor from the U.K.'s Financial Services 
Authority, hired by Vanuatu to examine the six banks. He said 
that Vanuatu had made no commitment to examine its other 
offshore banks, which currently number more than 50. He 
indicated that there was an ongoing debate in Vanuatu about 
whether offshore bank examinations were needed and whether the 
cost of compliance would discourage bank applications in 
Vanuatu.
    Bayer also said in his interview that, even though he is 
chairman of the Vanuatu Financial Services Commission, he plays 
only a limited role in the licensing process because he is not 
permitted to see bank ownership information. He said that, 
under Vanuatu law, only the official Commissioner, a government 
employee, has access to bank ownership information. He said 
that, because of this situation, he could not say with any 
certainty who owned Vanuatu's offshore banks--even though he is 
a key regulator of them. He said that it was his impression 
that most of the 60 offshore banks are ``ego banks'' owned by 
wealthy individuals or subsidiaries of private companies 
seeking to operate a bank on behalf of a related group of 
companies.
    Bayer said that it is his impression from his Commission 
duties that Vanuatu's offshore banks are generally not very 
active. He thought that they are also generally small 
operations with few formal procedures. For example, he thought 
that few would have formal anti-money laundering procedures. He 
said that it was up to U.S. banks to investigate these banks 
prior to accepting funds or opening accounts for them. When 
told that U.S. banks thought that they should be able to rely 
on Vanuatu banking authorities to ensure the legitimacy of 
their licensed banks, Bayer disagreed and said U.S. banks have 
their own due diligence obligations they need to perform.
    Although Bayer claimed there was no conflict of interest in 
his serving on a Commission that oversees only offshore banks, 
evidence indicates that European Bank operates a correspondent 
account for at least one Vanuatu offshore bank called Nest 
Bank. Nest Bank is one of the six Vanuatu offshore banks under 
examination for possible ties to Russian nationals. Citibank 
documents indicate that, beginning in January 1999 and 
continuing throughout the year, European Bank allowed Nest Bank 
to move more than $6 million through European Bank's U.S. 
dollar correspondent account at Citibank. These funds suggest 
Nest Bank may be a sizeable client at European Bank. The 1999 
transactions involved such entities as a fertilizer plant in 
Uzbekistan; a London company that trades in oil, chemicals, and 
agricultural commodities in Russia; a company called Societe 
Generale S.A. in the Ukraine; a company called Rusomax Ltd.; 
and International Bank Astana, Ltd. which the investigation was 
unable to locate but appears to have ties to Moscow. While the 
investigation did not attempt to analyze European Bank's 
relationship with Nest Bank, the existence of this 
correspondent account raises possible conflict of interest 
issues, since it calls for a private banker, Bayer, to oversee 
an offshore bank that is also his bank's client. The potential 
for conflict is made even more clear by the Commission's 
ongoing examination of Nest Bank for alleged ties to Russia and 
possible money laundering, since Nest Bank moved over $6 
million in 1 year through European Bank's correspondent account 
at Citibank.

  (6) Money Laundering and Fraud Involving European Bank

    The Minority Staff investigation did not conduct an 
exhaustive review of European Bank's activities, but did 
conduct a detailed examination of two major accounts opened in 
1999, which moved millions of dollars through European Bank's 
U.S. correspondent accounts. Both accounts raise serious 
questions about European Bank's client oversight and due 
diligence.

  (a) Taves Fraud and the Benford Account

    In 1999, European Bank opened a bank account and accepted 
$7.5 million on behalf of a Vanuatu corporation, Benford Ltd., 
that was established by its affiliated trust company and about 
which the bank had virtually no due diligence information. 
After learning that the $7.5 million consisted of proceeds from 
a credit card fraud, European Bank nevertheless fought for more 
than 1 year to prevent U.S. seizure of the funds from its 
correspondent account at Citibank.
    In April 2000, in civil proceedings filed by the U.S. 
Federal Trade Commission to halt unfair and deceptive trade 
practices, a U.S. district court found that Kenneth H. Taves 
and his wife Teresa Callei Taves, both U.S. citizens, had 
committed a massive credit card fraud involving over $49 
million.\289\ Imprisoned on civil contempt charges for refusing 
to surrender certain assets related to the fraud, Taves was 
indicted in February 2000 in separate court proceedings in two 
countries. In the United States, Taves was charged with making 
false statements; in the Cayman Islands he was charged with 
money laundering.
---------------------------------------------------------------------------
    \289\ For more information, see the description of the Taves fraud 
in the appendix.
---------------------------------------------------------------------------
    The U.S. court also authorized an FTC-appointed receiver to 
track down and recover the fraud proceeds. The receiver found 
over $25 million had been transferred to Taves-controlled 
accounts at Euro Bank, a small bank in the Cayman Islands.\290\ 
The Cayman Government charged three senior Euro Bank officials 
with laundering money from the Taves fraud and later ordered 
the bank closed. In July 1999, in exchange for releasing the 
bank from damage claims, Euro Bank's liquidators provided the 
FTC receiver with ``information and documents in the Bank's 
possession'' related to the Taves fraud. Using this 
information, the FTC receiver traced $7.5 million in Taves 
fraud proceeds to a European Bank account opened in the name of 
a Vanuatu corporation, Benford Ltd.
---------------------------------------------------------------------------
    \290\ Euro Bank is completely unrelated to European Bank in 
Vanuatu.
---------------------------------------------------------------------------
    Benford Ltd. was incorporated by European Trust, and its 
bank account was opened by European Bank. The company was 
established at the request of one of the Euro Bank employees 
later charged with money laundering, who said he was acting on 
behalf of an unnamed client. The incorporation and account 
paperwork was handled by a shared senior employee, Susan 
Phelps, who was working for both European Trust and European 
Bank. Phelps has stated in a sworn affidavit that, throughout 
the incorporation and account opening process, she never spoke 
with either the Euro Bank employee or Benford's beneficial 
owner, but relied entirely upon faxed information to establish 
the corporation and open the account.
    Phelps incorporated Benford Ltd. within 24 hours of 
receiving an application form faxed from Euro Bank with minimal 
information about the company's beneficial owner. The 
application provided no more than the beneficial owner's name, 
Vanessa Phyllis Ann Clyde, a London address, a copy of her 
passport photograph, and a one-word description of her 
occupation as ``business.'' On the same day Euro Bank wire 
transferred $100,000 to European Bank's account at Citibank in 
New York, for deposit into the Benford account. European Bank 
opened the Benford bank account, without any additional due 
diligence research into Clyde, the source of her wealth, or the 
origin of the $100,000. Bayer indicated that all of the forms 
were filled out in the usual way for bank accounts opened for 
companies formed by its affiliate, European Trust. In other 
words, it was typical practice for European Trust to 
incorporate a new company within 24 hours of a request and then 
for European Bank to open a bank account in the company's name.
    It was only after the Benford account was opened, that the 
Euro, Bank employee and the company's beneficial owner, Clyde 
who had an American accent, actually telephoned Phelps to 
discuss the account. Clyde apparently indicated that she wished 
to keep the Benford funds in U.S. dollars in a secure but 
liquid investment. Over the next 2 months, the Benford account 
received additional millions of dollars in deposits. The first 
transfer, for $2.8 million on March 17, 1999, prompted European 
Bank to ask some questions about their new client. After Euro 
Bank did not volunteer any additional information, European 
Bank's senior vice president asked someone he knew in the 
Cayman Islands about Euro Bank itself. He received the 
following negative information about Euro Bank:

      LSmall locally incorporated bank, with a local banking 
licence, 20/30 people on the staff, corporate activities too, 
not a good reputation locally, has its door open to business 
when other doors are closed to it, very much lower end of the 
local banking business, dubious, 3 months ago there were rumors 
that they might fail, not well respected, advise caution when 
dealing with them. Barclays would not accept a reference from 
them and would certainly not do business with them.

    Despite this negative portrayal of the sole reference for 
the Benford account, European Bank left open the account, 
accepted additional funds, and chose not to try to verify any 
information about Clyde or her assets.
    By April 1999, the Benford account held about $7.5 million. 
Bayer said that, by then, Benford was a ``huge client,'' whose 
deposits represented about 15% of the bank's total deposit base 
of $50 to $60 million. In May, however, two incidents suddenly 
cast suspicion on the Benford funds. The first, on May 25, 
1999, was a telephone call about the account from a Clyde who 
had an English accent, instead of an American accent. Bayer 
said it was the first time European Bank appeared to have two 
different persons claiming to be the beneficial owner of an 
account at the bank. Later the same week, European Bank 
received a fax stating that Euro Bank had been placed into 
receivership and the $7.5 million previously sent to the 
Benford account were proceeds of the Taves credit card fraud.
    In response, European Bank immediately froze the Benford 
account, transferred the funds internally into a new, non-
interest bearing account from which client withdrawals were 
prohibited, and filed a report with the Vanuatu police. Despite 
moving the Benford deposits into a non-interest bearing account 
within the bank, European Bank decided to continue placing the 
$7.5 million with the correspondent bank paying the highest 
interest rate on the funds, so that it could continue to earn 
revenue from this large deposit. European Bank did not, 
however, alert the correspondent bank holding the funds to 
their suspicious origin.
    At the same time, European Bank made another attempt to 
learn more about the funds. In June 1999, Phelps asked the 
English-accented Clyde in a telephone conversation about the 
origin of the funds. She wrote this summary of the 
conversation:

      [Clyde] said I should have got this info from [the Euro, 
Bank employee]. I said the funds had just arrived without 
supporting documentation. . . . English was asked to open the 
a/c. Doesn't know when. . . . Doesn't know how much. Wasn't 
responsible for putting funds in. Not her personal funds. 
Extremely uncomfortable. . . . If somebody had taken funds she 
doesn't want to be tarred.\291\
---------------------------------------------------------------------------
    \291\ See Phelps affidavit and notes, CG 6509-11.

    The evidence indicates that, within months of the $7.5 
million being deposited, European Bank had notice and evidence 
of their suspect origin. Yet European Bank steadfastly opposed 
releasing the funds to the FTC receiver seeking recovery of the 
money on behalf of the Taves fraud victims.
    Litigation over the funds began in the summer of 1999, when 
European Bank and the FTC receiver filed separate suits in 
Vanuatu to freeze the $7.5 million. In September, Clyde asked 
the Vanuatu court to allow her to remit the Benford funds to 
the FTC receiver, but European Bank's nominee companies 
contested her control of Benford Ltd. and opposed releasing the 
funds. The Vanuatu police launched a criminal investigation 
and, in November, charged Benford Ltd. with possession of 
property ``suspected of being proceeds of crime.'' The police 
also obtained a criminal freeze order preventing the funds' 
release to the FTC or anyone else.
    On December 10, 1999, after locating a document notifying 
Benford Ltd. that its funds had been placed in an interest 
bearing account at Citibank in Sydney, the FTC receiver filed 
suit in Australia, asking the Australian court to freeze the 
$7.5 million on deposit with Citibank. Unknown to the FTC 
receiver at the time of its filing, European Bank had taken 
steps that same day to transfer the funds from Citibank to one 
of its correspondent banks in Vanuatu. Before any transfer took 
place, however, the Australian court froze the funds. 
Additional pleadings were filed by the Vanuatu Government, 
European Bank and FTC receiver, each seeking control over the 
$7.5 million. European Bank, which had not told Citibank 
previously about the suspect origin of the Benford funds, sent 
a fax to Citibank explaining the situation and complaining that 
the FTC receiver was trying ``every trick in the book'' to 
``force the monies to be sent to the USA.'' The Vanuatu and 
Australian litigation continued throughout 2000.
    Almost 1 year later, on November 29, 2000, a third set of 
legal proceedings began in the United States. Acting at the 
request of the FTC, the U.S. Department of Justice filed a 
seizure warrant and took possession of the Benford funds from 
Citibank in New York. It was able to seize the funds in the 
United States because Citibank Sydney had always kept the 
Benford funds in U.S. dollars in a U.S. dollar account in New 
York. In December 2000, the Justice Department filed a civil 
forfeiture action seeking to eliminate any other claim to the 
funds. The complaint alleged that the funds were the proceeds 
of the Taves credit card fraud, and the FTC receiver had 
``tried to obtain the funds from European Bank through a 
Vanuatuan court proceeding, but failed to obtain relief in 
Vanuatu.'' It is unclear whether European Bank will assert a 
claim to the funds.
    During more than a year of litigation battles in three 
countries, Clyde has supported sending the Benford funds to the 
FTC, but European Bank has vigorously opposed it. When asked 
why, Bayer gave three reasons during his interview: (1) the 
ownership of the funds remained unclear, since Clyde had 
admitted in court that they were not her funds and she did not 
know their origin; (2) the allegation that the funds came from 
the Taves fraud should be established in Vanuatu court and, if 
true, the Vanuatu Attorney General could reimburse the fraud 
victims, rather than pay the monies to the FTC receiver who 
might exhaust the entire sum through fees and expenses; \292\ 
and (3) European Bank had to defend itself from the risk of 
inconsistent court decisions which might order it to pay the 
$7.5 million twice, once to the Vanuatu Government in 
connection with the Benford money laundering prosecution and 
once to the FTC receiver seeking funds for the Taves fraud 
victims. At times, Bayer also argued that the $7.5 million 
deposit at Citibank represented European Bank's own funds, 
unrelated to the Benford matter, although at other times he 
acknowledged the Benford deposits made up the bulk of the 
Citibank placement.
---------------------------------------------------------------------------
    \292\ However, the INCSR 2000 report warns: ``Case law in Vanuatu 
has shown that proving the criminal origins of proceeds, especially of 
offenses committed abroad, is extremely difficult. Linking criminal 
proceeds seized in Vanuatu with the offense committed abroad through a 
complex series of financial transactions conducted by related 
corporations operating in several offshore jurisdictions is all but 
impossible.'' INCSR Report 2000 at 751.
---------------------------------------------------------------------------
    The $7.5 million, now swelled with interest earnings to 
$8.1 million, is in the custody of the United States, while the 
litigation in Vanuatu, Australia and the United States 
continues.

  (b) IPC Fraud

    In February 1999, the same month it opened the Benford 
account, European Bank opened another ill-fated account under a 
credit card merchant agreement with a Florida corporation 
called Internet Processing Corporation (``IPC'').\293\ As in 
the Benford matter, European Bank opened the account without a 
due diligence review of the prospective client. IPC used 
unauthorized credit card charges to obtain $2 million in 
payments from European Bank and then absconded with the funds. 
By the time it learned of the fraud, European Bank was unable 
to locate IPC, the company's owner, or the missing $2 million. 
It ultimately suffered a $1.3 million loss which threatened the 
solvency of the bank.
---------------------------------------------------------------------------
    \293\ For more information, see the description of the IPC fraud in 
the appendix.
---------------------------------------------------------------------------
    According to Bayer, the IPC account was one of about a half 
a dozen new accounts that European Bank opened in 1999 in an 
effort to expand the bank's business into credit card clearing. 
It opened the IPC bank account within 1 week of being contacted 
for the first time by the company. As with the Benford account, 
the IPC account was opened based upon written materials and 
correspondence, without any telephone conversation or direct 
client contact.
    Despite the credit risk involved in a merchant account, 
European Bank failed to conduct virtually any due diligence 
review of either IPC or Mosaddeo Hossain, the company's sole 
incorporator, registered agent, director and officer. IPC is a 
Florida corporation that had been created 2 weeks prior to the 
opening of the account. It claimed to sell travel packages on 
the Internet. Hossain was a Bangladeshi national allegedly 
living in Florida. European Bank did not inquire into the 
company's ownership, double check its references, ascertain its 
capital or bank account balances, or verify its physical 
address. With respect to Hossain, it did not inquire into his 
business background, obtain any personal or professional 
references, check his credit history, or verify any personal or 
professional information about him. The bank also failed to 
notice that the Bangladeshi passport he submitted as 
identification had expired 7 years earlier.
    As soon as the account became operational in late March 
1999, Hossain claimed that IPC needed to process a number of 
pre-sold travel packages and filed credit card charges totaling 
about $13 million. About 85% of these charges would later be 
disputed by the cardholders who would refuse to pay them. In 
April 1999, European Bank processed about $3.5 million of the 
filed charges and paid IPC over $2 million in four separate 
payments. Each payment was made through European Bank's U.S. 
dollar account at Citibank and sent to IPC's U.S. dollar 
account at a Florida bank, called BankAtlantic.
    On April 21, 1999, European Bank received an email from its 
credit card processing company about ``a possible fraud of 
cardholders of your merchant: Internet Processing Corp.'' 
European Bank immediately stopped all credit card processing 
and attempted unsuccessfully to recall its latest payment to 
IPC of $728,000. It later learned that, each time IPC had 
received a payment from European Bank, IPC had promptly 
directed BankAtlantic to wire transfer the funds across 
international lines to a bank in either Israel or Jordan. An 
accountholder would then withdraw the funds from the bank, 
sometimes in cash. Despite urgent requests from European Bank 
and Citibank, BankAtlantic failed to return the $728,000, 
failed to promptly alert the banks in Israel and Jordan to the 
IPC fraud, and failed to provide effective assistance in 
locating Hossain or IPC.
    European Bank directly contacted the Israeli and Jordanian 
banks, but neither returned any funds or provided investigative 
leads. European Bank also alerted U.S. law enforcement, 
including the Secret Service. To date, it has been unable to 
find any trace of IPC, Hossain or the missing $2 million. After 
taking into account IPCs security deposit and the limited 
credit card payments it received, European Bank determined that 
it actually lost about $1.3 million from the IPC fraud.
    Citibank's relationship manager for the European Bank 
account, Christopher Moore, determined that the loss was 
substantial given European Bank's thin capitalization and 
required the bank to keep $1 million on deposit at Citibank 
until the IPC matter was fully resolved. Bayer described the 
loss as a ``very serious matter'' which could have resulted in 
bank failure, if the exposure had been greater. He said, 
however, that European Bank appears to have weathered the 
damage to its solvency.

  (7) Correspondent Account at Citibank

    Citibank's due diligence efforts with respect to opening 
and monitoring the European Bank account were among the most 
careful and conscientious witnessed during the investigation, 
but suffered from the practical difficulties inherent in 
overseeing a small foreign bank in a remote jurisdiction with 
weak banking and anti-money laundering controls and a tradition 
of bank secrecy.
    Citibank. Citibank is one of the largest banks in the 
United States with over $700 billion in assets and operations 
in more than 100 countries. According to Christopher Moore, the 
Citibank Sydney vice president interviewed by the 
investigation, Citibank holds two banking licenses in 
Australia, one for Citibank N.A. and one for Citibank Ltd., a 
Citibank N.A. subsidiary. Both make up what is referred to 
informally as ``Citibank Sydney.'' Citibank Sydney also 
includes an entity variously called the ``Citibank N.A. Sydney 
Branch Offshore,'' ``Sydney Offshore Banking Unit,'' which 
transacts business with persons residing outside Australia.
    Citibank Sydney has an active correspondent banking 
business. Most of its correspondent banking operations are 
handled by its ``Financial Institutions Group,'' which operates 
out of Citibank's Global Corporate and Investment Bank.'' 
According to Moore, the Financial Institutions Group manages 
about 50 correspondent relationships with financial 
institutions in Australia, New Zealand and the South Pacific 
region. The group also oversees Australian dollar accounts for 
another 200 financial institutions transacting business in that 
currency. Despite this large customer base, Moore said that the 
Financial Institutions Group operates with about four 
relationship managers. The relationship managers are supervised 
by Moore, who is a vice president and longstanding employee in 
the group, and its senior credit officer. Moore's direct 
supervisors are Citibank's Australia country head and country 
credit officer.
    Moore indicated in his interview that most of the financial 
institutions that Citibank Sydney works with also have U.S. 
dollar accounts. He indicated that, because of the frequency of 
U.S. dollar transactions, the Financial Institutions Group was 
in regular contact with Citibank offices in New York. He 
indicated that all U.S. dollar transactions take place in the 
United States, through Citibank New York; U.S. dollars are not 
kept in Australia by Citibank Sydney.
    Initiating European Bank Relationship. Citibank Sydney 
managed the correspondent relationship with European Bank. 
Moore explained that, although he did not normally become 
involved in the details of a correspondent relationship, he 
took it upon himself to act as the relationship manager for the 
European Bank account. He said it was Citibank's only account 
in Vanuatu, which is seen in Australia as a questionable 
jurisdiction, and he wanted to ensure that the initial due 
diligence and subsequent monitoring efforts for the account 
were adequate.
    In deciding whether to commit Citibank to a correspondent 
relationship with European Bank, Moore conducted a thorough and 
painstaking due diligence effort.\294\ Among other measures, 
Citibank Sydney took the following steps:
---------------------------------------------------------------------------
    \294\ See, for example, Citibank's first Basic Information Report 
on European Bank, CG 3852-61; first site visit report, CG 6155-57; and 
first credit analysis of the bank, CG 4203-07.

      --Citibank officials traveled to Vanuatu, visited 
European Bank's offices, inspected its operating systems, 
talked to the staff, and met with the bank's senior officers, 
---------------------------------------------------------------------------
including Bayer.

      --Citibank obtained copies of the bank's incorporation 
papers, banking license, audited financial statements and other 
key documentation.

      --Citibank asked Vanuatu banking regulators for their 
opinion of European Bank. It also analyzed Vanuatu's banking 
regulation and government.

      --Citibank required European Bank to submit three 
written bank references and followed up with personal calls to 
each bank that provided a written reference. Citibank also 
spoke with European Bank's outside auditor

      --Citibank inquired about and analyzed European Bank's 
finances and primary lines of business, and developed a 
detailed credit analysis of the bank.

      --Citibank inquired about and analyzed European Bank's 
client base. Citibank made independent inquiries into several 
clients that raised due diligence concerns, such as an 
Australian lottery and certain mail order companies. In the 
case of the Australian lottery, Citibank checked with 
Australian officials who apparently provided the company with a 
clean bill of health, even though the company was then under 
criminal investigation in the United States and later pleaded 
guilty to illegal lottery solicitations.\295\ With respect to 
five clients, including the Australian lottery, Citibank 
required European Bank to submit a written declaration 
attesting to the client's reputation, competence and 
suitability.\296\ Moore indicated during his interview that 
Citibank eventually realized that it did not have the resources 
to evaluate all of European Bank's clients, and it would have 
to determine whether it could rely on European Bank to conduct 
its own client due diligence.
---------------------------------------------------------------------------
    \295\ See United States v. C-W Agencies Inc. (U.S. District Court 
for the Western District of Washington Criminal Case No. CR99-454C), 
information (8/9/99) and plea agreement (8/24/99).
    \296\ See ``European Bank Ltd. Customers Information,'' (5/27/96), 
CG 3869-73.

      --Citibank directly and repeatedly discussed anti-money 
laundering issues with European Bank, including providing the 
bank with a 90-minute video on the topic and inquiring about 
the bank's due diligence procedures.\297\ In one memorandum, 
Moore expressed concern about the bank due diligence procedures 
stating, ``It's clear to me that [European Bank] [doesn't] have 
a disciplined internal call file process. The customer 
acceptance testing is done by Tom [Bayer] and Robert [Bohn] and 
its apparently filed in their heads! I'm sure they know what 
they are doing, but is that good enough for us.'' \298\ In his 
interview, Moore could not recall whether European Bank then 
had written anti-money laundering procedures, but said he was 
``confident'' the bank was aware of and sensitive to its due 
diligence and anti-money laundering obligations. European 
Bank's first written anti-money laundering procedures came, in 
fact, 3 years later in 1999.
---------------------------------------------------------------------------
    \297\ See ``Call Report European Bank'' (5/2/96), CG 6155; and 11/
26/96 letter from Citibank to European Bank, CG 6095.
    \298\ The bates designation for this document is CG 6138.

    Despite some deficiencies, the initial due diligence 
performed by Citibank was much more extensive than due 
diligence inquiries observed in the other correspondent bank 
case histories. The thoroughness of the effort may have been 
due, in part, to reservations about the relationship expressed 
by the person who was then head of Citibank Sydney and Moore's 
immediate supervisor. He wrote:

      I have been thinking a lot about this proposed 
relationship and while I appreciate your diligence in 
developing indepth information . . . I continue to have 
reservations about entertaining this business. I am 
particularly concerned about the lack of institutional 
stability of the bank, the difficulty in monitoring events from 
Sydney and the overall image of Vanuatu. . . . [Y]ou should 
know that it will not be an easy sell.\299\
---------------------------------------------------------------------------
    \299\ 5/9/96 memorandum from William Ferguson to Moore, CG 6149. 
The memorandum's reference to the bank's ``lack of institutional 
stability,'' according to Moore, was a reference to the bank's small 
size and thin capitalization. The reference to Vanuatu's ``overall 
image,'' he said, was a reference to its image as a tax haven and an 
area that drew the attention of bank regulators.

    In his interview, Moore said that he overcame these 
concerns by gathering detailed information about the bank and 
forming a consensus with his Citibank Sydney colleagues that 
the account was worth trying. Moore said that his meetings with 
the bank's management and staff impressed him with the bank's 
openness and willingness to provide information, Citibank's 
efforts to verify the bank's information were successful, and 
the regulators and other references all seemed to depict a 
solid bank under credible management. In an internal 
memorandum, Moore wrote, ``[A]s we have step by step advanced 
this prospect with greatest caution and initial scepticism, we 
have been very impressed by the integrity and process we have 
seen in European Bank and its people.'' \300\
---------------------------------------------------------------------------
    \300\ 5/9/96 memorandum from Moore to Ferguson, CG 6150.
---------------------------------------------------------------------------
    Monitoring the Account. Citibank Sydney began its 
correspondent relationship with European Bank on May 22, 1996. 
Over the next 4 years, Citibank provided European Bank with 
seven deposit accounts, each in a different currency; an 
electronic ledger and wire transfer software; check clearing 
services; check issuance capabilities allowing European Bank to 
issue checks in multiple currencies; foreign exchange services; 
limited credit lines for overdrafts and foreign currency 
transactions; access to Citibank's money market and other 
higher interest bearing accounts; and access to Citibank's bond 
and stock trading capabilities. The relationship expanded 
slowly, but steadily. Although Citibank indicated that it 
considered European Bank one of its smallest clients, the 
account statements show that, in 1998 and 1999 alone, European 
Bank moved $192 million through its Citibank U.S. dollar 
account.
    Moore personally supervised the monitoring of the European 
Bank account. In the first 6 months the account was open, he 
reviewed the bank's monthly account statements and cash letter 
reports. The documentation indicates that, while the account 
was open, Citibank personnel made regular site visits to the 
bank. Moore reviewed, and at times contributed to, Citibank 
``call reports'' summarizing contacts with European Bank, and 
various annual reviews of the relationship. In addition, when 
problems arose over the Benford and IPC matters, Moore 
personally requested explanations and performed an independent 
analysis of the facts.
    Citibank's documentation of the correspondent relationship 
contains numerous reports and analysis. Citibank Sydney's 
Financial Information Group uses a standard form for each 
correspondent relationship, entitled ``Basic Information 
Reports'' (BIRs), to present due diligence information, a risk 
analysis, transaction profile, overview of Citibank services 
and credit arrangements, account highlights, and an annual 
analysis for each relationship. The BIRs for European Bank were 
completed for 1997, 1998 and 1999, and approved by Moore.\301\ 
While these reports failed to mention the Benford or IPC 
matters or other specific account problems, they provided a 
significant amount of information and evidence of Citibank's 
active, ongoing monitoring of the account. Citibank Sydney also 
prepared several call reports and credit analyses.\302\
---------------------------------------------------------------------------
    \301\ The bates designation for these documents are CG 3852-61.
    \302\ See, for example, 4/30/97 memorandum by Moore, CG 6052-53.
---------------------------------------------------------------------------
    In May 1999, Citibank Sydney prepared a detailed analysis 
of the entire correspondent relationship.\303\ Among other 
issues, the analysis looked at European Bank's ``compliance 
risk,'' ``country risk'' and ``financial risk.'' It identified 
risks in all three categories, but found them mitigated by the 
bank's strong management. The analysis stated, for example:
---------------------------------------------------------------------------
    \303\ See ``FI--Commercial Bank Individual Analysis'' for European 
Bank (5/7/99), CG 4038-43 and 6063.

      In light of Vanuatu's tax haven status, there is the 
risk that EB might be dealing with clients/funds involved in 
money laundering/other abnormal activity. . . . Vanuatu's no-
exchange control and no-income tax environment makes it 
attractive to dubious individuals and businesses. . . . EB has 
a small asset . . . and capital . . . base, making it 
vulnerable to unexpected losses. . . . The relationship with EB 
is not critical to Citibank's franchise. However it has 
provided growing revenues for the minimal risk of the credit 
facilities. . . . [O]ur dealings with EB are based on our 
assessment of the integrity of the group and professionalism of 
---------------------------------------------------------------------------
its owners and management.

    During his interview, based upon his personal experience, 
Moore expressed the view that European Bank was both reputable 
and competent. He also acknowledged that it had not produced 
the expected revenue for Citibank, and had experienced some 
unexpected losses and troubling incidents.
    With respect to the Benford account, Moore indicated that 
he had never conducted a detailed review of the account opening 
documentation or process. After being shown the account opening 
documents and European Bank affidavits, he expressed surprise 
that the bank had opened the Benford account prior to speaking 
to the accountholder; he said that was ``not the way Citibank 
would do it.'' He also expressed surprise at the bank's failure 
to obtain more due diligence information prior to opening the 
account; he said that did not comport with his understanding of 
European Bank's due diligence practices. When asked how 
Citibank would have reacted to the negative information 
provided about Euro Bank in March 1999, Moore said they 
probably would have placed the Benford account ``in suspense'' 
at that time and performed additional research into the origin 
of the funds. He also indicated that he had not been aware of 
the ongoing litigation in Vanuatu over whether Clyde was the 
true beneficial owner of Benford Ltd. Asked for his overall 
reaction to the Benford account opening process, Moore 
characterized it as ``sloppy'' and expressed surprise that the 
bank had handled it in the manner it did. He said it did not 
match his understanding of how European Bank operated.
    Closing the Account. At the end of its May 1999 review of 
the European Bank account, Citibank had decided to continue the 
correspondent relationship. One year later, Citibank reversed 
course and closed the account.
    Citibank's decision to close the European Bank account was 
not based on profitability concerns or bank misconduct, but on 
a broader policy decision to join an effort by other 
multinational banks to restrict correspondent banking 
activities in certain South Pacific island nations, including 
Nauru, Palau and Vanuatu. This effort, which began in November 
1999, was partly in response to the Bank of New York scandal 
which raised awareness of money laundering concerns in 
correspondent banking and partly in response to media reports 
of $70 billion in Russian funds moving through shell banks 
licensed in Nauru.\304\ Among the banks restricting 
correspondent banking in the South Pacific were the Bank of New 
York, Deutsche Bank, and the Republic National Bank of New 
York. In a November 25, 1999 email, Moore notified European 
Bank that Citibank was considering adopting the same policy. On 
December 13, 1999, the Bank of New York rejected a European 
Bank wire transfer due to its association with Vanuatu. On 
December 17, 1999, Citibank sent a letter to European Bank 
announcing its decision to close the account.\305\ The account 
actually closed 5 months later in May 2000.
---------------------------------------------------------------------------
    \304\ For more information, see the Bank of New York description in 
the appendix.
    \305\ The bates designation for this document is CG 3945.
---------------------------------------------------------------------------
    When asked about closing the European Bank account, Moore 
sent an email to other Citibank colleagues explaining the basis 
for the decision. He wrote:

      We are exiting European Bank . . . a bank licensed and 
domiciled in Vanuatu, and owned by Vanuatu citizens, not 
because of any concerns about European Bank directly. 
Unfortunately, because of Australian Tax Office suspicions that 
Australian individuals use Vanuatu to evade taxes, Vanuatu 
attracts a lot of attention from here. On top of that, the BONY 
action has raised the profile of Vanuatu. . . . We just feel 
that the environmental risk, that something totally unexpected 
does bob up, is more than we wish to take. The icing on this 
decision was that our customer found itself with a deposit 
(from another bank) that was subject to action in the USA as 
possible proceeds of crime. They did all the right things, 
including obtaining a Vanuatu court injunction to freeze the 
funds with them. They also redeposited the USD with us, in the 
normal course of banking, and the US receivers found this out 
and obtained a freeze order on us. . . . [W]e are satisfied our 
customer is innocent of any complicity. . . . I have the 
highest regard for the individuals who own and operate European 
Bank, and we are exiting in [a] manner that causes least harm 
to their franchise.\306\
---------------------------------------------------------------------------
    \306\ Moore email dated 1/24/00, CG 1053; see also Moore email 
dated 1/11/00, CG 1051.
---------------------------------------------------------------------------

B. THE ISSUES

    The European Bank case history raises at least two sets of 
issues. First, it raises fundamental questions about how a 
correspondent bank oversees a respondent bank in a remote, 
jurisdiction with a tradition of bank secrecy and weak banking 
and anti-money laundering controls. Second, it provides a vivid 
demonstration of how a foreign bank can delay seizure of funds 
from its U.S. correspondent account, even when the funds are 
clearly the product of attempted fraud and money laundering.

  Correspondent Bank Oversight

    Citibank Sydney went the extra mile in its due diligence 
efforts with respect to European Bank. It assigned a senior 
bank official to oversee the relationship. It conducted site 
visits, meetings with management, financial analyses, and 
client evaluations. It monitored account activity and made 
inquiries into specific problems like the Benford and IPC 
matters. It maintained a high level of oversight for 4 years.
    But in the end, it is far from clear that Citibank really 
knew how European Bank was operating on a day-to-day basis. The 
evidence is overwhelming that European Bank opened the Benford 
and IPC accounts with little or no due diligence, contrary to 
Citibank's understanding of the bank's procedures. In both 
instances, European Bank opened the account knowing little more 
than the name of the accountholder. It made no inquiries into 
the accountholder's background, source of wealth or origin of 
funds. When confronted, in one instance, by negative 
information concerning the party who referred the Benford 
account,, European Bank simply averted its eyes, left the 
account open, and hoped for the best. A more cynical 
interpretation is that European Bank deliberately accepted the 
large deposits without caring where they came from or about 
their association with a disreputable bank. In neither case, 
did European Bank undertake reasonable steps to know its 
customer.
    The consequences for the bank have been serious. In the 
Benford matter, European Bank is battling legal proceedings in 
three countries. The collateral damage from this litigation 
includes negative media reports, diversion of bank resources, 
and ongoing legal expense. One case is litigating the basic 
issue of who is the true owner of Benford Ltd.--a fact that 
European Bank should have established with clarity when it 
created the corporation, opened a bank account for it, and 
accepted $7.5 million in deposits. Benford Ltd. has itself been 
charged with possession of crime proceeds, and European Bank's 
reputation has been tarnished by its role in incorporating and 
managing this company. In the IPC matter, European Bank lost 
$1.3 million. The bank's chairman and part owner, Bayer, had to 
cover the losses to prevent a bank failure. Citibank's 
confidence in the bank's management was badly shaken, and it 
required the bank to post $1 million in deposits to secure 
Citibank against possible future losses. European Bank decided 
to abandon the credit card clearing business at least in the 
short term.
    Yet there is no reason to believe that the Benford and IPC 
accounts were handled in anything but a routine manner. Both 
accounts were opened prior to any direct contact with the 
prospective client, a situation which Bayer said was typical 
given Vanuatu's remote location and time difference. Bayer 
indicated that the Benford account opening forms were completed 
in the same way the forms are completed for all clients 
referred by European Trust--providing minimal client 
information, signatures from European Trust employees, and no 
disclosure of the true owner of the Vanuatu corporation opening 
the account. European Trust has indicated that it routinely 
establishes new Vanuatu corporations within 24 hours of a 
request, a time period which necessarily restricts how much due 
diligence it can accomplish. The investigation found no 
evidence to indicate that the Benford and IPC accounts 
represented anything but business as usual at European Bank.
    Moreover, although the Minority Staff investigation did not 
conduct an extensive analysis of other accounts opened by 
European Bank, documentation and interviews contain warning 
signs of lax due diligence practices in other accounts as well. 
For example, for years, European Bank maintained an account for 
the Australian Lottery Federation International Ltd.\307\ At 
the same time the account was open, this company, its owner 
Randall Thiemer, and related companies were under criminal 
investigation in the United States and Canada, which resulted 
in a 1999 guilty plea to conspiracy to conduct illegal lottery 
solicitations.\308\ Both Bayer and Moore indicated they had 
been unaware of the U.S. proceedings. Another instance involves 
the correspondent account that European Bank opened for Nest 
Bank in 1999. Nest Bank is an offshore Vanuatu bank that, 
because of international concerns over suspect Russian funds 
moving through South Pacific shell banks, is now under review 
by Vanuatu authorities. Nest Bank moved more than $6 million 
through its European Bank account in 1 year, most of it with 
ties to Russia or countries formerly part of the Soviet Union. 
Bayer indicated that he could not discuss the account due to 
Vanuatu's confidentiality requirements and the lack of publicly 
available court filings disclosing Nest Bank's ownership and 
activities. Moore indicated he had been unaware of the account.
---------------------------------------------------------------------------
    \307\ See ``European Bank Ltd. Customers Information'' (5/27/96), 
CG 3869.
    \308\ See United States v. C-W Agencies Inc. (U.S. District Court 
for the Western District of Washington Criminal Case No. CR99-454C), 
information (8/9/99) and plea agreement (8/24/99).
---------------------------------------------------------------------------
    In 1996, the head of Citibank's operations in Australia 
expressed concern about the European Bank account, in part due 
to ``the difficulty in monitoring events from Sydney.'' 
Vanuatu's banks operate under a tradition of bank secrecy and 
weak banking regulation. European Bank is Vanuatu's only 
indigenous bank; no parent bank audits its operations. It is 
owned and directed by an individual who is a powerful player in 
Vanuatu's economy and government. It works closely with trust 
companies that have their own culture of nondisclosure. For the 
two accounts examined in detail, Citibank was given no negative 
information about the Benford account until a third party filed 
suit in Australia, and it had no warning of the IPC loss, even 
though Benford Ltd. and IPC were among European Bank's largest 
accounts.
    The European Bank case history provides a powerful 
illustration of the money laundering risks inherent in 
international correspondent banking. It demonstrates that, when 
dealing with a small bank operating in a remote jurisdiction 
with weak bank oversight and uneven anti-money laundering 
controls, even a diligent correspondent bank may be left in the 
dark about missteps leading to money laundering charges, 
beneficial owner disputes, fraud, and substantial losses.

  Seizing Suspect Funds

    The European Bank case history raises a second set of 
issues as well. Through the twists and turns of litigation 
battles in three countries, it demonstrates how a small foreign 
bank can delay seizure of funds from a U.S. correspondent 
account, even when the funds are the product of fraud and money 
laundering.
    Ample evidence links the $7.5 million in the Benford 
account at European Bank to the Taves fraud. The players 
involved, the timing, the amounts, the wire transfers--all are 
consistent with the money coming from the unauthorized credit 
card billing scheme described in the U.S. court decision in the 
Taves case. Ample evidence also links the Benford account to 
Clyde, including her signature on the form asking to establish 
Benford Ltd., her passport photograph and London address which 
match the materials in European Trust's files, her possession 
of the Benford incorporation papers, and her past association 
with one of the individuals charged with participating in the 
Taves money laundering effort.
    For more than a year, in her capacity as the beneficial 
owner of Benford Ltd., Clyde has supported remitting the 
Benford funds to the FTC receiver. Citibank has repeatedly 
expressed its willingness to transfer the funds in accordance 
with court order. But European Bank has not been willing to 
transfer the funds to the FTC receiver. It has fought legal 
battle after legal battle to try to keep control of the funds 
and ensure they were not ``forced'' to the United States, but 
sent instead to Vanuatu authorities. The reasons for the bank's 
actions are unclear.
    Perhaps European Bank felt committed to defending Vanuatu 
sovereignty. Perhaps it hoped to ensure that Vanuatu received a 
portion of the seized funds, even though the Taves 
investigative work was performed elsewhere and the monies were 
intended for fraud victims. Perhaps European Bank wanted a 
portion of the seized funds to reimburse its legal fees, even 
though much of the legal wrangling followed its refusal to 
allow the transfer of the funds to the United States in 1999. 
Perhaps European Bank wanted the interest earnings on the $7.5 
million--exceeding $600,000 at last count even though the bank 
would be profiting from illicit proceeds that it chose to move 
into a non-interest bearing account in May 1999. Perhaps 
European Bank worried about having to pay the $7.5 million 
twice, although it is hard to believe Vanuatu authorities would 
force one of its leading citizens to pay a sum that, if already 
paid to the FTC receiver, would break the bank. Perhaps 
European Bank wanted simply to best the FTC receiver, which 
tried so many legal maneuvers to obtain the funds and, in the 
bank's eyes, would pay its own fees and expenses before 
reimbursing any fraud victims.
    Whatever its motivations, European Bank mounted a 
resourceful campaign to stop the transfer of the Benford funds. 
In Vanuatu, it argued that no one really knew who owned the 
Benford money, since Clyde had admitted they were not her 
personal funds and the FTC had not proven in court they were 
from the Taves fraud. In Australia, it contended that the $7.5 
million on deposit with Citibank was not Benford's funds at 
all, but European Bank's own funds, placed in an investment 
account to earn higher interest. In making this argument, 
European Bank drew on the legal status of funds in a 
correspondent account. It claimed that the funds in the 
Citibank account were the property of the accountholder--
European Bank--and not the property of the bank's clients, even 
if client funds were used to make the deposits.
    The FTC receiver was equally resourceful in its litigation 
strategy. It began by filing suit in Vanuatu. When it found 
European Bank reluctant to release the $7.5 million from the 
Benford account, it persuaded Clyde to file suit in Vanuatu 
seeking court approval to authorize her own company to remit 
the funds to the FTC receiver. When the Vanuatu police appeared 
to be as reluctant as European Bank to surrender custody of the 
$7.5 million, the FTC receiver filed suit in Australia to try 
to obtain the funds directly from Citibank. While European Bank 
argued the funds were not actually in Australia, but remained 
in the Benford account at European Bank in Vanuatu, the fact 
is, when faced with the Australian court's freeze order, 
Citibank refused to transfer the funds at European Bank's 
instruction. Clearly, the $7.5 million was under Citibank's 
control.
    The FTC receiver's next legal effort came when it convinced 
the U.S. Department of Justice to seize the funds at Citibank 
in New York as money laundering proceeds. After all, the $7.5 
million had always been in U.S. dollars in a U.S. dollar 
account. Despite appearing to travel from California to the 
Cayman Islands to Vanuatu, the funds never actually left the 
United States--they just moved from one U.S. bank account to 
another. The proof is that, when confronted with the U.S. 
seizure warrant, Citibank delivered the funds to the U.S. 
Government.
    The U.S. Government's seizure of the funds is not, however, 
equivalent to forfeiture of the funds. The U.S. Justice 
Department's civil forfeiture action provides all interested 
parties with an opportunity to assert a contrary claim to the 
funds. If European Bank were to assert ownership of some or all 
of the $8.1 million, the United States might have to prove, 
under statutory provisions affording correspondent accounts 
special forfeiture protections,\309\ that European Bank 
``knowingly engaged'' in the laundering of the funds or in 
other criminal misconduct justifying seizure of the bank's own 
money. One recent U.S. district court has interpreted this 
standard to mean that the United States has to demonstrate a 
bank's ``knowing involvement'' in or ``willful blindness'' to 
the criminal misconduct giving rise to the seizure action.\310\ 
The questions in this matter would include what European Bank 
knew and when, and whether it was willfully blind to criminal 
misconduct associated with the Benford funds.
---------------------------------------------------------------------------
    \309\ See 18 U.S.C. Sec. 984(d). See also Chapter V(G) of this 
report.
    \310\ United States v. $15,270,885.69 (2000 U.S. Dist. LEXIS 12602, 
2000 WL 1234593 SDNY 2000).
---------------------------------------------------------------------------
    The larger policy issues come into view with the 
realization that European Bank keeps virtually 100% of its 
clients' funds in correspondent accounts and conducts 100% of 
its U.S. dollar transactions through U.S. correspondent 
accounts. That means that 100% of European Bank's funds in the 
United States benefit from greater forfeiture protections than 
suspect funds in other types of U.S. bank accounts. The same is 
true for all foreign banks choosing to deposit funds in U.S. 
correspondent accounts. And it is not just foreign banks who 
benefit, but also wrongdoers who ask the foreign banks to keep 
their deposits in U.S. dollars. Taves, for example, originally 
deposited his illicit proceeds in U.S. bank accounts in 
California. He then sent the funds from the United States, 
through two bank secrecy jurisdictions, the Cayman Islands and 
Vanuatu, only to have the funds end up back in the United 
States, but in a Citibank account which requires U.S. law 
enforcement to surmount additional legal hurdles to sustain 
forfeiture.
    The European Bank case history is a cautionary tale about 
how a small, determined foreign bank in a remote jurisdiction 
can delay and perhaps ultimately frustrate U.S. law enforcement 
efforts to seize illicit proceeds sent to the foreign bank as 
part of a money laundering effort, so long as the laundered 
funds are deposited into a U.S. correspondent account.

                               EUROPEAN BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
                                           January 1998-December 1999
----------------------------------------------------------------------------------------------------------------
                                                OPENING                                               CLOSING
                   MONTH                        BALANCE          DEPOSITS         WITHDRAWALS         BALANCE
----------------------------------------------------------------------------------------------------------------
January 1998                                       $51,600         $3,665,819         $3,696,455         $34,664
----------------------------------------------------------------------------------------------------------------
February 1998                                      $31,664         $1,821,760         $1,711,361        $145,064
----------------------------------------------------------------------------------------------------------------
March 1998                                        $145,064         $2,437,018         $2,415,062        $167,020
----------------------------------------------------------------------------------------------------------------
April 1998                                        $167,020         $1,622,284         $1,568,763        $220,541
----------------------------------------------------------------------------------------------------------------
May 1998                                          $220,541         $2,210,457         $2,102,815        $328,183
----------------------------------------------------------------------------------------------------------------
June 1998                                         $328,183         $1,722,647         $1,678,084        $372,746
----------------------------------------------------------------------------------------------------------------
July 19T8                                         $372,746         $2,714,000         $1,412,137      $1,134,609
----------------------------------------------------------------------------------------------------------------
August 1998                                     $1,134,609         $3,188,179         $3,888,629        $434,158
----------------------------------------------------------------------------------------------------------------
September 1998                                    $434,158         $5,572,689         $5,069,024        $937,823
----------------------------------------------------------------------------------------------------------------
October 1998                                      $937,823        $11,415,104        $11,938,224        $414,704
----------------------------------------------------------------------------------------------------------------
November 1998                                     $414,704         $5,033,054         $5,305,670        $142,088
----------------------------------------------------------------------------------------------------------------
December 1998                                     $142,088         $4,359,456         $3,987,909        $513,634
----------------------------------------------------------------------------------------------------------------
January 1999                                      $513,634         $3,588,709         $3,916,399        $185,944
----------------------------------------------------------------------------------------------------------------
February 1999                                     $185,944         $2,237,332         $2,320,974        $102,303
----------------------------------------------------------------------------------------------------------------
March 1999                                        $102,303         $8,505,525         $7,117,827      $1,490,002
----------------------------------------------------------------------------------------------------------------
April 1999                                      $1,490,002        $15,506,331        $10,170,361      $6,825,971
----------------------------------------------------------------------------------------------------------------
May 1999                                        $6,825,971         $3,284,932         $9,904,192      $1,016,711
----------------------------------------------------------------------------------------------------------------
June 1999                                       $1,016,711         $8,725,235         $7,472,331      $2,269,615
----------------------------------------------------------------------------------------------------------------
July 1999                                       $2,269,615        $51,826,202        $53,009,742      $1,086,075
----------------------------------------------------------------------------------------------------------------
August 1999                                     $1,086,075         $6,796,758         $6,937,332        $945,511
----------------------------------------------------------------------------------------------------------------
September 1999                                    $945,511        $18,641,703        $17,862,655      $1,724,559
----------------------------------------------------------------------------------------------------------------
October 1999                                    $1,724,559        $10,481,608        $11,783,867        $422,300
----------------------------------------------------------------------------------------------------------------
November 1999                                     $422,300         $5,159,706         $5,474,264        $107,742
----------------------------------------------------------------------------------------------------------------
December 1999                                     $107,742        $11,376,490        $10,907,139        $577,093
----------------------------------------------------------------------------------------------------------------
TOTAL                                                            $191,892,998       $191,651,216
----------------------------------------------------------------------------------------------------------------
Prepared by the U.S. Senate Permanent Subcommittee of Investigations, Minority Staff, December 2000

                           Case History No. 8


                          SWISS AMERICAN BANK


                      SWISS AMERICAN NATIONAL BANK

    Swiss American Bank Ltd. (``SAB'') and Swiss American 
National Bank Ltd. (``SANB'') are two banks with the same 
ownership that were licensed in Antigua and Barbuda in the 
early 1980's. Throughout their history, these banks have been 
troubled by controversial leadership, questionable practices by 
bank officials, and accounts that were repositories of funds 
from major financial frauds and other illegal activities. This 
case study shows how major U.S. banks that served as 
correspondents to these institutions were at times unaware of 
even high profile frauds and controversies associated with the 
banks and were slow to take action on the accounts, at times 
maintaining the accounts for years after they knew and were 
concerned about suspicious account activities and management 
problems that afflicted the SAB and SANB.
    The following information was obtained from documents 
provided by the Government of Antigua and Barbuda, Bank of 
America, Bank of New York, Chase Manhattan Bank, court 
pleadings, interviews of government officials and other persons 
in Antigua and Barbuda, the United Kingdom, and the United 
States, and other materials. Key sources of information were 
interviews with John Greaves, former General Manager of Swiss 
American Banking Group (1988-1995), conducted on July 24 and 
25, 2000; Brian Stuart-Young, Chairman and Managing Director of 
Swiss American Bank, conducted on October 11, 2000; 
relationship managers and other officials from Bank of America 
(conducted July 10, 11, 31, and October 24, 2000), Bank of New 
York (conducted August 10 and 30, 2000), and Chase Manhattan 
Bank (conducted August 2, 3, and 4, 2000). The investigation 
greatly benefitted from the cooperation and assistance provided 
by a number of officials of the Government of Antigua and 
Barbuda, particularly the Executive Director of the 
International Financial Sector Regulatory Authority and the 
Director of the Office of Drugs and Narcotics Control Policy.

A. THE FACTS

  (1) Ownership and Management

    SAB and SANB were part of a financial group in Antigua and 
Barbuda called the Swiss American Banking Group. It included 
the two banks and a trust company, Antigua International Trust. 
SAB is an offshore bank with a physical presence in Antigua and 
Barbuda. It was licensed to do business as an offshore bank in 
April 1983; as an offshore bank it is prohibited from doing 
business with citizens of Antigua and Barbuda. SANB is a 
domestic Antiguan bank, licensed in May 1981 to do business 
with citizens of Antigua. All three entities had the same 
ownership, the same board, a common General Manager and for 
many years both banks shared the same facilities and the same 
staff.
    When they were licensed, the owner of both SAB and SANB was 
listed as Swiss American Holding Company, a Panamanian company. 
The license application for SAB noted that Swiss American 
Holding Company was wholly owned by Inter Maritime Bank of 
Geneva, Switzerland, and Home State Financial Services, Inc. of 
Cincinnati, Ohio. Each entity is listed as controlling a 50% 
share of the holding company and the banks.
    Inter Maritime Bank in Geneva, founded in 1966, was part of 
a group of companies active in banking, shipping and the 
petroleum industry. It was initially created to serve as the 
in-house bank for shipping and other financial activities 
undertaken by its affiliates. The founder and owner of Inter 
Maritime Bank is Baruch (``Bruce'') Rappaport.\1\ Rappaport is 
an Israeli citizen who became very active in the economic and 
political life of Antigua. He also owned 50% of the West Indies 
Oil Company which owned a refinery in Antigua. In December 
1997, Rappaport was named as Antiguan Ambassador to the Soviet 
Union. In 1989, the Bank of New York purchased 19.9% of Inter 
Maritime Bank. At that time, Inter Maritime's name was changed 
to Bank of New York-Inter Maritime Bank. In July 1996 Bank of 
New York increased its ownership of Inter Maritime to 27.9%. 
Bank of New York reported in February 2000 that Rappaport 
continued to hold the remaining shares Inter Maritime.\2\ The 
remainder of this report, except when quoting material, will 
refer to Inter Maritime Bank by its current name, Bank of New 
York-Inter Maritime Bank (``BYN-IMB'').
---------------------------------------------------------------------------
    \1\ It is uncertain whether Rappaport was the sole owner of Inter 
Maritime when SAB and SANB were formed. In 1978, two internal memoranda 
of the Bank of New York, which established a relationship with Inter 
Maritime in 1969, reported that Inter Maritime officials stated that 
the Gokal brothers, Pakistani businessmen who later became heavily 
involved in the BCCI scandal, invested between $6 million and $8 
million Swiss Francs in Inter Maritime for 20% of the bank. Subsequent 
memos about Inter Maritime and the Swiss American banks do not mention 
the Gokal brothers, and a memo in 1983 states that ``almost all shares 
[of Inter Maritime] are owned or controlled by Bruce Rappaport.''
    \2\ According to a 1983 internal Bank of New York memorandum, 
Rappaport held 7.5% of Bank of New York stock and increased that 
percentage of ownership through the purchase of additional shares in 
1983.
---------------------------------------------------------------------------
    Home State Financial Services, Inc. was owned by Marvin 
Warner, who served as U.S. Ambassador to Switzerland in the 
mid-late 1970's. In 1986, Home State Financial Services, Inc. 
was placed in bankruptcy due to financial problems encountered 
by one of its subsidiaries, Home State Savings Bank. Warner 
pleaded guilty to misapplication of funds and securities 
violations for the role he played in the financial downfall of 
Home State Savings Bank. As part of the bankruptcy proceedings, 
the State of Ohio assumed control of Home State Financial 
Services, Inc. and, as a result, its holdings in the Swiss 
American entities. BYN-IMB subsequently purchased Home State's 
holdings in the Swiss American entities from the State of Ohio.
    Documents made available to the Subcommittee suggest that 
BYN-IMB owned Swiss American Holding Company and controlled SAB 
and SANB at least until 1993.\3\ The current ownership of the 
Swiss American entities is structured through a series of 
International Business Corporations (IBCs) and trusts. Swiss 
American Holding Company is currently owned by Carlsberg (or 
Carlsburg), S.A, a Bermuda corporation, which in turn is owned 
by a charitable trust controlled by Rappaport. Two of the U.S. 
correspondents of SAB and SANB that were interviewed by the 
Minority Staff did not know the name of the charitable trust, 
and the Bank of New York thought the name of the charitable 
trust is the Inter Maritime Foundation, but it was not certain. 
The Chairman and Managing Director of SAB was not able to tell 
the Minority Staff the name of the charitable trust, either. 
The lack of information by the correspondent U.S. banks with 
respect to the details of the ownership of SAB and SANB is 
troubling.
---------------------------------------------------------------------------
    \3\ BYN-IMB's ownership interest in Swiss American Holding Company 
remains uncertain. Recently BYN-IMB was dismissed from a case brought 
against it, SAB, and SANB by the U.S. Government to recover drug/
terrorist related assets that had been forfeited to the U.S. 
Government. BYN-IMB was dismissed due to lack of jurisdiction. BYN-IMB 
claimed it had divested itself of Swiss American Holdings in 1988:

    ``On December 28, 1987, BYN-IMB sold all of its shares of SAHC to 
an unrelated entity in which BYN-IMB had no interest or control, in a 
transaction in which all of the obligations of the parties were 
completed by December 15, 1988. . . . Since the end of 1988, BYN-IMB 
has not owned any shares or held any interest in SAHC.'' USA v. Swiss 
American Bank, L., Swiss American Holding Company S.A. of Panama, and 
Inter Maritime Bank, Geneva (U.S. District Court for the District of 
Massachusetts, C.A. No. 97-CV-12811 (RWZ)), Motion of Bank of New York-
Inter Maritime Bank, Geneva to Dismiss or, in the Alternative, for 
Summary Judgment, April 1, 1998.

    Yet, in correspondence submitted to both Bank of America and 
Nations Bank in March of 1993, David McManus, the Deputy General 
Manager of the Swiss American Banking Group wrote that BYN-IMB 
controlled the Swiss American Banking Group, which directly contradicts 
what was reported in the BYN-IMB filing in April 1998: ``Swiss American 
Banking Group consists of Swiss American Holdings, SA, a Panamanian 
company which owns 100% of Swiss American Bank Ltd., Swiss American 
National Bank of Antigua Ltd. and Antigua International Trust Ltd. 
Swiss American Holdings SA is wholly owned by the Inter Maritime Group 
in Geneva.''
---------------------------------------------------------------------------

  (2) Financial Information and Primary Activities

    SAB has about 4,000 clients with 5,000 accounts and total 
assets of $111 million (of which $103 million are deposits). 
The bank's main function is private banking, providing wealth 
management services to its clients. According to SAB officials, 
approximately 4,500 of its 5,000 accounts currently have less 
than $50,000 in value. Its customers are largely from Europe, 
and bank officials estimate that less than 15% of their 
customers are from the United States. Bank officials have told 
Minority Staff that they are attempting to phase out their 
business in the United States. Bank records indicate that in 
recent years a significant portion of SAB's business has been 
generated by Internet gambling companies or entities that 
provided cash transfer services for Internet gambling 
facilities. This issue is discussed in more detail later in the 
report.
    SANB provides retail banking services to individuals and 
companies in Antigua and Barbuda and other Eastern Caribbean 
nations. It also provides international banking services such 
as foreign currency exchange and letters of credit. It was 
recently sold to Antigua Barbuda Investment Bank (``ABIB''), 
and will soon become part of ABIB. ABIB, another domestic bank 
licensed to do business in Antigua and Barbuda, is affiliated 
with Antigua Overseas Bank, an offshore bank.

  (3) Correspondents

    Correspondent banks of SAB in the United States have 
included Nations Bank, Bank of America and Chase Manhattan 
Bank. Correspondent banks of SANB in the United States have 
included Citizens Bank and Southern International Bank (which 
later merged with Sovran Corporation and then with NCNB 
National Bank to become Nations Bank), NCNB National Bank 
(which later merged with C&S/Sovran Corporation to become 
Nations Bank), Bank of America (which later took over Nations 
Bank), Irving Trust Company (which was later taken over by Bank 
of New York), Bank of New York (which inherited the account 
from Irving Trust), and Chase Manhattan Bank.
    SAB and SANB currently have no correspondent relationships 
with U.S. banks; SAB has correspondent banking relationships 
with United Kingdom, Dutch and Canadian banks which presumably 
have correspondent relationships with U.S. banks. Through these 
nested correspondent relationships, SAB still maintains access 
to U.S. banks. As noted above, SANB has been sold to Antigua 
Barbuda Investment Bank.

  (4) Operations and Anti-Money Laundering Controls

    SAB officials told the Minority Staff that they have been 
making efforts to improve the bank's anti-money laundering 
controls. According to SAB materials provided the Minority 
Staff, the bank has established a series of account opening 
requirements for personal and corporate accounts. To open 
personal accounts, according to the materials, clients are 
required to provide verified signatures, proof of residence, 
proof of identity, a current bank reference, proposed average 
monthly deposit value and information on the anticipated source 
of funds. According to the SAB materials, applicants for 
corporate accounts are required to provide verified signatures, 
certificate of incorporation, memorandum and articles of 
association and a current certificate of good standing if the 
entity is more than a year old, proof of identity and at least 
one current bank reference on each shareholder/director and 
authorized signatory. Proof of the corporation's registered 
office, proposed account activity including anticipated average 
monthly deposit and anticipated source of funds is also 
required, according to the materials. In the case of bearer 
share companies, SAB says it requires an attestation by the 
directors to identify true beneficial ownership. SAB officials 
told the Minority Staff that in keeping with statutes enacted 
in Antigua in early 1999, the bank has not accepted deposits in 
cash or in bearer negotiable instruments since April 1999.
    SAB officials told the Minority Staff that as part of its 
ongoing monitoring program, all staff receives anti-money 
laundering training and management attends anti-money 
laundering conferences in the United States. SAB officials said 
that the bank has invested in computer monitoring software to 
track transactional activity. According to officials, the 
program is designed to monitor for suspicious activity in a way 
that would be compliant with U.S. Government anti-money 
laundering controls.
    The Chairman and Managing Director told the Minority Staff 
that they know the beneficial owners of 90% of the accounts and 
that they have not received enough information on the 
beneficial ownership of about 3% of the accounts.

  (5) Regulatory Oversight

    SAB is regulated by the Government of Antigua and Barbuda's 
International Financial Sector Regulatory Authority which was 
created in 1998. To date, no examination of the bank has been 
conducted. The bank is required to submit an annual audited 
financial statement to the International Financial Sector 
Regulatory Authority.
    SANB is regulated by the Eastern Caribbean Central Bank, 
which includes an annual bank examination.

  (6) Money Laundering and Fraud Involving SAB/SANB

    SAB and SANB have been identified as repositories of 
illicit funds from several illegal operations. Such incidents 
were not isolated events. They have occurred on a continual 
basis throughout the life of the institutions. In addition, 
bank officials engaged in misdeeds and questionable activities. 
With respect to some frauds and questionable activities that 
occurred through the accounts at the banks, top officers knew 
or should have known what was occurring; yet they were slow to 
act to halt the activity or failed to act. This succession of 
problems and questionable leadership (in addition to SAB's 
offshore license and lack of any examination by regulatory 
authorities) qualifies SAB and SANB as high risk institutions. 
The following items illustrate these points.

  (a) Controversial Leadership

    The leadership of Swiss American Banking Group (the group 
that includes SAB and SANB) has a history of involvement in 
controversial and questionable financial dealings and banking 
activities.
    First, the history of controversial dealings involving 
Baruch Rappaport, the beneficial owner of SAB and SANB, has 
been well chronicled. It includes a series of oil tanker deals 
with Indonesia's government-owned oil company, Pertimina, which 
contributed to the nation's economic problems in the mid-
1970's; an oil deal with Gabon (completed after one of 
Rappaport's banks loaned money to the President of Gabon, Omar 
Bongo, and the Oil Minister) that had such highly favorable 
terms for Rappaport's company that the government won a 
subsequent arbitration award of $25 million; his role as 
middleman in an effort to build an oil pipeline through Iraq; 
and business associations with some key figures associated with 
BCCI.\4\
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    \4\ ``Seeking Testimony in Pipeline Case: Immunity Given to a 
Secretive Swiss'' New York Times (March 6, 1988) Jeff Gerth and Stephen 
Engelberg; ``Untangling what Pertamina owes--and to whom'' Business 
Week (February 7, 1977); ``Key Player in BCCI fraud loses appeal'' 
Guardian (March 12, 1999) Dan Atkinson; ``Pak millionaire appeals 
verdict in BCCI case'' Hindustan Times (March 10, 1999).
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    Two members of the Board of Directors for SAB, Marvin 
Warner and Burton Bongard, were connected with Home State 
Financial Services, Inc. which initially was a 50% owner of 
SAB. Warner owned Home State Financial Services, Inc.; Bongard 
was President of Home State Savings Bank, a Cincinnati savings 
and loan that was owned by Home State Financial Services. In 
1986, Home State Financial Services Inc. was placed in 
bankruptcy due to financial problems encountered by Home State 
Savings Bank. In March 1987, Warner was convicted of six State 
criminal charges of misapplication of funds and three 
securities violations for illegal activities that caused the 
collapse of Home State Savings Bank. He was sentenced to 3\1/2\ 
years in prison and ordered to pay $22 million in restitution. 
Bongard was convicted of 41 counts of willful misapplication of 
funds and 41 counts of unauthorized acts. He was sentenced to 
10 years in prison and ordered to pay $114 million in 
restitution costs. In addition, he subsequently pleaded guilty 
to four Federal felony counts of misapplication of funds and 
was sentenced to 6 years in Federal prison.\5\
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    \5\ In 1985, the SEC closed ESM Government Securities Inc., of Fort 
Lauderdale, Florida, because it had an undisclosed debt of over $300 
million. The closure of ESM caused problems for Home State Savings Bank 
and American Savings and Loan Association of Miami, Florida. (Warner 
owned 28% of American Savings and Loan and served as its Chairman). 
Both Home State and American funneled millions of dollars worth of 
government securities into EMS, ostensibly as collateral for loans from 
ESM. However, the government securities were worth far more than what 
had been borrowed. ESM then raised cash by borrowing against the 
securities. At the time of ESM collapse, Home State Savings Bank had 
over-collateralized its loans by about $144 million and American had 
over-collateralized its loans by approximately $50 million. Those 
institutions lost money when ESM was closed, and that caused a run on 
Home State that led the Governor of Ohio to shut down the bank. The 
collapse of the bank also exhausted all of the funds in a thrift-owned 
insurance fund, causing a statewide crisis that resulted in a 3-day 
closure of all State-chartered savings and loans.
    The owners of ESM pleaded guilty or were convicted in State and 
Federal courts on fraud charges. Warner was charged and pleaded guilty 
to misapplication of funds and securities violations for the role he 
played in the financial downfall of Home State Savings Bank.
    As a result of these events, Warner declared bankruptcy. As part of 
the liquidation of Home State Financial's assets to repay the State of 
Ohio for bailing it out, the bank's 50% share in Swiss American Bank 
was sold back to BYN-IMB. See ``Michigan Jury Clears Home State's 
Warner of 18 Federal Charges'' National Thrift News Inc. (June 29, 
1987) Sharon Moloney; ``Early Warnings About Home State Pushed Aside'' 
Business First of Columbus Inc. (August 5, 1985) Dick Kimmins; ``Risky 
Business: The Story of Home State'' Business First of Columbus Inc. 
(May 27, 1985) Mark Heschmeyer; ``Final Suit Brings First Loss in ESM 
Fraud Case'' South Florida Business Journal, Inc. (January 22, 1990) 
Melinda Sisser; ``Warner, Two Guilty on ESM'' National Thrift News Inc. 
(March 9, 1987) Sharon Moloney; ``Jury Returns Verdict in Case Stemming 
from Ohio's Thrift Crisis'' Associated Press (March 2, 1987) Bill Vale; 
``Securities Firm Boss Gets 30 Years in Fraud'' Chicago Tribune 
(October 18, 1986) Associated Press.
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    Another SAB board member, Steven Arky was a son-in-law of 
Warner, and counsel to ESM Government Securities. Clients of 
his law firm, Arky, Freed, Stearns, Watson, Greer, Weaver & 
Harris, lost millions of dollars that they had invested in ESM. 
They subsequently sued the firm, contending that the firm knew 
that ESM was insolvent and that the clients' investment could 
be lost and yet failed to advise the clients of that fact.
    William Cooper, discussed previously in this report, signed 
SAB's license application as the organizer of the corporation 
and as Vice-President of Swiss American Holding Company. Cooper 
was also listed as a member of the Board of Directors. Cooper 
served as General Manager of Swiss American Banking Group from 
approximately 1981 to 1984. In 1992, Cooper became owner of 
American International Bank which is discussed in another 
chapter of this report. Cooper is now under U.S. indictment for 
money laundering activities associated with the operations of 
Caribbean American Bank, a rogue bank that operated through 
American International Bank.
    Another long time member of SAB's Board of Directors is 
Burton Kanter, a controversial tax attorney from Chicago. The 
current Chairman and Managing Director of Swiss American Bank 
estimated that Kanter has been a member of the Board for 
approximately 12 years. For the past 25 years, Kanter or his 
clients have been the subject of numerous criminal and civil 
investigations and complaints alleging tax evasion, money 
laundering, and securities fraud.\6\ All of these matters 
generally involved offshore banks and offshore trusts 
structured to ``avoid'' U.S. taxes. Yet, as of 2000, SAB, in a 
communication to another bank, still designated Kanter as one 
of the ``[i]ndividuals responsible for the bank.'' \7\
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    \6\ In December 1999, a special trial judge for the U.S. Tax Court 
determined that Kanter and a number of his clients had engaged in a 
scheme to hide kickback payments that the clients had received (some of 
which were paid to Kanter) and underpaid their taxes as a result. The 
court's 300 plus page decision contains a section entitled ``Kanter's 
Fraud,'' which includes the following:

    . . . Kanter was the architect who planned and executed the 
elaborate scheme with respect to the kickback income payments received 
. . . In our view, what we have here, purely and simply, is a concerted 
effort by an experienced tax lawyer and two corporate executives to 
defeat and evade the payment of taxes and to cover up their illegal 
acts so that the corporations, Prudential and Travelers, and the 
Federal Government would be unable to discover them.

    . . . Kanter created a complex money laundering mechanism made up 
of sham corporations and entities . . . to receive, distribute, and 
conceal his income, as well as [the other defendants'] income . . . 
Kanter's use of the various sham entities made it difficult and 
sometimes impossible to trace the flow of the money and is substantial 
evidence of his intent to evade tax.

    In addition, a number of trust arrangements structured by Kanter 
for his clients have been challenged by the IRS and have resulted in 
settlements, with the defendants paying millions of dollars to the IRS.
    Kanter was also associated with an entity called Castle Bank and 
Trust Company, Inc., a Bahamian Bank that was the subject of a 
concentrated IRS investigation in the mid-70's as one of the early 
Caribbean-based offshore banks for criminal accounts and tax evasion 
activities. Castle Bank served as the trustee and repository for many 
of the entities established by Kanter for his clients.
    \7\ However, the Chairman and Managing Director of SAB told the 
Minority Staff that Kanter was a non-executive director, and that he 
didn't have any role in the day to day management of the bank.
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    The General Manager of the Swiss American Banking Group 
from 1984 to 1987 was Peter Herrington. Herrington established 
and personally serviced the accounts of John Fitzgerald 
(discussed below in this report). These accounts were seized by 
both the U.S. and Antiguan Governments because the accounts 
contained funds related to drug sales and the Irish Republican 
Army.
    John Greaves, General Manger of Swiss American Banking 
Group from 1988 to 1995, was involved in a number of 
controversial matters during his tenure at Swiss American 
Banking Group and was in the leadership of two other banks and 
a management firm that were engaged in a number of 
controversial activities, described in other parts of this 
report.

  (b) The Fitzgerald Case--Drugs and Terrorist Money

    From 1985 to 1997, SAB and SANB were significantly involved 
in a money laundering case involving a man named John 
Fitzgerald. The involvement began when Fitzgerald, a money 
launderer acting on behalf of the Murray brothers, leaders of a 
drug organization in Boston, deposited, between 1985 and 1987, 
approximately $7 million into accounts that had been 
established at SAB and SANB.\8\ Four of the accounts were in 
the name of bearer share IBCs, that is, corporations whose 
ownership was vested in the individuals who controlled the 
certificates of the shares of the corporation. Two of the 
accounts (one at SAB and the other at SANB) were in the name of 
Guardian Bank, a bank licensed in Anguilla in 1986. Those two 
Guardian Bank accounts eventually became the repository for 
most of the funds deposited by Fitzgerald and other members of 
the drug organization. Three bearer share IBCs were listed as 
the owners of that bank.
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    \8\ It has been reported to the Subcommittee staff that the Murray 
brothers and Fitzgerald were also involved in the sale of weapons to 
IRA terrorists and that some, or even all, of the funds deposited into 
the accounts at SAB and SANB were associated with the IRA.
---------------------------------------------------------------------------
    The General Manager of the Swiss American Banking Group at 
the time was Peter Herrington who assisted Fitzgerald with the 
formation of all of the IBCs and the management of the accounts 
at SAB and SANB. The formation of the accounts was handled by 
Antigua International Trust. Herrington served as Director of 
all of the IBCs and Guardian Bank and performed transactions in 
the SAB and SANB accounts.
    Most of the funds were initially deposited into accounts at 
SAB and then transferred into other accounts at SAB and SANB. 
By mid-1987, the $7 million Fitzgerald accounts in the name of 
Guardian Bank constituted approximately one third of all 
deposits at SAB. SAB owner Rappaport, concerned that an unknown 
party controlled one-third of Swiss American Banking Group's 
deposits, asked Herrington to identify the beneficial owner(s) 
of Guardian Bank. When Herrington refused to do so, he was 
immediately suspended and was dismissed from his position 1 
month later (June 1987). Between the time of Herrington's 
suspension and his termination, he notified Fitzgerald of 
Rappaport's concerns.
    At that time, Herrington resigned as the director of 
Guardian and the IBC. When efforts to resolve the matter 
failed, the attorney who claimed to be the new director of 
Guardian Bank filed a lawsuit in Antigua and Barbuda requesting 
the court to recognize him as the director of Guardian and to 
authorize the withdrawal of funds in the Guardian Bank accounts 
at SAB and SANB which held Fitzgerald's money. At that same 
time, Swiss American Banking Group officials began to 
investigate the accounts opened by Herrington and hired an 
auditor to review the accounts. The review identified a number 
of irregularities. In addition, the Group learned from law 
enforcement officials that the funds may be tied to drug and 
arms trafficking. They contacted the Antiguan Government, and 
in June 1990, the Minister of Finance for the Government of 
Antigua and Barbuda instructed Swiss American Banking Group to 
freeze the funds. In December 1990, the High Court of Antigua 
ruled that Guardian Bank's director did not have the proper 
corporate authority to file the suit, and the funds remained 
frozen at SAB/SANB.\9\
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    \9\ This description is drawn from pleadings filed by the 
Department of Justice in association with USA v. Swiss American Bank, 
LTD, et al. (op. cit.) and documents and correspondence related to that 
matter.
    An October 1989 report by the Special Branch of the Royal Bermuda 
Police Force and the U.S. grand jury indictment issued against 
Fitzgerald provide a description of the trail of the funds that is 
instructive as to how the international banking system is used to move 
and launder illicit funds. In early 1985, Fitzgerald established a St. 
Lucian corporation by the name of ``Halcyon Days Investments, Ltd.'' 
and opened an account in that corporation's name at the Canadian 
Imperial Bank of Commerce in St. Lucia. Between January and March 1985, 
Fitzgerald and other members of the drug organization deposited $3 
million into the account. In May 1985, the account was closed and all 
of the funds (in excess of $3 million), were transferred to the 
Guinness Marn and Company Bank in the Cayman Islands through a bank 
check issued to the Guinness Bank. The total in the account 
subsequently grew to $5 million. In the Fall of 1985, the $5 million in 
funds were wire transferred from the Guinness Bank account to 
Philadelphia to Manufacturers Hanover Bank in New York to the Bank of 
Bermuda and on to SAB. The wire transfer of $5 million was divided 
equally between two accounts at SAB (Rosebud Investments and White Rose 
Investments). The funds were subsequently transferred into the accounts 
of Guardian Bank (one at SAB and one at SANB). According to the police 
report, ``not only is this path murky, but subsequently Guinness Marn 
sold their subsidiary in Cayman because of their embarrassment at the 
management. Regrettably Guinness Marn have chosen not to reveal why 
they were embarrassed or the source of the money.''
    The Special Branch report also detailed the irregularities and lack 
of controls attendant to the accounts and the operations of SAB/SANB 
during Herrington's tenure:

    One of the accounts (Rosebud Investments) received $450,000 in 
cash from the Bank of Bermuda. The funds appear to have come from a 
safety deposit box at the Bank of Butterfield. In October 1985, 
Herrington used Swiss American's relationship with the Bank of Bermuda 
to influence the staff there to accept the cash deposit. When the funds 
were transferred to the account at Swiss American, they were ``held'' 
until Herrington made the book entries.

    Another account (Jones Enterprises) was used as a ``feeder'' 
account for some of the other Fitzgerald accounts. According to the 
police report, ``[l]arge cash deposits were made into the account and 
later diverted to others but as the clients' statements are missing it 
is not possible at this stage to say where the cash originated.''

    Banks slips were written up as ``cash'' and ``deposit'' when money 
was being transferred from one account to another as a way to disguise 
its destination. Only by checking other banking records can the 
accountants identify whether true cash was handed over and frequently 
it was not.

    Many of the loans made by the banks are to companies c/o AIT and 
no other details are available.

    Documents related to the companies associated with the accounts 
were missing.

    The source of many deposits was unknown, as was the ownership of 
the companies.

    Over $500,000 in cash was deposited directly into the accounts at 
Swiss American Bank. Another $500,000 came through a cash deposit at 
the Bank of Bermuda.

    The police report also captures what appears to have been a general 
lack of concern about illicit activities on the part of bank officials. 
The report notes that the Assistant Manager of the Swiss American 
Banking Group, MacAllister Abbott, who with Peter Herrington was a 
signator on the corporate accounts set up for Fitzgerald ``thought 
Guardian was established to hide the profits skimmed from casino 
operations. He thought Jack Fitzgerald had a controlling interest and 
also thought that Herrington maintained a second set of books on behalf 
of the company. Abbott has been described as a person who would turn a 
blind eye to tax evasion but appears to have no knowledge of drug 
involvement.'' Mr. Abbott is currently General Manager of Antigua 
Overseas Bank.
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    In May 1993, Fitzgerald was indicted for racketeering 
conspiracy and money laundering, and in August 1993, he pleaded 
guilty to the charges. As part of the agreement, he forfeited 
all of the proceeds of those illicit activities that had been 
deposited in the accounts at SAB and SANB. A final order of 
forfeiture was issued in May 1994. In early 1994, U.S. 
authorities approached Antiguan officials to seek their 
assistance in freezing the funds, providing public notice of 
the forfeiture action and to facilitate the return of the funds 
once the forfeiture notice was final. Negotiations lasted for 
nearly 2 years.\10\ Finally, in November 1995, Washington, D.C. 
counsel for the Antiguan Government informed U.S. authorities 
that nearly 1 year before--sometime between December 1994 and 
January 1995--approximately $5 million of the Fitzgerald funds 
were transferred to the Antiguan Government by officials from 
the Swiss American Banking Group. Counsel informed the U.S. 
officials that the funds in the Fitzgerald accounts had been 
transferred to the Antiguan Government, which had spent the 
funds to pay pending debts and therefore the money was no 
longer available. At first, Antiguan officials maintained that 
the Swiss American Banking Group had unilaterally transferred 
the funds. In January 1998, Antigua wrote:
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    \10\ Although the U.S. had been asking Antigua to freeze the funds 
since early 1994, it wasn't until November 1996 that Antigua informed 
the U.S. that the funds had been frozen on its (Antigua and Barbuda) 
order in June of 1990.

      In 1994, prior to the payment, but after the U.S. Court 
order, the Banks and the Government discussed the appropriate 
disposition of these funds. While the Banks initiated these 
discussions, the Government understood all of the facts and 
circumstances regarding this account and acting in the public 
interest of Antigua and Barbuda released the freeze order on 
the funds and approved the disposition of the funds in a manner 
---------------------------------------------------------------------------
agreed by the Banks and approved by the Government.

    Swiss American Banking Group officials claim the $5 million 
were transferred on January 23, 1995. The Antiguan Government 
claimed the transfer occurred on December 28, 1994. The U.S. 
Government was later informed that the remaining $2 million of 
Fitzgerald funds had been retained by the bank. It is unclear 
whether the funds were retained as a set off against 
outstanding Antiguan loans or whether they were retained to 
cover expenses incurred by the bank.
    Moreover, the Minority Staff received a copy of a letter 
written in early 2000 that alleged that $880,000 of the 
Fitzgerald funds were ``transferred between January 22-25, 
1995, to Inter Continental Bulk Traders S.A. account #4763751 
at Bank of Bermuda, Hamilton.'' The Minority Staff confirmed 
that the account does exist at Bank of Bermuda and that a 
transfer of $880,000 did occur in the January 22-25, 1995 time 
period. It has been reported to the Minority Staff that those 
funds were paid upon a resolution of the Swiss American Banking 
Group board as payment against a series of invoices submitted 
by a number of people who, at the request of Rappaport, had 
engaged in a review of SAB. One explanation offered to the 
Minority Staff regarding the transfer was that Inter 
Continental Bulk Traders was an account controlled by Rappaport 
and the funds were transferred to that account rather than 
directly paying those who submitted the invoices, because 
Rappaport engaged the services of those people to provide an 
independent review of the accounts at Swiss American Banking 
Group, which he controls. However, the ownership of the Inter 
Continental Bulk Traders account has not been confirmed, and 
that does not explain why the payments would be made through 
the Inter Continental Bulk Traders account rather than directly 
to those who performed the services. Moreover, it has been 
reported to the Minority Staff that the funds were transferred 
out of the account at the Bank of Bermuda in two tranches, 
which seems inconsistent with the contention that payments were 
made to a number of individuals. Without confirmation from the 
Bank of Bermuda on the ownership of the account and what 
happened to the funds in question, the fate of the $880,000 
remains unclear.
    For the next 2 years--November 1995 to December 1997--the 
U.S. Government continued to press for a detailed explanation 
and accounting of the transfer of the funds, and records 
relating to each of the Fitzgerald accounts. Although the 
Antiguan Government identified the source of the funds that 
were transferred from SAB and SANB, it informed the United 
States that the records of the accounts were not available 
because they had been destroyed in a hurricane.\11\
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    \11\ It has been alleged that the funds transferred to the Antiguan 
Government were returned to the Swiss American Banking Group as 
repayment for outstanding debts that the Government of Antigua and 
Barbuda owed to SANB. This included millions of dollars of promissory 
notes that the Antiguan Government had issued to an enterprise called 
Roydan Ltd. Roydan Ltd. was the company that owned and operated a melon 
farm in Antigua called Roydan Farms, that used a high-technology 
tropical irrigation system. The operation was owned by an Israeli named 
Maurice Sarfati, and is discussed at length in a report, ``Guns for 
Antigua'' by the Commission of Inquiry established by the Governor-
General of Antigua and Barbuda to look into the circumstances 
surrounding the shipment of arms from Israel to Antigua. The report was 
issued in 1990 by Louis Blom-Cooper QC, the appointed Commissioner. 
According to the report, Sarfati received governmental approval for his 
agricultural project in August 1984, and operation on the farm 
commenced in 1985. Throughout its inception and operation, the 
enterprise borrowed heavily for startup and operation costs. Sources of 
funds included the U.S. Overseas Private Investment Corporation and 
SANB and SAB. The Government of Antigua and Barbuda issued a series of 
promissory notes to Roydan Farms. In addition, SANB had extended an 
overdraft facility to Roydan Ltd., and has allowed it to escalate to 
over $1 million without any board resolution or any collateral 
agreement. In March 1988, a receiver was placed in control of the 
venture at the insistence of OPIC and the two Swiss American banks. By 
July 1988, Roydan Ltd. was $8 million in debt. At the request of the 
Antiguan cabinet, the banks agreed to conditionally revoke the 
receivership for 90 days. By February 1989, Roydan Ltd. was no longer 
in existence.
    However, its owner, Sarfati, was at the same time in the midst of 
brokering a deal for the shipment of Israeli arms through Antigua to 
the Medellin drug cartel. The linkage was discovered after a raid on 
the Columbian farm of Medellin Cartel leader Jose Ganzalo Rodriguez 
Gacha in December 1989. It was also discovered that one of the weapons 
included in the shipment was used to assassinate Colombian Presidential 
candidate Luis Carlos Galin.
    The Commission of Inquiry was critical of Roydan's management and 
the influence Sarfati was able to exert within the Antiguan Government:

      . . . [A] lucrative market around the world was quickly 
jeopardized by the management structure of Roydan to enable it to 
service its loans, especially from an agency of the U.S. Government, 
the Overseas Private Investment Corporation (OPIC).
      . . . Throughout 1986 Roydan experienced continuous cash flow 
crises due to lack of management cost control systems and the use of 
antiquated accounting procedures. Financial statements were tardily 
produced and reflected a superficial financial picture.
      . . . [A] report in 1987 to a U.S. Congressman stated that 
``because of its demonstrated helter-skelter system of spending, 
without any type of fixed controls, Roydan's credit history is 
devastating, both in the USA and in Antigua.'' (p. 51)
      . . . The story of the melon farm trail, and other incidental 
events, discloses a tale of insinuation and influence of a man with a 
remarkable talent for getting from a vulnerable administration in 
Antigua almost anything he desired. (p. 121)

    One of Commissioner Blom-Cooper's recommendations was:

      ``A judicial inquiry should be set up to investigate the 
dealings in 1985-1987 between Maurice Sarfati and the Government of 
Antigua. The enquiries currently being undertaken by a firm of U.S. 
Attorneys are welcome but do not meet the justifiable demands of an 
inquiring public in Antigua and abroad. This should include the 
administration of Roydan Ltd and the issue of promissory notes.'' (p. 
132)
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    In December 1997, the U.S. Department of Justice filed a 
civil complaint alleging that SAB, SANB, Swiss American 
Holdings S.A. and BNY-IMB intentionally seized and converted 
the $7 million in illicit proceeds located in accounts at SAB 
and SANB that had been forfeited to the U.S. Government.
    In September 2000, the Federal District Court judge 
presiding over the case dismissed the U.S. Government's claim 
for lack of personal jurisdiction over the defendants. The 
government is going to appeal the matter.

  (c) The Gherman Fraud

    Henry Gherman served as a financial adviser to individuals 
and medical practice pension funds in the Miami area. Between 
1982 and 1988, while claiming to make purchases of Certificates 
of Deposit for his clients, Gherman transferred client funds to 
his corporate accounts which he controlled. The funds were 
wired to other accounts or used for the benefit of Gherman and 
his family members.\12\
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    \12\ On August 8, 1988, Gherman left the country leaving notes to 
his clients apologizing for his actions. Shortly before his departure, 
Gherman withdrew $4.4 million in cash from his corporate accounts at 
Commerce bank in Miami. On August 10, 1988, 25 creditors (some of 
Gherman's victims) petitioned the Dade County Circuit Court and secured 
the appointment of a receiver and a freeze of Gherman's corporate 
assets and the assets of his family. On August 28, 1988, the Federal 
Government filed a criminal complaint against Gherman, charging him 
with wire fraud and the embezzlement of $9.8 million. A warrant for 
Gherman's arrest was issued on August 29, 1988. In October 1988, 
Gherman was arrested in Japan after having been expelled from Taiwan.
---------------------------------------------------------------------------
    In February 1989, he pleaded guilty to the charges and 
received a 30 year sentence and was required to make payments 
of $12.9 million in restitution to the victims of his fraud. 
Authorities testified that Gherman never accounted for 
approximately $1 million of the funds he embezzled.
    A private investigator hired by some of Gherman's victims 
discovered that Gherman had established an account at SAB. On 
August 31, 1988, two of Gherman's victims petitioned the High 
Court of Antigua and Barbuda and secured a freeze of all assets 
in any accounts controlled by Gherman. The court-appointed 
receiver for Gherman's assets also filed an action before the 
High Court on November 4, 1988, requesting that he be 
recognized by the Court as the receiver for Gherman and to 
enjoin and require the turnover of all funds, related documents 
and other assets in the possession of SAB or its affiliates. 
However, because of Antigua's bank secrecy laws, when the 
victims filed with the High Court, they were unable to confirm 
how many accounts Gherman held, how much was in any account or 
even whether Gherman did hold accounts at the bank. At that 
time, SAB neither confirmed nor denied the existence of any 
accounts that belonged to Gherman. Cordell Sheppard, the 
counsel for SAB stated:

      We are willing to do anything we can, if we can do it 
without breaking the law. If we do have any documents, and that 
is not to say we do, we are prohibited by law from disclosing 
them.

    After his arrest in Japan, Gherman wrote to SAB on December 
6, 1988, and requested that the bank release all records of all 
of the accounts at the bank that he controlled. He also 
requested that all funds in the bank that he controlled be 
forwarded to the court-appointed receiver in the United States.
    The efforts by law enforcement officials, Gherman's victims 
and the receiver resulted in a review of Gherman's account at 
SAB. As part of his fraud, Gherman had established an Antiguan 
IBC called Chaska Trading and opened an account for the IBC at 
SAB, which was used to launder the funds that Gherman had 
stolen from his clients. Records and court testimony indicate 
that in a period of approximately 1 month--between July and 
August 1988--$3.2 million in embezzled funds were deposited 
into the Chaska account at SAB. Gherman told law enforcement 
officials that all of the deposits into the Chaska account at 
SAB were made with cash that he or his brother personally 
carried to Antigua. Apparently, SAB had no concern that a 
client would deposit $3.2 million into an account within a 1 
month time period. About $2.2 million of those funds were 
subsequently transferred into an account established in the 
name of Chaska Trading at Prudential Bache Securities.
    At Gherman's sentencing hearing his brother, Warren Gherman 
testified that he (Warren Gherman) deposited funds into Henry 
Gherman's SAB account shortly before Henry Gherman left the 
country by delivering the funds to a bank officer at SAB:

    Q. Now, Mr. Gherman, on August 5th of 1988 you made a trip 
to Antigua, did you not?
    A. Yes, sir.

                                 * * *

    Q. Now, you didn't walk down there--I am sorry--you didn't 
travel down there with a cashier's check, did you?
    A. No, sir.

    Q. In fact, you had a suitcase full of money, is that 
correct?
    A. I said this, yes.

    Q. Could you describe how you made the deposit, who you met 
with down there?
    A. A bank officer. I don't believe--I believe his name was 
Reeves (phonetic).

                                 * * *

    Q. Did you declare the money when you left?
    A. No, sir.

    Q. Why didn't you declare the money?
    A. I didn't put any thing down. I just signed--I travel 
around the country and outside the country, and I just normally 
sign the document that I--where they ask you to sign on the 
paper.

    Q. I am sorry. When you left the United States you didn't 
declare any Customs form that you were transporting $500,000 in 
cash?
    A. No, sir.

    Q. Did you read the Customs form?
    A. I said I didn't.

    At the time of Gherman's deposit, John Greaves was General 
Manager of the Swiss American Banking Group. He informed 
Minority Staff that he did not recall any employee at SAB who 
had a name like ``Reeves'' or a name that sounded like 
``Reeves.'' And, although Greaves' name sounds like ``Reeves,'' 
Greaves told the staff that he had no recollection of receiving 
$500,000 in cash from Warren Gherman, noting that he would have 
remembered if he received such an amount. Greaves noted that at 
the time the deposit took place--August 5, 1988--it was legal 
to accept cash deposits in Antigua.
    On April 28, 1989, the trustee received $787,271.84 from 
SAB, representing the balance of unrecovered funds that Gherman 
had deposited in the bank, less amounts withheld by SAB as 
attorney fees and handling charges. The trustee recalled that 
SAB charged a rather large amount ($50,000-$100,000) as its 
costs.

  (d) The DeBella Fraud

    Between September 1986, and May 1990, Michael Anthony 
DeBella was President and Chairman of the Board of Directors of 
United Bank International (``UBI'') and owner of 45,000 out of 
50,000 shares of UBI stock. UBI was an offshore ``Class B'' 
bank located in The Valley, Anguilla. Its ``Class B'' license 
was an offshore license that allowed it to conduct banking 
business with customers other than citizens or temporary 
residents of Anguilla.
    UBI was not a real bank. According to an attorney who 
investigated the bank on behalf of a client, it was nothing but 
a storefront office with one or two employees and a fax 
machine. The true purpose of UBI was to serve as a front for 
financial frauds. Through UBI, DeBella and his accomplices 
defrauded prospective borrowers by issuing fraudulent letters 
of credit, lines of credit and loans in return for the payment 
of advance fees. These advance fees ranged from 1 to 12 percent 
of the face value of the amount sought by the particular 
borrower. DeBella represented to various victims that UBI had 
assets of $12,000,000 and deposits totaling $16,000,000. 
Although pieces of paper purporting to be banking instruments 
were issued, UBI never produced any actual financing. Between 
1986 and 1990, DeBella and his accomplices defrauded victims of 
approximately $2 million. At the sentencing hearing for one of 
DeBella's accomplices, an IRS investigator stated that he was 
not aware of any legitimate business whatsoever conducted by 
UBI. ``I believe it was a front for a fraudulent enterprise,'' 
he stated. ``I am not aware of any successful transaction.'' 
The presiding judge stated, in accordance with the 
investigator's statements, ``This is not an example of a 
legitimate business that had one or two fraudulent acts, but 
the whole business from beginning to end is permeated with 
fraud. The business itself was the mechanism to perpetuate the 
fraud.'' \13\
---------------------------------------------------------------------------
    \13\ U.S. v. Michael A. DeBella, Jr., et al. (U.S. District Court 
for the Southern District of Florida, Case No. 93-6081-CR-Hurley), 
Superceding Indictment and Transcript of Sentencing Hearing, 12/18/95.
---------------------------------------------------------------------------
    To add to the legitimacy of UBI, DeBella and his 
accomplices claimed that UBI had correspondent relationships 
with other major banks. UBI had an account at SANB which had a 
correspondent account at Irving Trust Company. DeBella and his 
accomplices directed victims to wire transfer advance fees to 
the SANB correspondent account at Irving Trust Company (which 
was subsequently taken over by Bank of New York). These funds 
were then credited to UBI's account at SANB.
    Testimony by the U.S. IRS agent who investigated the fraud 
provided a description of how criminals used offshore banks in 
secrecy jurisdictions to hide the trail of the funds they had 
stolen. According to the agent, the money ``would be wired from 
the victim's bank account to the Bank of New York where Swiss 
American National Bank had an account. From there, the funds 
would be wired down to Swiss American National Bank and placed 
in the account of United Bank International.'' After the funds 
reached the UBI account in SANB, ``within a short period, the 
funds would be wired back from Swiss American Bank up to the 
Bank of New York, and placed into one of the accounts 
controlled by Mr. DeBella.''
    DeBella established companies in the United States and 
elsewhere and held accounts in the names of those corporations 
in banks in Florida and Connecticut. Those accounts were used 
to move funds acquired through the frauds in and out of the 
United States and further hide the trail of those funds.\14\
---------------------------------------------------------------------------
    \14\ For example DeBella was the president and director of Atlantic 
Capital Corporation, a corporation chartered in the State of Florida, 
and was also the director of Atlantic Capital Corporation, Ltd., a 
corporation chartered in St. Johns, Antigua, British West Indies. 
DeBella held an account at Commonwealth Savings and Loan Association of 
Florida under the name of ``Atlantic Capital.'' DeBella also operated 
an unincorporated business known as Marlborough Village, a mobile home 
park located in Marlborough, Connecticut, and held an account People's 
Savings Bank, West Hartford, Connecticut, under the name of Marlborough 
Village.
---------------------------------------------------------------------------
    In addition to the advance fee for loan frauds, DeBella 
also used UBI to commit a theft involving approximately 
$800,000 worth of shrimp. DeBella represented that UBI would 
finance the shipment of shrimp from a company in China (China 
Foreign Trade, a company that was, at least in part, owned by 
the Chinese Government) to a company in the United States 
(Imported Meats, Inc.). As a result of this agreement, China 
Foreign Trade shipped the shrimp to the United States and 
Imported Meats, Inc. made seven wire transfers totaling 
$873,762.54 to SANB's correspondent account at the Bank of New 
York for further credit to UBI between December 18, 1989, and 
February 23, 1990. DeBella sent only $77,000 to China Foreign 
Trade.\15\
---------------------------------------------------------------------------
    \15\ The wire transfers totaled $873,762.54. On November 21, 1989, 
DeBella prepared a UBI cashier's check in the amount of $935,225.61, 
payable to China Foreign trade. However, on December 18, 1989, UBI 
stopped payment on the cashier's check. On December 22, 1989, UBI wired 
only $77,014.08 from the account of Swiss American National Bank at the 
Bank of New York to the account of China Foreign Trade at Citibank, 
Shenzen, China. On December 27, 1989, China Foreign Trade transmitted a 
copy of a telex from Shenzen, China to UBI refusing UBI's payment. 
After this date, UBI made no further payments to China Foreign Trade. 
However it continued to receive wire transfer payments from Imported 
Meats, Inc. through SANB's correspondent account at the Bank of New 
York. U.S. v. Michael A. DeBella, Jr., et al., (U.S. District Court for 
the Southern District of Florida, Case No. 93-6081-CR-Hurley), 
Superceding Indictment.
---------------------------------------------------------------------------
    An attorney was retained by China Foreign Trade to recover 
the $800,000 in funds owed to it by UBI. He discovered that UBI 
was nothing more than a storefront operation, as described 
above. He also discovered that UBI's banking license was 
revoked by Anguillan Ministry of Finance on May 29, 1990. In 
the Notice of Intended Revocation, issued on April 4, 1990, the 
Minister of Finance declared that the license was being revoked 
because UBI was ``carrying on business in a manner detrimental 
to the public interest.'' The revocation notice identified nine 
separate frauds that had been perpetrated through UBI by its 
owners between 1987 and 1989.
    After his discovery, the attorney contacted the General 
Manager of the SAB, John Greaves. The attorney told Greaves 
about the fraud that had been perpetrated against his client by 
UBI and DeBella. The attorney also informed Greaves that UBI's 
license had been revoked by the Government of Anguilla. The 
attorney followed up the phone conversation with a letter to 
Greaves at SAB and a letter to Rappaport at the headquarters of 
his Swiss Bank, BNY-IMB in Switzerland.
    On June 25, 1990, Greaves responded to the attorney's 
letters. He wrote:

       ``In reply to your letter 22nd June, addressed to Mr. 
Bruce Rappaport, could you please take note that neither Mr. 
Bruce Rappaport nor the Inter Maritime Bank in Geneva has any 
connection with the Swiss American group, either as 
shareholders or directors and that future enquiries or 
correspondence should be addressed directly to the undersigned 
at the address below.

      To now refer to your enquiry, the bank in question did 
have a small banking relationship with us, and during the 
course of this relationship, we, on occasions, effected 
transfers out through our correspondent banking network on 
their behalf and received payments in. The turn over on the 
accounts has never exceeded a low five-figure.''

    There were a number of misstatements and misleading 
information contained in the portions of Greaves' letter cited 
above. As noted in an earlier portion of this report, Rappaport 
was the owner of Swiss American Banking Group. However, the 
ownership chain was hidden through a series of offshore 
corporations and trusts. In addition, he was directly involved 
in the operations of the banks.\16\ The paragraph left the 
impression that Rappaport had no ownership or control of the 
Swiss American Banking Group when, in fact, he clearly did. 
Greaves told Minority Staff that Rappaport had directed that 
similar language be included in all letters addressing the 
issue of his relationship to the Swiss American Banking Group 
because Rappaport did not want his association with the group 
to be known.
---------------------------------------------------------------------------
    \16\ Rappaport personally hired Greaves as Herrington's 
replacement. Greaves told Minority Staff that he would regularly fly to 
Geneva to meet with Rappaport and discuss the operations of the Swiss 
American Banking Group.
---------------------------------------------------------------------------
    In addition, records obtained by the U.S. Government show 
that Greaves' characterization of UBI's account at SANB was 
incorrect. The letter stated that UBI ``did have a small 
banking relationship'' with SANB. In fact, although the letter 
referred to the account in the past tense, the account was 
still active during and after the date of Greaves' letter.
    Greaves also told the attorney that ``the turnover on the 
accounts has never exceeded a low five-figure.'' The records 
obtained by the Subcommittee related to UBI's activity that 
took place through its account at SANB shows that between early 
1987 and late 1990, UBI received deposits totaling over $1.1 
million, including some transfers that were greater than 
$100,000. The record of UBI's activity through SANB's 
correspondent account at Irving Trust and Bank of New York 
shows that between April 1989 and September 1990 UBI had 25 
outgoing wire transfers totaling over $400,000, with 4 
transactions of $50,000 or more. These figures are more than 
the ``low five figure'' amount cited in Greaves' letter.
    Even after Greaves and SANB had been advised of the fraud 
against China Trade and that UBI's license had been revoked by 
the Government of Anguilla, SANB allowed the UBI account to 
remain open, and processed transactions--including 
withdrawals--through it. Records show that SANB processed 11 
transactions worth over $160,000 involving UBI after June 22, 
1990.
    Moreover, officials at the Swiss American Bank Group 
allowed DeBella and one of his accomplices to open three 
additional accounts at SAB after receiving notification of the 
China Foreign Trade fraud and the revocation of UBI's license. 
One of the accounts was in the name of Commonwealth Investment 
Corporation. This account served a conduit through which 
DeBella defrauded additional victims after he abandoned the UBI 
scheme.
    In one of the frauds run through the Commonwealth 
Investment Corporation account, DeBella defrauded one victim of 
$600,000. In February 1993, a criminal complaint was sworn out 
against DeBella and his accomplices for their activities 
related to the frauds committed through UBI in the late 1980's 
and 1990. DeBella was taken into custody in February 1993. In 
April 1993, DeBella falsely represented to an English engineer 
by the name of Anthony Craddock that DeBella's company, 
Atlantic Capital Corporation, Ltd., had received, in its 
capacity as a fiduciary, $120,000,000 from the Nigerian 
Government, which had been deposited into the Commonwealth 
Investment Corporation account at SAB. DeBella represented to 
Craddock that he could release the funds after a payment of 
$600,000 in disbursement fees. On April 13, 1993 Craddock wire 
transferred $600,000 into the Commonwealth Investment account 
at SAB.\17\ However, no funds were ever disbursed to Craddock, 
nor were the ``fees'' repaid to him. Between April 15 and April 
20, 1993, DeBella withdrew most of the $600,000.
---------------------------------------------------------------------------
    \17\ On April 13, 1993, the funds were incorrectly wired to SANB 
for credit to the account of Commonwealth Investments Corporation. Bank 
officials realized the account was actually at SAB and credited the 
account at that bank on April 14, 1993. Another $50,000 from another 
fraud was wired into the SAB account in March 1993. Anthony J. 
Craddock, Craddock (UK) Limited v. Michael A. DeBella, Jr., Atlantic 
Corporation Limited, Commonwealth Investment Corporation and Swiss 
American Bank Ltd. (In the High Court of Justice, Antigua and Barbuda, 
Suit No. 213/1996), Affidavit of Brian Stuart Young, and Exhibits, 
March 18, 1997. U.S. v. Michael A. DeBella, Jr., et al., (U.S. District 
Court for the Southern District of Florida, Case No. 93-6081-CR-
Hurley), Superceding Indictment.
---------------------------------------------------------------------------
    On May 6, 1993, DeBella and two accomplices (Sandra Ann 
Siegel, also known as ``Sandy DeBella,'' and Joseph Macaluso) 
were indicted on a range of offenses related to the advance fee 
for loan fraud, including conspiracy, mail fraud, wire fraud, 
money laundering, bank fraud, and tax evasion. A superseding 
indictment was filed on January 6, 1994, to incorporate the 
Craddock fraud.
    The Atlantic Capital and Commonwealth Investment accounts 
at SAB were closed between the months of July and September, 
1993. DeBella was convicted of the charges in May 1995. In 
December 1995, he was sentenced to 51 months in prison and 
ordered to pay $600,000 in restitution to Craddock and $69,500 
to the IRS.
    In his continuing efforts to recover the $600,000 he paid 
to DeBella, Craddock wrote to SAB seeking return of his funds 
and filed a claim against the bank in the Antigua High Court of 
Justice in 1996. Craddock also wrote to SAB's correspondent 
bank, the Bank of New York, about the fraud. When the Bank of 
New York inquired about the matter in 1996, SAB provided the 
following response:

      Michael DeBella, a U.S. citizen, has been jailed in the 
U.S. for, among other things, defrauding Craddock of $600,000. 
It would appear that in a Nigerian-type scam, DeBella promised 
Craddock a handsome share of $120 million from the Nigerian 
Ministry of Finance if he participated in whatever the deal 
was. This in itself does not speak well for Craddock.

      In any event, Mr. Craddock has been bombarding our board 
members and management with numerous letters requesting the 
return of his funds (which we do not have) and, only yesterday, 
we sent copies of his correspondence to an attorney in the USA 
for him to examine and determine whether there is sufficient 
cause for a cease and desist order.

      Unfortunately, because of local offshore banking 
legislation, we are not in a position to advise Mr. Craddock 
whether or not any part of the funds he is trying to trace is 
on deposit with us as that would probably put an end to the 
matter.

    SANB's reply to the Bank of New York did not mention the 
fact that SAB opened accounts and processed transactions for 
DeBella long after its General Manager, Greaves, had been made 
aware of frauds that DeBella perpetrated through UBI and that 
the license of DeBella's bank, UBI, had been revoked for 
activity detrimental to the public interest.
    Minority Staff asked Greaves about the inconsistencies in 
his June 1990 letter and why SAB would open and service 
additional accounts for DeBella after learning of the frauds 
DeBella perpetrated through UBI and that UBI's license had been 
revoked for activity detrimental to the public interest. 
Greaves informed the staff that ``mistakes had been made'' at 
Swiss American, including mistakes at the senior management 
level and including mistakes by himself. He would not elaborate 
further on the case of DeBella and Swiss American's role in it.

  (e) The Fortuna Alliance Fraud

    The Fortuna Alliance was a Ponzi scheme that attracted its 
victims by marketing over the Internet.\18\ Labeled as a multi-
level marketing plan, the scheme promised investors large 
returns on their initial investment as new members were 
recruited into the program. For example, promoters told 
investors that they would receive $5,200 for a one-time 
investment of $250. Higher investments would earn even higher 
monthly returns according to the promoters. The program 
operated between November 1995 and May 1996, when the Federal 
Trade Commission secured a court order halting the program. The 
FTC estimated that during its operation, the Fortuna Alliance 
scheme collected over $7.5 million from victims. The FTC 
documented that the perpetrators of the fraud had established 
two accounts at SAB in Antigua in the name of two trusts--the 
Fortuna Alliance Trust and the Prosper Trust \19\--and had 
forwarded at least $5.5 million of victims' funds into those 
accounts between March and May 1996, utilizing SAB's 
correspondent account at Chase Manhattan Bank.\20\ The 
perpetrators of the fraud also used credit cards issued by SAB 
that drew from the Fortuna Alliance Trust account.
---------------------------------------------------------------------------
    \18\ This fraud was examined as part of the Subcommittee's 
investigation into Internet fraud. See ``Fraud on the Internet: Scams 
Affecting Consumers,'' Hearing before the Permanent Subcommittee on 
Investigations, February 10, 1998 (S. Hrg. 105-453).
    \19\ According to U.S. enforcement personnel, the Prosper Trust was 
a holding account for a number of clients that were trusts. Presumably 
the assets of each trust was held in a separate sub-account. In June 
2000, the Minority Staff discovered a Web site for an entity called the 
Prosper International League Ltd. (``PILL''), a Bahamian entity 
offering Belize offshore trusts called Prosper Trusts, stressing the 
secrecy and the tax evasion potential of the trusts. The organization 
also markets a Ponzi investment scheme similar to that offered by the 
Fortuna Alliance. It is owned by individuals operating out of Florida. 
Material included on its web site indicates the organization has been 
in existence at least since 1994. The web site for PILL states that the 
trust funds are held by Swiss American Bank in Antigua. It may be the 
case that PILL controlled a large account at SAB, and the Prosper Trust 
account beneficially owned by the principles of the Fortuna Alliance 
was actually a sub-account of the larger Prosper Trust account.
    \20\ The FTC's estimate was based on records obtained from wire 
transfer requests originating from Whatcom State Bank in Washington, 
where the Fortuna Alliance held an account. The Minority Staff reviewed 
the monthly statements of SAB and SANB's account at Chase Manhattan 
Bank. The staff identified $5.3 million [This figure is a correction by 
Subcommittee staff of the figure that appears in the original 
publication of this report in February 2001.] that had been sent from 
the Whatcom State Bank, by order of the Fortuna Alliance, to Fortuna's 
two accounts at SAB during the March-May time period. Another $1.65 
million had been sent from the Whatcom State Bank, by order of the 
Fortuna Alliance, to a Prosper Trust account at SANB. During that same 
period, an additional $24,000 [This figure is a correction by 
Subcommittee staff of the figure that appears in the original 
publication of this report in February 2001.] was wired into the SAB 
accounts at Chase for further credit to the Prosper Trust from other 
U.S. and foreign banks. SAB officials told Minority Staff that they 
eventually secured a cease and desist order against PILL.
---------------------------------------------------------------------------
    The FTC filed its complaint against the Fortuna Alliance 
and four perpetrators of the scheme--Augustine Delgado, Libby 
Gustine Welch, Donald R. Grant and Gail Oliver--in the U.S. 
District Court for the Western District of Washington on May 
23, 1996. The court issued a temporary restraining order on May 
24 and a preliminary injunction on June 12. Both orders 
prohibited further marketing of the scheme or any related 
program, froze Fortuna's assets, appointed a receiver for 
Fortuna and ordered the defendants to ``direct that Swiss 
American Bank of Antigua transfer to Fortuna Alliances's bank 
account at Whatcom State Bank all funds previously transferred 
by or from Fortuna Alliance, Augustine Delgado or Libby Gustine 
Welch to that bank.''
    At the same time that the FTC sought to obtain a 
restraining order in Washington, the Department of Justice 
filed a claim in the High Court of Antigua to freeze the funds 
in the accounts controlled by the Fortuna Alliance and its 
principles. On May 29, 1996, the High Court issued an order 
freezing the two Fortuna Alliance accounts and all other 
related accounts.
    The principals of the Fortuna Alliance failed to return the 
funds that they had forwarded to the two SAB accounts. On June 
12, 1996, the U.S. District Court for the Western District of 
Washington issued a contempt citation against the defendants 
for failing to return the funds from SAB and refusing to 
provide an accounting of the funds. When they continued to defy 
the court's initial order in the preliminary injunction, the 
court issued civil arrest warrants against three of the 
defendants on June 27, 1996.
    Although SAB officials told Minority Staff that they 
cooperated with the U.S. efforts to secure the return of the 
funds, the bank appears to have been less than cooperative. The 
U.S. Government had named SAB as a neutral party in the freeze 
petition. This is a normal occurrence in seizure actions in the 
United States, and the banks that are named in such suits 
generally cooperate with the court order. SAB, however, 
actively fought the United States in the recovery process. 
According to U.S. Government officials negotiating a return of 
the funds in the SAB accounts, SAB officials were initially 
uncooperative in negotiations. SAB officials would not tell 
U.S. representatives how much money was in the accounts, citing 
Antigua's bank secrecy laws. This made it difficult for the 
government to know the exact amount of money in the accounts 
because additional funds may have been wired into the account 
from different banks, and principals of the Fortuna Alliance 
had been drawing down against one of the accounts to pay credit 
card bills. SAB officials also demanded that the U.S. 
Government pay the bank $1 million of the funds in compensation 
for the costs the bank had absorbed in dealing with the issue, 
the damage to its reputation caused by the suit, and the 
interest lost from the account because it was frozen.
    On September 10, 1996, SAB joined with some of the 
principals of the Fortuna Alliance and asked the court to 
remove the freeze. In its filing, SAB claimed that it was an 
innocent third party; that if the freeze continued, it would 
affect SAB's normal course of business; that the U.S. 
Government had failed to provide any evidence that any of the 
funds in the Fortuna Alliance accounts were in fact those of 
the principals, that the principals were signatories of the 
account, or that the assets were at the disposal of the 
principals.
    On October 22, 1996, Delgado, the owner of Fortuna 
Alliance, wrote to the manager of SAB and expressed his deep 
frustration with the continued freeze of his funds. In the 
letter, Delgado admitted that he was a beneficiary of the 
accounts that had been frozen and claimed that SAB had accepted 
additional funds for the Fortuna Alliance accounts after the 
freeze was imposed by the High Court of Antigua and SAB was on 
notice of questionable activities by the beneficiaries of the 
account:

      As you are aware I am a beneficial party for certain 
funds held in Fortuna Alliance Trust. . . . In addition to 
these there are other funds held in suspense that have come to 
your bank after the injunction (August 9th from the 
Netherlands).

      I am formally requesting that you arrange a loan to me 
collateralized by these funds held by you that does not violate 
your banks policies or the injunctions.

    The SAB manager's response included the following:

      Management has given serious review to the circumstances 
related to your request, and guided by fiduciary 
responsibilities and relevant legalities, we are unable to 
register as security for a credit facility the funds held 
either in the Trust account or for the Trust account.

      We appreciate the grave concerns raised in your letter 
to us, and have sought to identify legal means by which we 
could respond to your request. On the one part, we are bound by 
order of the Court and, on the other part, the fact that funds 
are held for a trust account carry further responsibility for 
the bank to ensure that there is no breach of trust. The only 
authority for the custody of the funds is the stated trust, and 
a Trustee has no implied power to borrow.

      At this time we have no means to respond to your 
request, we will however continue to press for the legal 
resolution of this matter. We share your concerns over the 
length of time taken to address the matter and the adverse 
impact it has on your business. We are powerless to influence 
these events of the court, and can only act in compliance with 
its orders.

      Please contact us if you wish to meet further on these 
matters.

    Finally on February 24, 1997, the FTC and the Fortuna 
principals entered into a settlement agreement providing for 
the return of $2.8 million from SAB and requiring the Fortuna 
principals to make additional funds available to pay all 
claims. According to U.S. officials, even after the principals 
of the Fortuna Alliance agreed to the settlement, SAB officials 
balked at sending the funds back to the United States, 
insisting that they be paid part of the funds. SAB eventually 
settled for $50,000.
    By May 1, 1998, the FTC had refunded approximately $5.5 
million to over 15,000 victims in 70 countries throughout the 
world.\21\ However there were still $2.2 million in additional 
claims that were outstanding. Under the terms of the February 
1997 settlement, Fortuna was obliged to pay those additional 
funds. However, the defendants refused to fulfill their 
obligations and did not supply additional funds. Instead, 
Delgado and other members of the original Fortuna Alliance 
opened another Ponzi operation similar to the first scheme, 
called Fortuna Alliance II. On June 5, 1998, the U.S. District 
Court for the Western District of Washington issued a civil 
contempt order against Fortuna Alliance and its owner, Delgado, 
for failure to make the payments as required under the 
settlement agreement and for failure to abide by the agreement 
not to engage in similar activities.
---------------------------------------------------------------------------
    \21\ The sources of the $5.5 million are as follows: $2.2 million 
in uncashed checks returned to investors; $2.8 million returned from 
accounts at SAB; $350,000 in assets frozen in U.S. banks.
---------------------------------------------------------------------------
    Bank records reviewed by the Minority Staff indicate the 
Fortuna Alliance wired at least $6.9 million [This figure is a 
correction by Subcommittee staff of the figure that appears in 
the original publication of this report in February 2001.] into 
its SAB and SANB accounts, but the settlement agreement called 
for only $2.8 million to be returned from SAB and SANB. After 
the $2.8 million had been returned to the U.S Government, it is 
likely that substantial sums still remained in the accounts and 
presumably were available to the principals of Fortuna 
Alliance, perhaps to perpetrate their second Ponzi scheme.

  (f) Other Frauds/Questionable Accounts

    In 1997 or 1998, Robert Burr, an accomplice in the Cook 
fraud (described in the appendix to this report), opened two 
accounts in the name of two foreign trusts (Right Hand 
Investments and Silver Search International) at SAB. Burr 
instructed SAB that all funds transferred into the Right Hand 
Investments account should be immediately transferred into the 
Silver Search International account. Given the bank secrecy 
laws of Antigua and Barbuda, the mechanism employed by Burr 
would effectively hide the trail of his funds. An investigator 
working with the SEC appointed receiver attempting to recover 
the funds stolen by Cook told the Minority Staff that it has 
been established that Burr attempted to use these trusts to 
prevent law enforcement officials from seizing assets he 
acquired through the fraud.
    Peter Berney, a U.S. citizen who has been indicted in both 
New York and Nevada for stock fraud and money laundering 
apparently ran millions of dollars through an account at SAB 
during 1999.
    The issues discussed above raise serious questions about 
the adequacy of the initial due diligence and ongoing 
monitoring conducted by both Swiss American banks. In some 
instances, these frauds evidence possible complicity of SAB and 
SANB bank employees or officials. SAB officials have told 
Minority Staff that they have recognized past problems and have 
made a concerted effort to improve their management and anti-
money laundering policies. One law enforcement official also 
reported improved performance. However, over the past few years 
SAB has taken on accounts from entities involved with Internet 
gambling activities, which raise additional money laundering 
and legal concerns for correspondent banks.

  (g) Internet Gambling/Sports Betting

    Antigua is one of a number of countries that have legalized 
Internet gambling, and it has become one of the most popular 
locations for such enterprises. For a licensing fee between 
$100,000 and $75,000, an Internet gambling operation can 
purchase a license in Antigua and Barbuda. Approximately 100 
Internet gambling licenses have been issued by Antigua and 
Barbuda. As noted in another section of this report, Internet 
gambling is vulnerable to money laundering, and it is illegal 
in the United States. This has caused some U.S. banks to refuse 
accounts from Internet gambling clients and correspondent 
relationships with foreign banks that accept such clients. When 
offshore banks with Internet gambling clients open 
correspondent accounts with U.S. based banks, the money 
laundering vulnerability of the correspondent bank is 
increased, because it is not just dealing with unknown 
customers of the client bank, it is also handling the customers 
of the Internet gambling establishments who have access at the 
client bank. Moreover, the correspondent bank is in the 
position of facilitating a possible crime by accepting funds 
for activities that are illegal when carried out within the 
United States.
    SAB services a large number of Internet gambling accounts. 
A brief search of the Internet disclosed hundreds of Internet 
gambling entities that advertised SAB as their bank and 
directed clients to wire funds to their SAB accounts through 
one of SAB's U.S. correspondent banks. In 1998 and 1999, wire 
transfers directed to Internet gambling entities flowing 
through SAB correspondent accounts grew to millions of dollars 
each month. The Internet gambling clients of SAB included World 
Sports Exchange, whose co-owner Jay Cohen was recently 
convicted and sentenced to 21 months in prison in the United 
States for violation of the Federal Wire Act, which prohibits 
interstate or foreign gambling via telephone or telegraph.
    In addition to SAB's U.S. based correspondent accounts, 
SAB's correspondent accounts at non-U.S. based banks, such as 
Toronto Dominion in Canada and BNY-IMB in Geneva were also 
advertised as places where gamblers could send funds for SAB's 
gambling clients.
    Moreover, the money laundering vulnerabilities of 
correspondent accounts that are compounded by the combination 
of correspondent banking and Internet gambling clients are 
further magnified through the proliferation of E-cash 
operations such as Totalnet, InterSafe Global, Ecashworld, 
Electronic Financial Services. E-cash operations are 
intermediaries for the transfer of funds between consumers and 
merchants. Many Internet gambling operations are using such 
services. Individual bettors are instructed to open accounts 
at, and send their funds to, the E-cash intermediary, which 
then deals with the gambling company. This further hides the 
origin of funds.
    The Web sites of a number of on line casinos contained the 
exact same description of one of the E-cash companies, 
``InterSafe Global,'' and described how the casinos utilized 
its services:

      LInterSafe Global LLC is a Nevada based company that 
operates the E-cash service for Casino on Net. InterSafe 
specializes in secure Internet transaction processing. They 
provide a vital link between Internet customers and merchants. 
When our clients want to make a deposit to their casino 
bankroll, this is done through InterSafe. The credit card is 
charged to InterSafe Global LLC, and this is the name that will 
appear on your credit card statement.

    The Internet casinos using InterSafe instruct clients who 
wish to make wire transfers into their casino account to 
forward the transfers to ``InterSafe Global LLC, Account number 
1641101, Swiss American Bank.''
    These intermediaries further obscure the source and extent 
of Internet gaming that may be taking place through a bank that 
services such accounts, and makes it even more difficult for 
correspondent banks to know which and how many gambling 
entities may be using one of their client banks. The gambling 
entities are nested within the E-cash company account.
    SAB recently announced it would no longer use its U.S.-
based correspondent accounts for Internet gambling clients. 
However, it is not clear whether SAB will continue to service 
the accounts of, and accept wire transfers for, the E-cash 
companies that accept deposits for Internet gambling companies.

  (7) Correspondent Accounts at U.S. Banks

  (a) Bank of New York

    SANB established a correspondent relationship with Irving 
Trust Company in December 1981. The relationship was continued 
by Bank of New York (``BNY'') when it acquired Irving Trust 
Company in 1988-1989 and was terminated in June 1999. Little 
information is available about the structure and operating 
procedures of Irving Trust's correspondent banking department 
at that time. A December 1981 memo by the relationship manager 
indicates that Irving Trust was introduced to SANB through its 
courier in Antigua and Barbuda, who was the brother-in-law of 
SANB's Assistant Manager, McAllister Abbott.
    Minority Staff interviewed the BNY relationship manager who 
was responsible for the account from October 1993 through its 
termination in April 1999, and the head of the Latin American 
Division who has held that position since 1990.
    The Correspondent Banking Department is located within the 
International Sector Division, headed by the Vice-Chairman of 
the bank. The International Sector is divided into four 
geographical regions--Europe, Asia, Middle East/Africa and 
Latin America. The Latin American Division is headed by a 
Division Head, a Senior Vice President of the bank. The 
Division is divided into two Districts. The Caribbean Region is 
located in District Two. District Two has two relationship 
managers and a District Manager. The Latin American Division 
has four representative offices in the region. The duty of the 
relationship managers is to sell products and services to 
clients. However, relationship managers are also responsible 
for following the activities of their clients and events in the 
countries in which they operate. The administrative, back 
office activities are handled by a group called deposit 
services. The Latin America Division has 200-225 correspondent 
banking relationships, with a total of 480 accounts. The 
relationship manager who handled the SANB account had 30-35 
clients with 40-45 accounts.
    Representatives of BNY told Minority Staff that to open a 
correspondent account at BNY, a bank must submit a request in 
writing; provide a letter from its regulatory authority that it 
is licensed to do business; three letters of reference 
including a letter from the Central Bank of the country and if 
possible two from U.S. banks, and a list of all of the owners, 
directors and management; identify the type of products and 
services it would like to use; and indicate the expected volume 
of activity. Relationship managers are required to visit the 
site of the bank. The relationship manager, the District 
Manager and the Division Head review the application and make 
the decision whether to accept the account. If a potential 
client plans to conduct business with, or utilize services of, 
some other division of the bank, representatives of that 
division will also be in on the review process. The Compliance 
Division for the bank is a separate unit, but a compliance 
officer is assigned to the International Services Sector.
    BNY representatives told Minority Staff that as part of 
BNY's ongoing monitoring program, relationship managers in the 
Caribbean Division have a goal of visiting clients at least 
once a year and in highly sensitive areas the District Manager 
is required to meet with the clients. After returning from a 
site visit, relationship managers are required to write a 
country report and a client visit report. Client banks are 
required to supply audited financials annually. Monthly 
statements are not reviewed. However, BNY has a monitoring 
system that can follow trends in account activity and produce 
monthly reports on unusual activity. Relationship managers are 
required to review the reports and provide a written 
explanation of the activity in question.
    According to the client contact memos produced by BNY, 
which include Irving Trust memos from the beginning of the 
account, the relationship managers did not identify any serious 
problems or concerns with the SANB account until about 1995. 
Significant frauds that utilized SANB were not addressed by the 
relationship managers. For example, when Peter Herrington was 
dismissed in 1987 as General Manager of the Swiss American 
Banking Group for involvement in the Fitzgerald matter noted 
above, the reports from the relationship manager stated: 
``Peter Herrington has left and Andrew Barnes is the new G.M. 
(Apparently Herrington did not leave on very amiable terms).'' 
The relationship manager apparently did not obtain any 
information regarding the Fitzgerald case. Similarly, although 
the SANB account at Irving Trust Company and then BNY were the 
conduit for the flow of funds involving the DeBella fraud in 
1989 and 1990, there is no mention of the matter in any of the 
files provided to the Subcommittee. IRS agents had subpoenaed 
account records from BNY during its investigation, discussed 
the account with BNY representatives and addressed the matter 
in the trial and sentencing of DeBella, which lasted through 
1995. There is no indication that BNY relationship managers 
were advised of this issue by other divisions within BNY, or 
that relationship managers made any inquiries of SANB to 
understand SANB's role in the matter. As noted in the review of 
the DeBella fraud contained above, documents and information 
made available to the Subcommittee indicate that the General 
Manager of the Swiss American Banking Group, John Greaves, 
continued to allow DeBella to utilize SANB accounts after he 
had been provided with information and documentation alleging 
DeBella's involvement in fraudulent activity. The Division Head 
and the Relationship manager interviewed by Minority Staff 
indicated that the account was quiet until about 1995.
    In 1995, BNY memos indicate that personnel began to notice 
questionable transactions occurring in the account. In 1993, 
SANB issued and BNY confirmed two standby letters of credit to 
Banco de la Union in Costa Rica.\22\ Ostensibly, the letters of 
credit guaranteed the capital reserves the bank was required to 
maintain. In April 1994, Banco de la Union authorized another 
bank to collect on the letters of credit. However, SANB 
instructed BNY not to pay. In late 1994, attorneys for Banco de 
la Union threatened to sue BNY. Yet, for a long period of time, 
SANB failed to respond to numerous requests by BNY for SANB to 
explain its position on the matter, and to provide the name of 
its legal counsel in New York.
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    \22\ A standby letter of credit is a financial guarantee against 
non-performance. It is similar to a surety bond. Generally when such an 
instrument issued by a offshore bank or a bank that is not 
internationally known, the party who is relying on the standby letter 
will demand that a larger, better known financial institution ``commit 
to,'' or back, the letter. Often, the small bank will ask its 
correspondent bank to commit to the standby letter of credit. 
Committing to the letter places the bank at risk if the small bank does 
not honor the letter. Generally, to eliminate its exposure, the 
correspondent bank will require the respondent bank requesting the 
commitment to provide collateral equal to the value of the pledge that 
the correspondent bank is making. Thus, the correspondent bank has no 
risk of loss. This is what BNY did with its standby letter of credit 
arrangements with SANB.
---------------------------------------------------------------------------
    Around the same time as BNY confirmed the letter of credit 
in 1993, Bank of America (BOA) (at that time, a correspondent 
for SAB) received a similar request to confirm a standby letter 
of credit that SAB wanted to issue to Banco de la Union. The 
stated purpose of the standby letter was the same as the letter 
of credit backed by BNY: To serve as a guarantee for the 
capital requirements that bank was required to possess in order 
to meet Costa Rican licensing requirements. Although BNY backed 
the standby letter, BOA refused. In an internal memo, the BOA 
credit manager expressed his concerns:

      I am not in favor of our issuing this SBLC in support of 
a client establishing a bank in Costa Rica for the following 
reasons:

      --We don't know the client or the type of bank we are 
guaranteeing.
      --This is not trade related.
      --This is not a specific transaction in the sense that 
client is going to have this SBLC as long as it continues 
business in Costa Rica and we are going to be asked to 
continually renew.
      --The pricing of 50 BPS is not attractive.

      The principle reason of those above is that we would be 
guaranteeing and support liquidity needs of a bank we don't 
even know and don't know that we would want our name associated 
with that entity or its principals. Therefore, from a policy 
perspective this is turned down.

    Documents associated with SANB's correspondent account at 
Nations Bank also raise questions about Banco de la Union and 
the wisdom of approving a letter of credit for Banco de la 
Union.\23\
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    \23\ Material obtained from the SANB correspondent account at 
Nations Bank indicate that in 1993 Nations Bank became involved in a 
controversy with the Deputy General Manager of the Swiss American 
Banking Group, David McManus, that revealed more information about 
Banco de la Union and raised questions about the bank and the 
individuals associated with it. A letter and memorandum from a Nations 
Bank Vice President described the matter. Two foreign insurance 
companies that were clients of SANB were attempting to expand their 
businesses into the United States and were looking for a U.S. Trustee 
to hold funds to pay insurance claims filed by U.S. citizens. McManus 
recommended the companies to Nations Bank. Before Nations Bank ever 
made a decision about accepting the trust fund, McManus sent Nations 
Bank 2 million shares of a Nevada corporation to be used to fund one of 
the insurance companies. In performing due diligence on that company, 
Nations Bank discovered that the owner/recordholder of the stock was 
Banco de la Union; the company whose stock was sent to Nations Bank had 
its charter terminated nearly 6 months earlier; the stock was a 
restricted offering that under U.S. securities laws was required to be 
held outside the United States, and a Ronald Seale, who identified 
himself as a financial advisor to the insurance company, told Nations 
Bank that he was a shareholder of Banco de la Union and in that 
capacity had allowed the insurance company to use the name of the bank 
to hold title to the stock. Seale had eight separate complaints filed 
against him in Florida for selling discounted letters of credit related 
to oil business ventures. It turns out that the BNY documents on the 
Banco de la Union issue reveal that Seale had been a minority 
shareholder in Banco de la Union; became its President in August 1993; 
and was involved in the letter of credit controversy that involved BNY 
and the SANB correspondent account.
---------------------------------------------------------------------------
    Additionally, SANB reported to BNY that a number of forged 
checks totaling $53,000 had been written against SANB's account 
at BNY. Nine months after the checks had been cleared, SANB 
informed BNY of the forgeries and asked that its account be 
credited $53,000. The relationship manager discussed these 
matters with John Greaves, the General Manager of Swiss 
American Banking Group during a visit to SANB in April 1995. 
According to the relationship manager, SANB officials refused 
to tell him who it was that issued the checks and the 
circumstances surrounding their issuance. BNY did not press 
SANB on the matter. The relationship manager and the Division 
Head stated that these incidents raised concerns about the 
account.
    By 1996, Swiss American Banking Group had replaced Greaves 
with a new General Manager and the SANB account was of such 
concern to the BNY Division Head that she discussed the matter 
with other BNY officials, including the head of credit policy. 
A decision was made to have a set of meetings with SANB to 
pursue the issues more aggressively. There was some discussion 
of closing the account, but the new Swiss American Banking 
Group General Manager made the representation that he had a 
mandate to improve operations at the bank and requested the 
help of BNY to do so. BNY made a decision to give him the 
opportunity to improve the condition of SANB.
    In February 1996, the relationship manager addressed a 
number of frauds and suspicious transactions (including those 
addressed in the April 1995 meeting) with the new General 
Manager. These included $90,000 in forged checks in 1993; a 
fraud involving the Bank of Scotland and a SANB client; efforts 
to wire cash deposits made at BNY to SANB; and the $600,000 
stolen by DeBella in 1993. The issues were discussed at the 
meeting and the Swiss American General Manager followed up with 
a letter to BNY addressing the matters.
    Once again, the answers from SANB were incomplete and some, 
as the relationship manager described, were ``total 
contradictions.'' For example, SANB acknowledged that the 
$53,000 in forged checks involved the SANB employee who was 
responsible for reconciling the checks (i.e., confirming that 
the checks debited to the SANB account matched the record of 
disbursements in the SANB ledger), but would provide no 
additional information to BNY. SANB told BNY that the 
individual who controlled the account involved in the attempted 
fraud against the Bank of Scotland had been incarcerated and 
the account number had been re-issued to another party. The re-
issuance of the account number was described as ``unusual'' and 
``something I didn't like'' by the relationship manager. In 
discussing the DeBella fraud, SANB acknowledged that DeBella 
had been defrauding a number of people, but SANB made no 
mention of the long and extensive use that DeBella made of 
accounts at SANB to perpetrate his frauds even after SANB was 
on notice that DeBella was involved in questionable 
activities.\24\ Regarding the attempt to wire transfer cash 
deposits to SANB, BNY asked SANB to confirm that the account no 
longer existed and provide the closure date. SANB officials 
refused to provide BNY with any details of the entity whose 
account was in question except to write that ``we have no 
account, nor have we ever had an account in the name [of the 
account in question].'' The General Manager of Swiss American 
Banking Group then proceeded to suggest that the matter 
involved an account at SAB, and was being handled by Bank of 
America, which was a correspondent for SAB. No additional 
information was provided. The relationship manager described 
this response as ``total contradictions,'' adding that it was 
one more factor in the process that led to the decision to 
eventually close the account.
---------------------------------------------------------------------------
    \24\ In 1995, after DeBella was convicted in Federal Court, 
Craddock, the victim of a $600,000 swindle perpetrated by DeBella in 
1993, wrote to BNY, advised the bank of the conviction and asked for 
assistance in securing the return of his money. BNY wrote back to 
Craddock and informed him that the funds had been deposited though 
Barclays Bank and did not involve SANB's relationship with BNY. 
However, there is no indication that BNY made any connection between 
this matter and the DeBella frauds that earlier used the SANB account 
at Irving Trust and BNY. Although BNY questioned SANB about the 
Craddock funds, it made no inquiries about the SANB relationship with 
DeBella.
---------------------------------------------------------------------------
    When asked by Minority Staff why BNY did not press to 
receive more complete answers to these matters, the 
relationship manager noted that in the early 1990's banks were 
more concerned with credit risk than anything else. There was 
not much of that type of business in the Caribbean. Security 
and money laundering were not the high priority because BNY was 
not involved with a lot of offshore banks. He noted that when 
banks talked of exposure and risk, they were more concerned 
with losing money. The relationship manager noted that the 
nature of banking is changing and the international efforts to 
battle money laundering has shifted the focus of the banks. 
Meanwhile, however, BNY's relationship with SANB continued.
    During this period of time, SANB had been BNY's largest 
revenue producer in Antigua for a number of years. However, 
both the relationship manager and the Division Head stated that 
SANB was a relatively small account, and that its revenue 
position would not influence any decision whether to close the 
account. The relationship manager noted that BNY officials told 
him they would support a decision to close the account if that 
was his decision. He noted that in 1996, he wrote a memo 
recommending that BNY not accept additional accounts in some 
areas because of weak regulatory controls and it was approved 
by his superiors. The relationship manager reiterated that he 
wanted to give the new Swiss American General Manager an 
opportunity to improve operations at the bank.
    In May 1996, the Division Head again met with senior 
officers of the bank to alert them to activities and issues 
related to SANB. She recognized the matter could be a sensitive 
issue because of the position of Rappaport as a major 
shareholder of BNY and the sole owner of Swiss American. 
According to the Division Head, upper management supported her 
approach and the relationship with Rappaport did not factor 
into the decisions affecting SANB. Rather, the decision was 
made to treat the SANB relationship at arms length and not give 
it any special treatment.
    The Division Head asked the relationship manager to provide 
a summary of all of the cases involving SANB. The memo noted 
that ``all the subpoenas and check forgeries are really 
concentrated between 1993 and 1995.'' After reviewing the 
cases, the relationship manager concluded by writing:

      Clearly, all these cases at Swiss American occurred 
during the administration of Mr. John Greaves the former 
General Manager, who resigned last summer September and still 
resided on the island. . . . [T]he new GM, has been brought by 
the Board of Directors to clean the record of the institution.

      Even though this relationship has been very frustrating 
during the past 3 years we should try to extend a grace period 
to Mr. Fisher and his new team.

    He informed Minority Staff that he believed the new General 
Manager was making an effort to improve the situation at SANB. 
At that point, the Division Head instructed the relationship 
manager to continue to follow the situation and keep her 
informed.
    In November 1996, the Division Head and the relationship 
manager again met with the General Manager of Swiss American 
Banking Group. The Division Head informed Minority Staff that 
she had a lot of issues she wanted to discuss and hear from the 
General Manager in detail on each of the items. The Division 
Head wanted to stress to the General Manager that these matters 
were receiving the attention of senior management at BNY and 
that ``we have to get to the bottom of this.'' The Division 
Head also wanted to size up the General Manager and estimate 
the prospects of his ability to improve matters at SANB.
    The report of the meeting prepared by the relationship 
manager underscored the serious tone of the meeting:

      Taking in consideration all the problems the Bank of New 
York has been experiencing with this relationship, ``our 
meeting went very well.''

      Ken told us that his priority was to review and clear 
the institution of all of its problems and finally bring back 
Swiss American to profitability. He mentioned that most of the 
problems were due to the mismanagement of the previous 
administration. Problems ranged from, as he said to [sic] 
``under-reported or mis-reported'' non performing assets to the 
Board of Directors and the Eastern Caribbean Central Bank to 
suspicious offshore accounts at Swiss American National Bank.

      . . . [The Division Head] strongly restated to Mr. 
Fisher that we would close the account if there was no 
improvement in the way Swiss American conducts its businesses. 
The Bank of New York received five subpoenas regarding Swiss 
American from various U.S. agencies, during the past 16 months.

      The memo concluded by noting, ``We will keep 
monitor[ing] the account very closely.''

    When asked by Minority Staff why BNY continued to maintain 
the relationship in light of the concerns it had, the Division 
Head said it was due to a number of factors: The new General 
Manager appeared to be trying to turn things around and she 
felt BNY was having some success with him and that he was 
making progress; as a professional courtesy, BNY wanted to help 
him succeed; no one likes to terminate a client; and BNY faced 
some potential losses if the account was terminated and BNY 
wanted his help to mitigate those.
    The Division Head informed the Minority Staff that around 
the same time as the November meeting, the SANB account was put 
on the ``refer'' list, meaning the wire transfer and cash 
letter transactions of the SANB received more monitoring and 
manual intervention, and credit activity (such as clearing 
large checks or wire transactions when funds may not be 
immediately available to cover the amount of the transaction) 
had to receive the approval of the relationship manager.
    BNY was unable to locate any documents (other than monthly 
statements) that addressed the relationship during 1997. There 
are no documents to indicate any knowledge or inquiries by BNY 
of the Fortuna Alliance fraud that affected both SAB and SANB, 
despite the wide attention it received. However, in February 
1998, BNY was notified that the U.S Government had sued SAB, 
SANB and BNY-IMB for recovery of funds related to the 
Fitzgerald case. Both the Division Head and the relationship 
manager were surprised by the news of the civil action and 
concerned. The Division Head was upset that SANB had not 
advised BNY of what was a long term controversy. As the 
Division Head noted, it became a major topic during BNY's visit 
to SANB a few weeks later. According to the relationship 
manager, the BNY representatives received another surprise when 
they arrived at SANB. They learned that the General Manager of 
Swiss American Banking Group had left and SANB had a new 
General Manager. BNY had not been advised of the change. 
According to the relationship manager, the new General Manager 
``sounded the same'' as the previous GM as he laid out his 
mandate for the BNY officials.
    Regarding the lawsuit filed against the banks, the new 
General Manager told the BNY representatives that SAB was not 
at fault. He provided the history of the funds and noted that 
SAB and SANB were caught between conflicting demands of the 
Antiguan and the U.S. Government. According to the report of 
the meeting written by the relationship manager, the General 
Manager concluded his presentation of the Fitzgerald funds by 
saying ``currently nobody knows where these funds are!! The 
Antiguan Government claims they do not have them anymore!!!'' 
[emphasis included in original]
    The Division Head offered a similar account to the Minority 
Staff and characterized the claim as ``highly improbable.'' The 
Division Head was upset that SANB did not notify BNY of the 
lawsuit, but noted that the General Manager explained that he 
thought BNY would have known of the suit because of its part 
ownership of BNY-IMB. Clearly, the BNY Correspondent Banking 
Department had not been notified by its own bank, either. The 
Division Head indicated that as a result of the matter and the 
way it was handled by SANB, she was seriously considering 
terminating the relationship.
    Other information presented by the General Manager at the 
meeting raised additional concerns for the BNY representatives. 
The relationship manager's meeting report describes another 
controversial matter raised by the SANB General Manager:

      10.) [The General Manager] see [sic] future growth in 
Antigua is in Internet Gambling. This new industry in Antigua 
works as follows:

        1. When there is a sport event--boxing, football, 
soccer, etc. especially in the U.S.
        2. People will place their bet through the Internet to 
an offshore company in Antigua.
        3. Wire funds to Antigua via remittance company, 
Western Union, for example.
        4. The company will mail checks to the winner--these 
checks issued by local banks are usually drawn on U.S. banks 
(BNY, Nations Bank, etc.).

    Another offshore activity which will generate a lot of 
questions on the part of the U.S.\25\
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    \25\ Another issue raised by the General Manager also raised 
concerns. According to the relationship manager's report:

    SANB is still lending to the Antiguan Government, financing its 
deficit. However, [the general manager] told us confidentially, all of 
these loans to the government are guaranteed by the West Indies Oil 
Company, the local company owned 50% by the government and the rest by 
SANB's principal shareholder. A percentage of the taxes paid by the 
consumers on each gallon is allocated to SANB [confidential].

    According to the Division Head, this raised another question about 
Rappaport's involvement with the bank and the Antiguan Government. 
Although BNY officials had been told that Rappaport was distancing 
himself from Antigua, the information supplied by the SANB General 
Manager contradicted that. The information also raised concerns that 
Rappaport may be using financial institutions under his control to 
further his own interests.
---------------------------------------------------------------------------
    The Division Head told the Subcommittee staff that BNY had 
already been hearing a lot about Internet gambling, she wanted 
no involvement with Internet gambling proceeds being processed 
through the BNY account, and she made that very clear to the 
General Manager. Although the General Manager responded that 
the activities were being conducted through the offshore banks 
and not the domestic banks in Antigua and Barbuda, she was 
concerned that it would be difficult for the Swiss American 
Banking Group to limit the activity to its offshore bank 
because of the tie in ownership between SAB and SANB.
    The relationship manager told the Minority Staff that when 
the General Manager spoke about Internet gambling, he made up 
his mind to recommend that the account be closed. Before he 
could process his recommendation, Swiss American Banking Group 
installed another General Manager, and then BNY identified a 
series of suspicious checks that had been written against the 
SANB account.
    When the Division Head returned from the February 1998 trip 
to SANB, she wrote up a memo and had a discussion with the Head 
of the International Banking sector and an Executive Vice 
President of the Bank. The Division Head's intention was to 
bring her concerns--including the lawsuit--to the attention of 
the Executive Vice President. Her inclination was to close the 
account. She wanted the Executive Vice President to discuss the 
matter with more senior members of the bank and the BNY Board 
members who also sat on the BNY-IMB Board. The Division Head 
and the relationship manager then waited for some response for 
senior management. In October 1998, the Swiss American Group 
hired another General Manager, the third in a 1-year period.
    In December 1998, nearly 10 months after the meeting in 
Antigua at which the U.S. lawsuit and Internet gambling were 
discussed, the relationship manager reported to the BNY 
compliance department that SANB had issued six checks in 
series, two for $9,900 and four for $9,000 each. All of the 
checks were drawn on SANB's account with BNY. The relationship 
manager wrote:

      Even though Swiss American authorized the payment, we 
believe, like California Bank and Trust, that these drafts are 
highly suspicious and must be reported to the proper 
authorities. We are almost sure the negotiating bank will do 
the same soon.

    According to both the Division Head and the relationship 
manager, this was the event that triggered the closure of the 
account. In addition, SANB had again failed to notify BNY that 
a new General Manager had been hired. According to the Division 
Head, she discovered the change when SANB submitted a notice to 
the administrative office that it wanted to add the signature 
of the new General Manager to the authorized signature card for 
its account. At that point, the Division Head notified the 
Executive Vice President of her intention to close the account 
and also, as a courtesy, told the BNY Board member who sat on 
the BNY-IMB Board of her intentions.
    In reviewing the account to determine how long the 
termination period should last, the relationship manager wrote 
the following:

      I conducted a preliminary survey of SANB relationship 
with The Bank of New York, and I have to admit to you the 
relationship has been more extensive than we thought. BNY is 
subject's primary clearing bank in the U.S. It is going to take 
more than 60 days to close it down, especially SANB has 
currently two stand by letters for $500,000 and $300,000 
assigned to Visa and Mastercard.

      These slc's [standby letters of credit] guaranteed 
SANB's credit cards in the Caribbean Region. In addition, SANB 
has an average of 300 checks issued and drawn on BNY floating 
around the market, a monthly average of 250 payments going 
through the account and finally they send 3,000 cash letters 
every month.

    On January 9, 1999, the relationship manager wrote the new 
General Manager and informed him that BNY would close SANB's 
correspondent account effective March 31, 1999. SANB did not 
transfer out the balance of its account by the closing date of 
March 31. On April 8, the Division Head wrote the General 
Manager:

      Even though a 3-month deadline to March 31, 1999, was 
extended for an orderly transition to another U.S. Commercial 
Bank, to date no actions have been taken by your staff to 
reduce the number of payments and checks in your account and 
the transfer of the Visa and Master Card standby letters of 
credit.

    The Division Head told the General Manager that within 10 
days BNY would cease clearing any checks; would not process any 
payment instructions; and would notify Master and Visa Cards 
that BNY would not renew the stand by letters of credit when 
they expire.
    The Division Head instructed the General Manager to ``Take 
all appropriate measures to transfer the balance of your 
account by Friday, April 23, 1999.''
    The account was closed on June 1, 1999. The memo closing 
out the account stated:

      Latin America and The Caribbean Division closed the 
accounts of Swiss American National Bank as a result of a 
series of suspicious transactions and payments during 1997, 
1998 and 1999. The division actually received five subpoenas 
during this period from the U.S. Government concerning 
different cases of money laundering and other illegal 
activities.

      The Caribbean Desk decided to close the account at the 
end of 1998, when 50 [sic] checks were issued for $9,900 each 
in favor of one individual.

    Both the Division Head and the relationship manager told 
the Minority Staff that they should have closed the account 
sooner. When asked why no decision was made until December 
1999, nearly a year after the meeting in Antigua, the 
relationship manager told the Staff that he didn't know what to 
say, that it was a lapse on his part. He said closure of the 
account was definitely something he should have done in 1998. 
The Division Head said that in hindsight, the account should 
have been closed down sooner, right after she returned from the 
February trip to SANB.
    There were other aspects of the SANB operation that BNY did 
not pursue. In two of the meeting reports, the relationship 
manager wrote that the General Manager noted that Swiss 
American Banking Group board members were from New York and 
Chicago. When asked if they knew who the board members were, 
the relationship manager and the Division Head told the 
Minority Staff that the general managers never gave the names 
of the board members. Eventually, BNY learned the name of the 
board member in New York. When asked if they ever learned the 
name of the board member in Chicago, the Division Head told the 
Minority Staff that she and the relationship manager were never 
given the name of that board member. The relationship manager 
asked for the name a number of times and the Division Head kept 
telling the relationship manager to go back to SANB and get the 
name. She said that the situation was frustrating and that BNY 
should have known the name of the board member and SANB should 
have told BNY when asked. The board member from Chicago is the 
controversial tax attorney Burton Kanter.
    In addition, BNY was not sure of all of the entities in the 
ownership chain of SANB. Internal memos describe the ownership 
of SAB and SANB as: ``Swiss American Holdings (Panama), which 
is owned by Carlsberg (Bahamas), which is owned by a private 
Trust controlled by Rappaport.'' BNY informed the Subcommittee 
that it believes the name of the private trust is the Inter 
Maritime Foundation, but it is not sure. Although BNY knew the 
true owner of the bank, it did not have a complete 
understanding of the entities that comprise the ownership 
chain.
    BNY records related to the SANB correspondent relationship 
reveal a number of visits and exchanges, starting in mid-1995 
and continuing through 1998, in which BNY representatives 
questioned SANB management about a number of specific 
suspicious transactions and other controversial incidents 
involving the bank. In some cases, SANB officials failed to 
share all of the information they had on a matter with the BNY 
representatives. In some instances, SANB did not provide an 
accurate description of the transactions. Both the relationship 
manager and the Division Head told Minority Staff that these 
events and SANB's response raised concerns about the bank and 
its management. Yet, for a prolonged period of time, even 
though BNY closely monitored the account and its problems, and 
was concerned about the relationship, it allowed SANB to 
continue to maintain a correspondent relationship.

  (b) Bank of America

    SANB established a correspondent relationship with Bank of 
America in April 1987. The account was terminated in June 1991 
when it was replaced by an account in the name of SAB. The SAB 
account was closed in June 1999. This section focuses on SAB's 
correspondent relationship with BOA.
    The structure of BOA's International Banking Department and 
its Caribbean division, and its due diligence policies and 
ongoing monitoring programs are detailed in the case study on 
American International Bank. Minority Staff interviewed the BOA 
relationship manager who was responsible for the SANB and the 
SAB accounts from 1990 through the termination of the SAB 
account in July 1999, and senior officials from the 
correspondent banking and compliance departments of BOA.
    Prior to establishing a relationship with SAB, BOA records 
show that it had concerns about its correspondent relationship 
with SANB as far back as 1990. In August 1990, the relationship 
manager for the account wrote a call memo (a report on a visit 
with or call to the client bank) which stated: ``This is a 
privately owned bank with poor financials and obvious operating 
problems. . . . Follow-up: . . . Nothing more until financials 
improve measurably.'' When asked why BOA kept the account if it 
had the problems described, the relationship manager stated 
that BOA only performed transactional business for SANB, and 
the memo only meant that BOA needed to keep an eye on the 
account, not that SANB had violated any laws.
    In 1991, BOA established an automatic investment account 
for SANB, which allowed SANB to receive more interest on assets 
on deposit in its account. In the memo establishing the 
account, the administrative officer who handled the account 
noted, ``As per Tom Wulff watch this bank very carefully.'' The 
relationship manager explained that he was notifying the 
administrative officer that the bank was not well managed and 
should be watched, but that he did not believe that the bank 
was engaged in anything illegal. He believed that SANB was not 
sharp operationally and wanted the administrative officer to 
watch the account to make sure SANB did not do anything to hurt 
BOA.
    A few months later, in June 1991, SANB wrote to the 
account's administrative officer in New York:

      Confirming our recent conversation, we wish to close out 
the account of Swiss American National Bank of Antigua and 
initiate a new account in the name of Swiss American Bank Ltd. 
. . .

      We are making this change because the time has come to 
better divide the activities of the two entities and as the 
transactions that have been handled through Bank of America 
traditionally have been more oriented towards Swiss American 
Bank Ltd., we feel that we should have the account in that 
name.

    SANB included Articles of Association, financial statements 
and approved signatory lists for itself and SAB. No additional 
account opening material accompanied the letter and the 
relationship manager observed that it appears as if the SAB 
account was opened without anyone at BOA first making a 
determination if they wanted SAB to open an account. Yet, as an 
offshore bank, SAB potentially had a much different clientele 
and engaged in different banking activities than SANB, which 
was a domestic, commercial bank and it was regulated by a 
different authority. Domestic banks (such as SANB) are 
regulated by the Eastern Caribbean Central Bank. Offshore banks 
(such as SAB) are regulated by the jurisdiction licensing the 
bank. To the extent that the two institutions shared anything 
in common, it was the management and administration, about 
which BOA had already expressed concerns.
    The 1989 audited financial statements for SAB contained the 
following auditor's comment:

      A number of the Bank's depositors have given written 
instructions that correspondence should not be sent by the 
Bank. Consequently, we did not attempt to obtain confirmation 
of customer accounts totalling [sic] $1,931,627 credit and 
$71,972 debit.

    A similar disclaimer was included in SAB's audited 
financial statement for 1990. A BOA senior official agreed 
those disclaimers should have raised questions, noting that the 
amount cited in the 1989 financial statements ($1,931,627) 
represented approximately 20% of all deposits. There was no 
indication in the documents provided to the Subcommittee that 
the BOA relationship manager at the time noted or followed up 
on this matter.
    Another cautionary call memo was written in July 1991:

      The private ownership of this bank is known to be 
legitimate although General Manager David McManus was recently 
linked to a minor bank scandal in Anguilla when he made calls 
there with clients of the bank later found to be of 
questionable reputation.

      . . . [T]here is an ongoing investigation by the Gov. 
General's office in Anguilla concerning alleged questionable 
banking practices by their client. Reportedly, the issue 
relates to the unauthorized solicitation of funds. David 
understood and agreed that until these issues are officially 
resolved, it would not be prudent to explore further business 
opportunities between our banks.

    The next day, the relationship manager sent a message to 
the account officer in New York, stating: ``I am sending you a 
separate copy of my 7-18-91 call memo on this bank. We need to 
keep an eye on the activity in this account.''
    When asked by Minority Staff if he was concerned that BOA 
was getting involved in a banking relationship that it did not 
want to be in, the relationship manager noted that it was a 
long standing relationship, that it was not obvious that SAB 
was a different bank from SANB, and that the change in bank 
accounts was just a bookkeeping matter.
    Again in 1992, the relationship manager commented on the 
problems of SAB:

      This remains an outwardly unimpressive, disorganized and 
cluttered operation, plagued by turnover and seemingly weak 
management.

      The bank is nevertheless liquid, and frequently keeps 
very good CD balances with BINY [Bank of America International 
New York].

      It remains to be seen, however, if they can generate 
sufficient volumes to attain profitability on what must have 
been an extremely expensive start-up operation.

    When asked why BOA kept the account after recognizing 
ongoing problems at the bank for a number of years, the 
relationship manager replied: ``Why not? It was not a problem 
for me. They needed someone to clear for them. We were set up 
to do that. We had been doing that since 1987. Those [problems 
addressed in the call reports] weren't aspects of the bank that 
we were concerned with.'' When asked if the problems identified 
in the memos could lead to other kinds of problems, the manager 
noted that is why he asked the administrative officer to keep 
an eye on the account--that the problems were not illegal 
activities, but operational difficulties.
    In 1993, the relationship manager sought approval to 
establish a small revolving line of credit for SAB that would 
be used to issue commercial letters of credit and standby 
letters of credit on behalf of private banking customers. The 
credit line would be collateralized by certificate of deposits 
placed with BOA. The credit manager denied the request, noting:

      --We know little about the parentage of this bank. The 
structure appears designed to isolate the real owners and to 
take advantage of tax and regulatory havens in Panama and 
Antigua.

      --Our borrower is designed to serve an offshore market 
of private banking clientele.

      --Who controls or monitors activities?

      --We are being asked to issue SBLCs guaranteeing 
activities of their private banking clients. We don't know 
these clients. We don't know the beneficiaries. We don't even 
know at this point what kinds of loans or non payments we would 
be guaranteeing. Our standby's could be all over the place. . . .


      The potential for being blind-sided is quite pronounced 
and I am not in favor of the presentation. If we knew more 
about the parentage, respectability, integrity of the bank I 
would be willing to consider trade finance but I would continue 
to believe we should not extend credit to service their private 
banking clients.

    The relationship manager stated that although he disagreed 
with some of the comments made by the credit officer he did not 
file a reply because the issue was not worth fighting. He did 
confirm that BOA knew that the bank was owned by Rappaport.
    In 1993 and 1994, the relationship manager's call memos 
indicate that SAB appeared to turn the corner financially 
(although not operationally) and maintained good balances with 
BOA. At the same time, BOA began to receive reports of 
questionable activities involving accounts at SAB. BOA records 
show that between 1993 and 1995, SAB accounts were associated 
with fraudulent bills of exchange, sports betting activities, 
and suspicious wire transfer activity. Then in March 1995, a 
member of BOA's control and compliance department sent the 
relationship manager a fax with the message: ``This afternoon 
additional evidence of another scam where Swiss American Bank 
name is used in conjunction with their account at BINY.'' The 
information included in the fax related to a pyramid scheme 
operating through accounts established at SAB that encouraged 
victims to send funds to SAB's correspondent account at BOA. A 
notation on the fax cover sheet signed by the relationship 
manager states: ``Discussed closure of account with John 
Greaves, i.e. ceasing of ck writing and cash letters. He 
agreeable will give progress ck tomorrow.'' In May 1995 the 
relationship manager reported to the Vice President of BOA's 
International Deposit Services that major services provided to 
the SAB account were being terminated:

      I met with this bank [Swiss American] last week. They 
are well underway to replacing all of our facilities with 
Chase, and agreed that May 31 would be the deadline for the 
discontinuance of drafts drawn on us, cash letters to us, and 
Microwire and telex transfers outgoing.

    Other than the documentation cited above, there was no 
documentation on the reasons for, or the processes that led to, 
the decision to terminate the services or close the account. 
The relationship manager told the Minority Staff that he 
believed that the basis for the action was the discovery of the 
pyramid scheme. A senior BOA official told the Minority Staff 
he believed that the decision was less related to money 
laundering and more related to sloppy banking, which, in his 
opinion, may explain why BOA moved more slowly on completely 
closing the account. As a result of the actions taken, the 
account services offered to SAB were significantly reduced, as 
was the flow of funds through the account.
    Less than 2 weeks later, the relationship manager authored 
another negative memo about SAB:

      Since our decision a month ago to ask Swiss American to 
find another correspondent bank, their operation appears, if 
anything, to have worsened.

      . . . This poorly managed bank which seemed to be 
especially lacking in controls on new relationships, was 
constantly preyed upon by con artists and during the visit, it 
was noted that their account balance was inflated by approx 
$250M in checks apparently being returned unpaid, and this was 
rectified with BINY.

    At the same time, another issue presented itself when 
representatives of an entity called European Union Bank, an 
Internet bank licensed in Antigua that subsequently defrauded 
depositors of millions of dollars, approached BOA about opening 
a correspondent account. The relationship manager's call memo 
reported:

      This bank had written asking for an account relationship 
and during the visit, provided extensive documentation 
attesting to their status as a duly authorized offshore bank in 
Antigua. Ownership, however, was referred to as a group in the 
Bahamas on which they had no readily available information, 
quarters were new, unfinished and occupied mostly by computers 
and their customers are mostly ``European investors'' who they 
reach thru ``International publications'' and the Internet. 
This appears to be an example of what we do not want to get 
near.

    The material presented to BOA by European Union Bank 
representatives indicated that it had a correspondent account 
with SAB. This apparently did not result in any further 
inquiries or cause any further reevaluation of BOA's 
relationship with SAB.\26\ The account manager doesn't recall 
if it caused additional concerns, noting that he already had 
enough reason to terminate the relationship with SAB. A senior 
BOA official commented that BOA simply failed to make the 
connection between European Union Bank, its relationship with 
SAB and, as a result, its connection with BOA.
---------------------------------------------------------------------------
    \26\ The current Chairman and Managing Director of SAB told the 
Minority Staff that while European Union Bank had a corporate account 
at SAB, it never had a correspondent account at SAB.
---------------------------------------------------------------------------
    Approximately 1 year later, in July 1996, the SAB account 
was still with BOA and still the object of negative assessments 
by the relationship manager:

      It has been a year since we requested Swiss American to 
find another correspondent as the result of their continued 
operational problems, and they have at least finally managed to 
redirect their cash letter and payments business, although they 
still maintain a sizeable demand balance and are the recipients 
of a considerable volume of in-transfers. We agreed to 90 days 
for them to notify remitters and close the account totally as 
we clearly did the right thing in getting rid of this 
relationship although again, we cannot move too abruptly lest 
we be accused of damaging their business without apparent 
cause.

      . . . [T]hey also admitted to problems with their ECCB 
[Eastern Caribbean Central Bank] audit which resulted in their 
petitioning that bank for some relief, citing their previous 
management problems and steps to clean up in the meantime. 
Problems apparently included mis-classification and hidden 
loans, complicated by inadequate followup.

    The relationship manager noted the situation showed that 
with banks that have a high volume of activity, it is difficult 
to stop the flow of funds from clients. He noted that the 
termination of check clearing and wire transfer services 
stopped the potentially most harmful activities and that the 
volume of funds through the account was very low. However, the 
account remained open.
    In August 1997, more than 2 years after BOA had asked SAB 
to find another correspondent, the relationship manager wrote a 
more favorable memorandum about the client:

      Swiss American seems to have made great strides in 
getting their house in order with this, their offshore bank, 
now physically separated from the local bank and the previous 
management now long departed.

      . . . At our insistence as a result of some past dubious 
transactions which passed through their account, they also long 
ago discontinued their cash letter and electronic payments 
business with us and have since maintained just a deposit 
account through which they receive approximately 50 incoming 
payments monthly, and for which they are very appreciative. 
This seems to be a reasonable compromise as I had been hesitant 
to force them to totally close their account as we really had 
no defensible grounds.

    There is no evidence in the documentation related to the 
SAB account that BOA was aware of the major frauds involving 
accounts at Swiss American Bank, such as the Fortuna Alliance 
fraud, which was receiving a great deal of public attention at 
the time. The relationship manager told Minority Staff that in 
retrospect he had to admit some bad judgment at the time he 
wrote the memorandum cited above. He said he should not have 
been so easy on SAB and that it was not a sharp operation, but 
he never thought the bank had done anything that was illegal.
    In February 1998, BOA learned of the complaint filed 
against SAB by the U.S. Government regarding the Fitzgerald 
account. At first, the relationship manager once again agreed 
to continue the relationship with SAB:

      This is an old issue going back to the 1980's, also 
includes the Antiguan Government. As we have done in other 
cases, it was my intention to tell him to go find another 
correspondent bank, explaining that it would be in our mutual 
interest to avoid the possibility of later embarrassments 
should compliance issues, etc. arise. Also as before, it is 
difficult to be more forceful as no guilt has been proven, etc.

      Stewart Young [the Manager of Swiss American Bank] was 
totally cooperative while describing this situation as 
something which occurred long ago before the bank purged its 
management, includes heavy involvement of the local government 
which largely initiated the problem and is an issue in which 
the current bank is cooperating fully and hopeful will be 
shortly resolved.

      The bank has totally changed management and has managed 
its DF account with us in an entirely satisfactory manner for 
the past 2-3 years. It uses us only for limited transactions 
not including cash letter or funds transfers and has been 
totally cooperative with respect to the clean up of earlier 
processing problems. I therefore agreed to table this issue for 
now, while making it a matter of record.

    The relationship manager said that it was the first 
illegality involving SAB that he encountered and sympathized 
with the position of SAB, seemingly caught between conflicting 
orders of two governments. A senior BOA official pointed out 
that at that time it was BOA practice to rely heavily on the 
judgment of the relationship manager. With an account for a 
small bank, such as SAB, BOA gave great discretion to the 
relationship manager, and there would not be a lot of other 
people looking at, or asking questions about, the account. He 
told the Minority Staff that is one reason why BOA was 
revamping its policies and practices.
    In March 1998, the relationship manager received a memo 
from the BOA legal department detailing a number of inquiries 
that BOA had received about SAB and its clients. According to 
the relationship manager it was then that he realized that ``we 
had a mess beyond operational problems.'' At that point, he 
reported that he had asked SAB to close its account with BOA:

      ``I had long ago required Swiss American to discontinue 
their cashletter (clearings) and wire transfer (Microwire) 
activities with us as some transactions appeared suspect, 
although seemingly as the result of poor management. With a 
complete change of management and cessation of those 
activities, their DF account had remained open to facilitate 
in-transfers. We now have the 1/98 issue of Money Laundering 
Alert describing a possible precedent settling civil lawsuit by 
the U.S. authorities against Swiss American Bank and others, 
involving the Antiguan Government, and accusing collaboration 
with money launderers. As above, Mr. Stewart Young has today 
been asked to close their BA New York branch DF account.

    The same day, the relationship manager sent a memo to the 
administrative officer in New York:

      I have copied you on call memos noting that I today 
asked each of the banks above to close their accounts with us 
at their earliest convenience. Please monitor these balances 
accordingly and let me know if they do not close within 30 
days. As per the memos, this is the result of continued money 
laundering related inquiries.

    Yet, in July 1998 the relationship manager reported that 
the account was still open:

      The last of our overseas bank relationships in Antigua, 
Swiss American will now be transferring the remainder of their 
deposit balances with us to their existing Chase account, as 
per my earlier request. Although a very bland US $73MM balance 
sheet reflecting little more than the arbitrage of local 
deposits to offshore and a relationship otherwise satisfactory, 
the bank had been involved in some litigation between the U.S. 
Government and the local authorities concerning the ownership 
of funds in a situation which although not necessarily wrong, 
was typical of the offshore industry in Antigua and we had 
elected to terminate this account relationship. Stewart Young 
was understanding and admitted he had been slow to move as he 
had enjoyed the benefits of reciprocity.

    In June 1999, the account was still open. The relationship 
manager, meanwhile had retired from BOA. He told Minority Staff 
that when he retired he thought the account had been closed. 
However, it had not been closed and the merger with Nations 
Bank brought in an account that SAB had with Nations Bank, so 
the size of the account had grown, although the limitations on 
account services remained in place.
    Throughout the 1990's BOA appears to have been unaware of 
the frauds and controversies (such as those described at the 
beginning of this case study) that plagued the Swiss American 
Banking Group. The relationship manager noted that the history 
of the account does show that when he became aware of problems, 
he did try to stop them. A senior BOA official noted that the 
decision to completely terminate the relationship with SAB in 
1999 did not involve the relationship manager and was more of a 
business decision and was not based on the problems previously 
discussed. According to the official, the account had little 
activity, was not generating much income for BOA and there was 
no reason to bear the time and expense of keeping it open. He 
indicated that it should have been closed a long time ago, and 
was not the type of account that BOA wanted.
    On June 16, 1999, the account was finally terminated.
    This is another example of a bank that was slow to 
terminate a correspondent relationship even when it had 
questions about the client. The records of BOA's relationship 
with SAB show that over many years, BOA representatives had 
ongoing concerns about the management and organization of the 
bank. Serious questions about the ownership and purpose of SAB 
were raised by the credit department early in the relationship. 
Yet even after being confronted with questionable account 
activity and other controversial incidents, BOA curtailed but 
did not terminate the relationship; instead, it was allowed to 
continue for another 4 years.

  (c) Chase Manhattan Bank

    SANB established a correspondent relationship with Chase 
Manhattan Bank (``Chase'') in October 1981; however, BNY was 
the main correspondent for SANB. SAB established a 
correspondent relationship with Chase in April 1995. Chase was 
a major correspondent for SAB. This section focuses on Chase's 
correspondent relationship with SAB. Both accounts were 
terminated in 2000, during the Minority Staff's inquiry into 
the account.
    The structure of Chase's International Banking Department 
and its Caribbean Division, and its due diligence policies and 
ongoing monitoring programs are detailed in the case study on 
American International Bank. Since the debt crisis that 
affected Latin America in the early 1980's, Chase did not 
pursue credit relationships in many Latin American and 
Caribbean nations. In those areas Chase often did not assign 
relationship managers to serve as point of contact for the 
financial institutions in those areas. Instead, the countries 
were served by sales teams that marketed non-credit, cash 
management products. Between 1994 and 1996, the unit assigned 
to cover Antigua as well as some other Caribbean and Latin 
American countries was headed by a credit risk management 
official who supervised one and then a second account officer. 
Two of the accounts handled by the unit were SAB and SANB. 
After 1996, the credit official left the unit and the account 
officers worked under the direction of a sales team leader. 
Sale representatives sell services and products to clients but 
do not act as a relationship manager for an account. As a 
result, there was no main contact who was responsible for 
coordinating all of the responsibilities associated with the 
SAB account. The credit risk manager continued to monitor the 
account and, for nearly 4 years, raised questions about the 
relationship. However, the vacuum created by the lack of a 
single relationship manager for the SAB account delayed a 
coordinated and informed assessment of the SAB relationship.
    The account opening documentation for SAB contained little 
information on the institution other than the annual report 
supplied by SAB. Even though SAB was designed to be a 
completely different type of bank than SANB, with different 
clientele and a different regulatory authority (local Caribbean 
banks are regulated by the Eastern Caribbean Central Bank and 
offshore banks are regulated by the jurisdiction that licensed 
the bank), the sales representative relied on Chase's existing 
relationship with SANB to justify establishing a relationship 
with SAB. He wrote: ``Given that there is a DDA already opened 
in our books in n/o Swiss American National Bank of Antigua 
(DDA #001-1-87985), no further account justification comments 
are included.'' \27\
---------------------------------------------------------------------------
    \27\ The sales representative told the Minority Staff that the 
reason for so little justification in the memo may have been the fact 
that Chase had an existing relationship with SANB. He also speculated 
that there may be a missing call memo because SAB was an offshore bank 
and he usually would have questions on financials and fund flows and 
would have put the information in a memo. However his memo cited above 
indicates that he relied on the existing relationship.
---------------------------------------------------------------------------
    In September 1995, the credit risk manager asked one of the 
account administrators to initiate a daily item-by-item review 
of all debits and credits to the accounts of SAB and SANB, 
including all cash letters. By October, the review identified 
what the credit manager described as deposits that did not seem 
consistent with the business of a private offshore bank--
deposits more appropriately deposited into SANB, the onshore 
bank. In October, the credit manager issued a memo that the 
Legal Department was considering filing a criminal referral 
with the U.S. Government on the matter.
    As a result, the sales representative informed the Minority 
Staff that on his next visit to SAB in January 1996, he asked 
about the banks' anti-money laundering policies. He wrote:

      LDuring our meeting, I raised the subject of money 
laundering and asked what procedures SAB had in place to deter 
it. They said this matter was of utmost concern to them, and 
cited requirements embedded in account conditions delivered to 
every new customer (in fact, they provided me with a copy). 
They also said this subject is covered in internal guidelines 
to marketing officers. In general, I found that the threat of 
money laundering is explicitly recognized and guarded against 
by Antiguan bankers. They tend to put it in the context that it 
is not worth risking the legitimate offshore business; tax 
avoidance and asset protection, for the huge downside of taking 
on the illegitimate offshore business; drug-related.

    The sales representative who managed the SAB and SANB 
accounts from 1995 through September 1996 and again from 
February 1999 through their closure in 2000, stated that issue 
was the only questionable activity he had heard of regarding 
the SAB accounts during the 1995-1996 period.
    The sales representative told the Minority Staff that to 
him money laundering always had the connotation of money from 
drug trafficking. He viewed offshore activity as a means for 
individuals to set up entities (IBCs, trusts) and accounts that 
would enable them to deposit funds so that they would be immune 
to foreign exchange violations.
    In March 1996, the credit officer wrote a memo to the sales 
representative regarding the owner of SAB:

      My sources tell me that ``international financier'' 
Bruce Rappaport, the alleged owner of Swiss American, is an 
Israeli shipowner who established Maritime Bank in Switzerland, 
now BONY-Maritime with Rappaport still the Chairman. We once 
had credit lines to Maritime, but we became ``uncomfortable'' 
and canceled them (this all happened before BNY bought into the 
operation).

      Rappaport is a controversial figure--his supporters 
would probably characterize him as aggressive, innovative and 
entrepreneurial. His detractors would probably choose far less 
kind words to describe him. As best as I can tell, however, he 
could be called a ``Donald Trump type'', but not a ``Robert 
Vesco type'', i.e. he's a wheeler-dealer but has no known 
involvement with any truly nefarious activities (e.g., drugs). 
Obviously, our colleagues at BNY seem to consider him a 
respectable partner.

    The sales representative stated that he probably knew that 
Rappaport was the owner of SAB when he called on the bank in 
1995, but he would not have known the significance of the name. 
He stated that he probably noted in a call report who the owner 
was, but if no one reading the memo knew anything about 
Rappaport, it would have had no bearing on the decision to open 
the account. The sales representative who was responsible for 
the account from September 1996 through February 1999 said she 
learned of Rappaport's ownership of SAB during a meeting with 
Business Development Manager of Swiss American Banking Group in 
October 1997.
    In June 1997, Chase received a subpoena for documents and 
statements related to the SAB and SANB accounts. When the 
credit risk manager learned of the subpoenas in October of that 
year, he again raised questions about the client to the 
compliance officer and operation risk manager for cash 
management services:

      You may remember that we recently closed the DDA of 
American International Bank, Antigua, and I was surprised that 
there was no concurrent government investigation of Swiss 
American (which was the inspiration for American Int'l).

      Looks like somebody is interested.

      Do you know if Swiss American ever comes up in your 
meetings with Legal re suspicious transactions?

    The credit risk manager told the Minority Staff that he 
recalled that AIB was closed because of the general nature of 
its activities. He understood that AIB was started by former 
SAB people trying to replicate SAB and he thought SAB would 
also be investigated because of its size and similarity of 
marketing strategy. He noted that although he had no specific 
responsibility for the SAB accounts at that time, in addition 
to the subpoena, he had heard of some incidents over a period 
of years where SAB was mentioned as having been involved in 
situations where their customers were alleged to have been 
involved in questionable activities, and used SAB accounts as 
repositories for illicit funds. He said the incidents involved 
a fraud, an investment scheme, a theft of funds from a U.S. 
bank, and an incident involving German customs. The credit risk 
manager observed that he could not state whether the incidents 
were significant given SAB's size, but he was trying to be pro-
active.
    The sales representative who took over the SAB and SANB 
accounts in September 1996 was copied on the internal e-mail 
regarding the subpoenas, but did not recall the matter and did 
not perform any follow up on the issue. Other than the credit 
risk manager's memo cited above, there is no indication that 
the subpoenas occasioned any review of the SAB accounts or any 
follow up with the client.
    In 1996 and 1997, the Fortuna Alliance fraud received 
national attention. Millions of dollars taken in the fraud 
moved through SAB's account at Chase. In fact, in the months of 
April and May 1996, the amount of funds wired by the Fortuna 
Alliance into the SAB account at Chase represented 31% and 18%, 
respectively, of all deposits into the SAB account ($3.4 
million of $10.7 million in April and $1.6 million of $8.8 
million in May). Yet, there is no indication in any of the 
documents provided to the Subcommittee by Chase that indicate 
that those responsible for the account were aware of the fraud 
or that anyone in Chase followed up with SAB on the matter.
    In August 1998, a member of Chase's fraud prevention unit 
wrote to the sales representative to report that he was 
informed by another U.S. bank that a client of SAB had 
fraudulently transferred money out of the U.S. bank and into 
its account at SAB. The U.S. bank contacted Chase to see if 
Chase could assist in obtaining a return of the funds from SAB. 
He concluded his message with the following:

      Our records show that Swiss American has been suspected 
of money laundering. Can you tell me whether this is an account 
that Chase will continue to maintain.

    The sales representative told Minority Staff that she was 
not aware of any records that showed that SAB had been 
suspected of money laundering and said there was no specific 
proof that SAB was involved in money laundering with respect to 
the funds that were transferred out of the U.S. bank and into 
SAB. The sales representative reported that SAB claimed the 
funds were already gone and had liability concerns about 
returning the funds to the U.S. bank. She also wrote to the 
credit risk manager:

      I explained to [the member of the Fraud Prevention Unit] 
that SAB may not necessarily be consciously money laundering 
but was used as a conduit by their customer just as some 
Mexican banks recently involved in money laundering had used 
Chase as a conduit. In addition, I explained that the revenue 
from this account was at least $100k per annum and we are not 
going to make a rush to judgment to close the account 
immediately.

    The credit risk manager noted that revenue of $100,000 is 
moderately attractive but not huge and that if someone had 
truly challenged and substantiated shortcomings in the 
integrity of a customer, he could not imagine that any of his 
colleagues would use revenue as a reason to keep the client if 
trust had been broken.
    In October 1998, Chase officials initiated a follow up on 
the U.S. Government's legal action against SAB regarding the 
Fitzgerald case. The U.S. Government filed a complaint against 
SAB and some of its related entities in December 1997. By 
February 1998, the news of the case had been widely circulated 
and, as described above, BNY and BOA, began to follow up with 
SAB on the matter. Chase did not respond until later. The sales 
representative told the Minority Staff that SAB's business 
manager notified her of the matter in June 1998. She told the 
Subcommittee staff that she decided to wait for the outcome of 
the case and see what needed to be done at that time. She noted 
that the matter did not really involve Chase. As a result, she 
did not pass the matter on to legal investigations. The August 
8 memo by a Fraud Prevention official alluding to allegations 
of money laundering (cited above) may reflect an awareness of 
SAB's connection to the Fitzgerald case, but it is not certain. 
However, there are no indications in the documents supplied to 
the Subcommittee that Chase had pursued the issue with SAB 
until October 1998, about 10 months after the legal action was 
initiated.
    According to the sales representative, the credit risk 
manager called her in October, after a Wall Street Journal 
article announced the case had been dismissed. At that point, 
the credit risk manager began to look at the matter, and called 
the sales representative.
    The credit risk manager recalled that he first became aware 
of the matter when he learned that the case against SAB had 
been dismissed.\28\ It also drew the attention of his 
superiors. He noted it was not clear whether SAB was unjustly 
accused or still under suspicion, and he asked the sales 
representative for some underlying information. According to 
the sales representative, this request coincided with one of 
her periodic trips to SAB and she questioned the Managing 
Director about the incident when she visited the bank in 
November 1998. She reported that the Managing Director told her 
that the United States tried to collect the funds from SAB 
after it had unsuccessfully tried to collect the money from the 
Antiguan Government. However, SAB turned the funds over to the 
Antiguan Government at the request of the government.\29\ The 
sales representative reported that the Managing Director 
provided documentation to her and she forwarded it to risk 
management. According to the sales representative, there was no 
additional action taken by Chase after the information was 
received from the Managing Director.
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    \28\ The credit risk manager told the Subcommittee staff that he 
believed that the date when he first learned of the issue was in July 
1998, when the case had been dismissed. However, the case was not 
dismissed until October, and this is when the sales representative 
recalls being contacted by the credit risk manager. So it may be that 
the credit risk manager did not learn of the issue until October 1998.
    \29\ This account is not accurate. As described above, SAB 
initiated the transfer to the Government of Antigua and Barbuda. It was 
not ordered to do so.
---------------------------------------------------------------------------
    Notes from the sales team leader, written in November 1998, 
state:

      ``Call 11/15/98 Ken Brown . . . his boss is furious 
about the news published in the Wall Street J. on the U.S. 
Gov't losing the case against SAB for lack of merit . . . He 
wants to close the account. I tell him no unless we have a 
universal policy in the region, but it is up to them. . . . A 
couple of days later the boss reluctantly relented. For the 
time, at least, they are ok. . . . The pressure from the U.S. 
Gov't is likely to keep increasing, so these kind of accounts 
are very likely to die anytime soon, anyway, because of the 
cost of complying with rules, if nothing else.''

    The credit risk manager stated that he received SAB's 
explanation from the sales representative, and it appeared to 
him as if SAB had stepped in and saved the funds and that the 
situation was another case of a fraud perpetrated by customers 
but nothing to suggest any complicity on the part of the SAB. 
When he conveyed that information to his superior, the account 
was allowed to remain open.
    When asked if Chase should have known about this incident 
earlier than it did, the credit manager told the Minority Staff 
that if the relationship with SAB had been a credit 
relationship, or there was a relationship manager for the 
account, the information would have conveyed earlier and Chase 
would have expected SAB to pass the information on earlier. 
Since it was a non-credit relationship and there was no 
relationship manager, it was not a situation where Chase would 
expect SAB to give it news. Since there was no relationship 
manager, the sales representative was the logical contact point 
but it was not her job to be the focal point for the 
relationship.
    In November 1998, the credit risk manager made a series of 
internal inquiries about the SAB account. He told Minority 
Staff that because there was no relationship manager for the 
account and he was the credit risk manager, he was receiving a 
lot of piecemeal information about the SAB account, some of 
which identified incidents involving SAB. He told the Minority 
Staff that concern about the relationship was growing because 
it had to be viewed from a big picture. The account had been 
solicited under circumstances and a marketing strategy that no 
longer existed at Chase. Chase solicited the client and SAB had 
terminated or reduced relationships with other U.S. banks 
because of the interest that the Chase sales force showed to 
it. According to the credit risk manager, because of that Chase 
could not in good conscience just terminate the account because 
of unease with the relationship if SAB was making reasonable 
efforts to make sure its clients were appropriate. The credit 
risk manager stated that when the account was opened, Chase 
knew that SAB would have to take extra precautions because of 
the nature of its business and the potential clients it would 
attract. Chase had been led to believe that SAB was extra 
cautious, but the growing number of incidents led him to 
question if SAB was taking the precautions. He decided to take 
the responsibility to coordinate the collection of information 
on SAB to pull together a more complete picture of the client 
and the relationship.
    The credit risk manager made inquiries in a number of Chase 
departments about the account. One hand written note of a 
conversation with the fraud prevention and investigations unit 
reads:

      ``Generally bad rep. But not on anybody's hit list.''

     He also asked the fraud department to identify instances 
where the SAB account had caused some concern. The official in 
the fraud department who followed up on the credit risk 
manager's request wrote the following memo:

      Inquiry initiated upon request of [credit risk manager], 
Treasury Solutions, who was undertaking a review of our 
relationship with captioned bank in light of recent publicity 
regarding laundered money being turned over to the Government 
of Antigua and Barbuda by Swiss American. Inquiry revealed that 
captioned bank has come to official attention as a suspected 
repository of proceeds of con games; however, there is no 
present indication that the bank is currently considered a 
money laundering institution. We are aware that in several 
instances, phony wire transactions have designated customers of 
Swiss American as beneficiaries, and in at least one such 
instance, the beneficiary was suspected of operating a scam in 
the past. Considering the difficulties in determining actual 
ownership of the bank, its location, the operating environment 
of these offshore banks, and the questions raised above, 
recommend that we exercise especial caution dealing with this 
entity if a decision is made to continue our relationship at 
all. [Credit risk manager] advised.

    According to the credit risk manager, the response he 
received identified incidents that were small relative to other 
frauds, and not in the major league swindle category, that 
Chase has seen. According to the credit risk manager there was 
nothing to indicate that SAB had been anything but an innocent 
victim. He noted it did not have a perfect system to screen 
account holders, but no one did. Chase was aware that SAB was 
soliciting business broadly and that it had accepted a lot of 
clients who were not from Antigua and it was difficult to 
obtain references on such clients. The issue was whether SAB 
had been less than prudent in accepting clients. He concluded 
that nothing he saw suggested the bank had been less than 
honorable.
     He stated that at the time he considered sending the 
results of his research to the sales representative with 
instructions to get all of the information on the relationship 
collected and out in the open so that an informed and 
coordinated decision could be made on the account. However, he 
said at the time it did not seem illogical to conclude that SAB 
met Chase's standards, so he did not go to the sales 
representative. Eventually, he did take that step.
    However, the reports provided to the credit risk manager 
did not address some of the major controversies involving SAB, 
such as the involvement of SAB officers in money laundering and 
frauds such as the DeBella case. Nor did it mention the Fortuna 
Alliance fraud which did involve the Chase correspondent 
account.
    Other issues began to arise with respect to SAB. During a 
site visit to SAB in November 1998 (when the U.S. legal action 
against SAB was discussed), the sales representative learned 
that SAB was serving Internet gambling accounts. She told 
Minority Staff that she had noticed that there was an increase 
in the volume of checks issued by SAB each month and when she 
inquired about the matter she learned of the gambling accounts. 
In her call memo, this issue was discussed as part of a 
proposal to supply SAB with a new service to speed the issuance 
of checks:

      --CPS--Check Print--Proposal was sent prior to the 
visit. . . . Check issue is now close to 2,000 per month and 
likely to double in 1999. Part of the volume is coming from 
checks issued to winners of the virtual casino players on the 
Internet; their customers instruct payee to be paid via fax and 
an indemnification is provided. Virtual casino is licensed in 
Antigua. An article from the Interactive Gaming Council titled 
``Congress Strips Internet Gaming Prohibition From Final Budget 
Bill'' dated October 21, 1998 was given to us (dated October 
21, 1998).

    The sales team leader who accompanied the sale 
representative on the visit also noted SAB's Internet gambling 
accounts:

      The reason behind the increase in transactions with us, 
mainly paper checks, is because they are conducting the 
payments for casinos in the island, especially those that use 
the Internet. They are very careful to send winners' checks 
immediately, via mail, directly from the island to the 
beneficiary, as soon as they are so requested, to avoid 
damaging the casino's image. The way this works is that the 
gaming occurs by debiting a credit card, and winners get a 
refund of winnings the same day as the original debt; any 
positive balance, or wins over current account, are sent via 
check.

    As noted in a previous section that discusses Internet 
gambling, it is illegal in the United States to place wagers by 
the Internet. In addition to the questions of legality, there 
is an increased risk of money laundering. The sales 
representatives who handled the SAB accounts were not aware of 
these issues. The sales representatives who learned of SAB 
gambling-related accounts in 1998 told the Minority Staff that 
she did not know the activity was illegal, that it was based on 
licensed Antiguan entities, and she never received any feedback 
from her superiors that gambling-related accounts were a 
problem or a concern. She noted that the General Manager of SAB 
had provided her with notice that Congress had defeated 
attempts to make Internet gambling illegal. When asked if it 
raised concerns from a money laundering perspective, the sales 
representative said no because it was legal in Antigua and not 
illegal under U.S. law.
    The sales representative who took over the SAB account in 
February 1999 learned that SAB was servicing gambling-related 
accounts when he took over the account and read the memo of the 
sales team leader. He told Minority Staff that he did not 
discuss the issue with SAB because he believed that everything 
Chase needed to know about the matter was already on record and 
he did not think Internet gambling was illicit. The sales 
representative said it did not cause any concerns for him, the 
information had been recorded by his boss (the sales team 
leader), and if it didn't cause his boss any concern he didn't 
see why it should raise a concern for him.
    He also did not recall anyone raising a concern about Chase 
being a correspondent for a bank that serviced gambling-related 
accounts. He was unaware that Internet gambling companies were 
instructing their clients to forward their funds through SAB's 
correspondent account at Chase. However, he said that even if 
he was aware of that activity, it would not have caused a 
concern for him unless he had prior knowledge that the activity 
was illegal, and he did not know that.
    The credit risk manager believed that he became aware that 
SAB was servicing gambling-related accounts in early 2000, when 
he assisted in answering an inquiry about why SAB was 
projecting that it would use 10,000 checks per month and it was 
determined that the increased volume was related to issuing 
checks to customers of gambling institutions.\30\ He didn't 
receive or read the sales representative's November 1998 memo 
on the matter. He noted that he is still unaware if anything 
SAB did with respect to Internet gambling is illegal, and he 
presumed it to be legal. He did not recall discussing with 
anyone whether it was legal or not and doesn't know if anyone 
had made an inquiry on that matter. He did not recall 
discussing the issues of reputational risk or money laundering 
because so many of the checks were small and there didn't seem 
to be any substantial movement of money.
---------------------------------------------------------------------------
    \30\ It is possible that the credit risk manager first learned of 
the gambling connection in late 1999. In November 1999, Chase noticed a 
series of payments going to several Antiguan concerns that appeared to 
be gambling establishments. It was subsequently confirmed that the 
entities were gambling institutions. The credit risk manager was 
involved in the effort to identify the institutions. In March 2000, 
there was an inquiry regarding SAB's projections that it would need 
10,000 checks per month. It was determined that the volume was due to 
gambling-related payments. The credit risk manager was also involved in 
that inquiry.
---------------------------------------------------------------------------
    He noted that one of the duties of a relationship manager 
would have been to follow all customer activities and put all 
of the pieces of the puzzle together. Because the SAB account 
did not have a relationship manager, this did not happen.
    From the responses of the Chase personnel and the lack of 
any attention to this matter in the account documents provided 
to the Subcommittee by Chase, it appears that the legal and 
money laundering issues associated with Internet gambling 
received little, if any attention. Yet, there was clear 
evidence that this activity represented a significant part of 
SAB's business and the SAB correspondent account at Chase was a 
major vehicle for the flow of those funds. As noted above, both 
the sales representative and the sales team leader identified 
Internet gambling as the reason behind SAB's increased 
transactions through the Chase account; inquiries about 
payments made through the SAB account identified Internet 
gambling activity and accounts at SAB in 1998; and in 1999, 
Chase was advised that SAB's monthly use of checks would expand 
significantly due to Internet gambling-related payments.
    Beyond those items already noted, the size of the monthly 
statement for the SAB account at Chase suddenly expanded from 
approximately 50 pages per month to about 150 pages per month. 
By late 1998 the size of the monthly statements had grown to 
approximately 400-450 pages and over 500 pages long by the end 
of 1999. A significant portion of the increase appears due to 
the increased number of transactions related to collection and 
payments of funds related to Internet gambling activities. The 
Subcommittee staff reviewed five monthly account statements 
from 1998 and 1999. The amount of funds deposited into the SAB 
account for further credit to entities that were clearly 
identified as Internet gambling enterprises were $1.5 million 
(January 1998); $938,000 (May 1998); $3.1 million (November 
1998); $6.3 million (May 1999); and $6.9 million (September 
1999).\31\ These figures represent 10%, 5%, 20%, 30% and 22%, 
respectively, of the total deposits into the SAB correspondent 
account at Chase during those months. In March 1998, the U.S. 
Attorney for the Southern District of New York indicted 21 
owners, managers and employees of 11 Internet sports betting 
firms for collecting wagers from U.S. citizens over the 
Internet. One of those indicted was Jay Cohen, one of the 
owners of World Sports Exchange (``WSE''), an Internet sports 
betting operation. Cohen was tried and convicted in Federal 
District Court in New York in 1999 for criminal violation of 
the Federal wire act for engaging in gambling over the 
Internet. WSE was a client of SAB. Many transactions processed 
through the SAB account at Chase were for the WSE. Chase 
records were subpoenaed for the trial and a Chase employee 
provided testimony at the trial about check and wire transfer 
activity in the SAB account at Chase that involved WSE. In July 
and August 2000, the Minority Staff searched the Internet and 
identified hundreds of Internet gambling sites that instructed 
clients to wire funds to the SAB account at Chase Manhattan 
Bank.
---------------------------------------------------------------------------
    \31\ The credits totaled for each month were only the credits that 
were registered for, the benefit of entities that the Subcommittee 
could clearly identify as being related to Internet gambling. There may 
have been additional gambling-related deposits not included in these 
totals because the name of the beneficiary of the funds was not clearly 
identifiable as an Internet gambling entity. Monthly debits were more 
difficult to total because many of the pay outs were to the individual 
bettors, not to the gambling firms.
---------------------------------------------------------------------------
    Yet, there is no evidence that any of these incidents 
caused any concerns or raised any questions within Chase or 
resulted in any question of SAB activity or clients until the 
account was finally terminated in August 2000.
    In early August 2000, the Minority Staff informed Chase 
personnel of recent U.S. Federal and State court determinations 
that betting over the Internet is a violation of U.S. law, and 
that the staff had identified hundreds of Internet gambling web 
sites that instructed customers to forward funds through the 
SAB account at Chase. On August 18, 2000, the sales team leader 
wrote to the General Manager of the Swiss American Banking 
Group to reaffirm that the Swiss American accounts at Chase 
would be closed on September 14. In that letter he also wrote:

      Moreover, it has come to our attention that customers of 
yours have created websites on the Internet, numbering in the 
hundreds, in which they advertise Internet gambling services, 
and in some instances plainly link these sites to sites 
offering pornographic materials, and include Chase's name and 
at times incorrectly identify Chase as your affiliate. This 
unauthorized use of Chase's name on public websites is 
unacceptable, and we insist that you inform your customers who 
operate such sites to remove Chase's name from them. More 
importantly, Chase has learned that at least one U.S. Federal 
court has recently determined that conducting Internet gambling 
operations within the United States is a criminal violation of 
U.S. law. I am sure that in light of this you agree with me 
that it would be inappropriate for your accounts with us to 
continue to be used by your customers who operate Internet 
gambling sites to either receive funds from or send funds to 
persons within the United States, and we expect that you will 
immediately advise your customers who conduct Internet gambling 
operations of that fact and that such transmissions will cease.

    In September 1999, the credit risk manager learned that the 
Chase compliance department had been using the flow of the 
Fitzgerald funds through SAB and SANB as an illustration of a 
money laundering scheme in its training materials. The 
illustration involved SAB and SANB and noted the relationships 
between the two banks as well as Rappaport. When asked, if the 
fact that the banks were used as examples in Chase's anti-money 
laundering training raised additional concerns about the bank's 
correspondent relationship with Chase, the credit risk manager 
noted that the SAB had been cleared of the case used in the 
training illustration and no one in compliance had told him 
that SAB was doing something wrong and should not be a client.
    In the Fall of 1999, two events occurred that caused the 
credit risk manager to conduct another review of the SAB and 
SANB relationships. SAB asked Chase to open foreign currency 
accounts for SAB and SANB in London.\32\ Because the accounts 
allowed withdrawals in different currencies, there was a 
possibility that the account could be overdrawn. This type of 
account required a credit rating and approval by a separate 
credit risk group. In an attempt to avoid writing up a new 
memo, the sales representative asked the credit risk manager to 
vouch for the account. The sales representative told Minority 
Staff that he realized that Chase was reaching a new juncture 
with the account and would have to make a decision whether to 
move ahead with it. He believed that if the credit risk manager 
signed off on the new account, the credit risk group would also 
approve it. He also believed that the credit risk manager 
wanted a strong recommendation from the sales team. If that was 
provided, the sales representative believed that the credit 
risk manager would sign off on the expansion of the account. He 
wrote to his sales team manager seeking advice:
---------------------------------------------------------------------------
    \32\ In addition to the request by SAB and SANB to open foreign 
exchange accounts in London, the credit risk manager saw newspaper 
accounts that reported on possible ties that Rappaport and his bank, 
BNY-IMB, had with some of the individuals and companies associated with 
the flow of billions of dollars of Russian money through BNY, some of 
which may have passed through Rappaport's bank, BNY-IMB. The press 
attention also focused on past controversies involving Rappaport. As a 
result of such reports, the credit risk manager sent a memo to a Chase 
employee in Europe who followed the BNY-IMB correspondent account at 
Chase. He wrote asking what actions, if any, Chase might be taking with 
respect to the BNY-IMB account. He noted that Chase was reviewing the 
relationship with SAB/SANB:

      It is rather crucial as Swiss American is seeking to open 
additional DDA's and expand business with CMB. We would obviously be 
``influenced'' by CMB-Switzerland's perspective.

    The credit risk manager later reported to colleagues that the 
employee in Switzerland reported that she expected the account to be 
closed. At the same time, the credit risk manager asked the sales 
representative to ask SAB about its ownership and relationship with 
BNY-IMB. When asked why Chase did not already possess such information 
about a client, the credit risk manager told Minority Staff that the 
information is something Chase would ask for when opening a 
relationship, but it is not something it would ask for during a 
relationship because there is no annual review of a non-credit 
relationship.
    The sales representative reported back that SAB and SANB were owned 
by Swiss America Holdings Company and that Swiss America Holdings 
Company was owned by Carlsberg. However there was no mention of the 
charitable trust that owned Carlsberg.
    The sales representative also reported some information on the 
relationship of Rappaport to BNY-IMB, but some of the information he 
reported was incorrect. He concluded his memo to the credit risk 
manager by writing:

      My conclusion is that we MAY have some indirect, common 
ownership by Rappaport in Swiss American and Intermaritime. However, 
whereas his ownership of Swiss American is full and unquestionable, it 
is unclear whether he even has principal or controlling interest in 
Intermaritime Bank of New York. Brian Stuart Young can address the 
Swiss American ownership details, but it would be unreasonable for me 
to press him for details on the Intermaritime side of the ledger.

    Thus, basic information about the ownership structure of its 
correspondents SAB and SANB, and important information about other 
banking interests of the owner of SAB/SANB were not fully known to 
Chase years after it established relationships with SAB and SANB, and 
the sales representative was reluctant to inquire about them.
    Also in the Fall of 1999, the credit risk manager notified his 
colleagues that there were ``numerous accounts of Caribbean and other 
non-U.S. banks'' that had been established by Chase divisions, other 
than the division that normally handled correspondent banking 
relationships. He noted that two Antiguan banks--Antigua Overseas Bank 
and Worldwide International Bank--had been opened by the United Nations 
Branch of Chase. In a follow up memo, he noted:

    Just wanted everyone to be aware that there are DDA's residing 
elsewhere in CMB which are outside my Team's ``jurisdiction'' and thus 
not subject to our screening or monitoring. [emphasis in original]

    One colleague replied:

    Obviously, ``know your customer'' policies, presumably have been 
covered off and someone looks after them. Also, I believe that the 
SCO's [senior credit officers] should be aware of corporate and 
institutional names in their respective countries.

    Another colleague wrote:

    My own unscientific rating of certain geographic locations 
includes the presumption (biased, obviously) that anything from Antigua 
or Tortola is probably diseased and contagious and should be avoided 
like mosquitos in Queens. I hope that KYC criteria have been followed 
here--as the UN branch has dealt with int'l accounts for a long time, 
hopefully they were on the ball in these cases. Meanwhile, my head is 
going back into the sand on this one.

    Chase officials told the Minority Staff that the individual who 
wrote the memo meant that because Antigua Overseas Bank and Worldwide 
International Bank were not in his department, they were not his 
responsibility and he didn't know anything about them.

      LI spoke with the on-shore affiliate [SANB] [in the] 
morning, and they asked me to open FX accounts in London. Then, 
now in the afternoon, . . . the offshore [SAB] also asked me to 
---------------------------------------------------------------------------
open up the same. . . .

      What I see coming at Chase is a situation similar to 
[another account], where we operate with no eventuality with 
what exists, but when it comes to open a new account[s], there 
are complications, since they require that Risk Management 
approve, etc. I don't know what the [credit risk manager in 
London] will ask, but he will certainly want something from the 
client manager (???), and whom will we ask to guarantee the 
name?

      What should we do? [A Swiss American official] is going 
to be in Miami. . . . Is it time to tell him frankly that 
opening a new account would give us a lot of problems? . . . 
[W]hich makes me think . . . I just sent them a proposal [for a 
check disbursement account]. Now I'm asking myself if [the 
credit risk manager] will authorize that account? What do you 
recommend?

      (Just recently [the credit risk manager and someone from 
compliance] have been asking about the nature of a client at 
SAB, because of a series of MO's [money orders] that had passed 
through the account and whose name they did not recognize).

    The sales team manager responded:

      Talk with [the credit manager] and suggest the theory 
that as long as Chase doesn't decide otherwise, they are a 
``client in good standing'' and there's no reason to deny them 
service. I will speak with [another Chase official] on Tuesday 
if it's not going well. If [the credit risk manager] says no (I 
don't see why he would be more papist than the people) you and 
I will talk to him together on Tuesday, what do you think?

    The sales representative told the Minority Staff that he 
realized that the account was at that time ``wounded.'' It had 
been tainted because of some of the previous incidents and 
attention given to it. When asked if he wanted to keep the 
account open, the sales representative told the Minority Staff 
that the account was important to him ``revenue wise''. It was 
important for him to get clear direction from his boss to close 
it, and he said that he was getting the opposite--SAB was a 
citizen in good standing, so why close it. He then pressed the 
credit risk manager for a memo vouching for the account. In 
late December 1999, the credit risk manager responded:

      PRIVATE/CONFIDENTIAL/OFF THE RECORD

      SAB is getting too much bad press--it's even used as a 
Case Study in our Money Laundering Training. It must be 
rigorously examined without further delay. If Credit raises the 
issue, they're ``under attack'' from the outset. If you raise 
the issue (``the best defense is a good offense''), you may 
still have a shot. [And if we all do nothing, we will all look 
like idiots, plus any request for new accounts/services will 
most probably be denied.]

      Here's what I suggest:

      A) Lay out the background on SAB
      B) Describe what you want to do, and
      C) Describe how you propose to ``police'' them.
      D) Get Skea's support (since Ken Lay is lame duck at 
this point)
      E) Seek concurrence of John Stevens and Chris Carlin

      By ``background'', I mean a succinct but honest listing 
of the pluses and minuses, such as (not necessarily complete):

      PLUSES:
      We solicited them, not them/us.
      DDA has been conducted properly--no issue whatsoever.
      Good revenue generator.
      I've reviewed their Cash Letters--nothing suspicious.
      To best of our knowledge, their strategy (soliciting PBI 
types via Frequent Flyer magazines and Website) is completely 
legal--probably no different from our own PBI activities.
      Per their statement, customer base is about 80% US/
Canadian; 20% European; only 2% Latin American (i.e., not the 
Medellin Cartel).
      Only 15 customers have accounts > $500M; only 4-5 > $1MM 
(again, not exactly major drug dealer profile).
      Management completely open with us.
      They themselves have been quick to pull the plug on 
suspicious customers.

      MINUSES:
      Not a ``strategic'' customer.
      Their domicile (Antigua) lax.
      They've been drawn into several frauds/money laundering 
incidents but were cleared.
      Their strategy undoubtedly attracts individuals evading 
taxes in their home countries.
      Ownership (Bruce Rappaport) is controversial.

      By ``what you want to do'' I mean:
      Absolutely no credit facilities (I presume)
      Maintain existing business plus accept new accounts (I 
presume)

      By ``how do you police them'' I mean:
      CMB visits
      Other conditions, controls, informational requirements, 
etc. (for example, continuing to review Cash Letters, getting 
info on customer base, etc. on a periodic basis)

    The credit risk manager told the Minority staff that there 
were individuals throughout the organization who were 
expressing concern about the relationship (and he would even 
include himself in that group). He told the sales 
representative that without a relationship manager to handle 
the account, the sales representative should assume the 
responsibility to pull all of the information about the account 
together have a comprehensive analysis of the relationship. The 
credit risk manager felt if Chase officials could satisfy 
themselves that SAB was an innocent victim, then they might be 
convinced that it was still an acceptable client. The credit 
risk manager felt that it was necessary to achieve some 
consensus on the account.
    The sales representative told the Minority Staff that after 
the credit risk manager's memo was issued, there was no need 
for the sales team manager to speak with the credit risk 
manager. Instead, he needed to speak to more senior officials 
in sales. It was clear that the credit risk manager wanted the 
sales team to sign off. The sales manager said he encouraged 
the sales team leader to speak to more senior sales officials, 
but the sales team never signed off.
    In early January 2000, the sales representative spoke with 
an official of SAB and noted that he told the SAB official 
that,

      ``[W]e will not move to open FX accounts for them in 
London until we are able to re-position SAB internally as 
regards risk management.''

    The sales representative told the Minority Staff that 
opening new accounts would require introducing a whole new set 
of people at Chase to SAB and the history of the account and 
would require a whole new initiative and the support to do that 
did not exist at the current time. He told the SAB official 
that they could revisit the issue in 6 months.
    In March 2000, a new check disbursement account was opened 
for SAB. The sales representative told the Subcommittee staff 
that, unlike the new accounts discussed in December and 
January, the checking disbursement account was an offshoot of 
the existing DDA account that SAB held in New York. He told 
Subcommittee staff that he was not required to go through a new 
account opening process for that service (as he was with the 
foreign exchange accounts discussed above) and he was not sure 
that he was required to go through risk management. He noted 
that it appeared that the credit risk manager was not sure 
either. He said that the fact that news of the new service 
never got to the credit risk manager until after it was opened 
is a function of how custom service felt it had to route the 
program to get it into the system.
    He said the credit risk manager never spoke to him about 
the issue, nor did he ever hear that the credit risk manager 
was concerned or frustrated that the account had been opened 
up.
    The credit risk manager agreed that additional accounts for 
U.S. corporate names can be opened by the sales representatives 
without additional sign off from the risk management 
department. He noted that the sales representative had 
mentioned the new service a few months earlier and advised it 
would provide Chase with greater control over the disbursement 
of checks. The credit risk manager believed it was a logical 
explanation, but had advised the sales representative to 
complete the analysis he outlined in his December 21 memo 
before any new accounts were opened. When he learned that a new 
account had been opened, the credit risk manager told the 
Minority Staff that he felt he had asked that the future of the 
SAB account be discussed before any new accounts were opened. 
However, he did not feel that the sales representative was 
trying to go around him, since he would inevitably receive 
notice that the new account was being established.
    As noted above, however, the opening of the account did 
draw the attention of Chase officials when it was noted on the 
account form that SAB was projecting a monthly volume of 10,000 
checks.\33\
---------------------------------------------------------------------------
    \33\ The sales representative told the Minority Staff that he is 
not sure where the projected monthly volume of 10,000 checks 
originated. He was not sure that was the number he gave to the 
administrator. He said that based on earlier conversations with SAB, 
the number 10,000 would be a lot less and he questioned the validity of 
the 10,000 figure.
---------------------------------------------------------------------------
    The credit risk manager told the Minority Staff that it was 
during 2000 that Chase officials from the credit, sales and 
compliance/risk divisions discussed the SAB and SANB accounts. 
The concern was that given the publicity around the account and 
the man hours that Chase had devoted to the relationship, it 
was no longer a good fit for Chase. The officials decided to 
terminate the relationship.
    On April 28, 2000, the sales representative wrote to Swiss 
American Banking Group and informed it that Chase was going to 
terminate its accounts due to a ``lack of strategic fit.'' The 
sales representative told the Minority Staff that he did not 
participate in any conversations that presumably led to the 
decision to terminate the accounts. He was asked to communicate 
the decision to the client and wrote the letter. He noted that 
he had a general conversation with the sales team leader about 
the terminations of the accounts and the leader noted that they 
could not defend the account any longer, the pressure was 
building.
    Initially, Chase asked SAB to close the account within 30 
days. According to the credit risk manager, SAB retained 
counsel who approached Chase and informed Chase that SAB was 
trying hard to find a new correspondent, but could not meet the 
30-day deadline. The counsel suggested that if Chase shut down 
the account before SAB could locate elsewhere, SAB might sue 
Chase. The sales team leader told Chase officials that SAB was 
working to find a new correspondent and should be able to close 
the account within a matter of weeks. Chase told SAB that if it 
ceased all activity in the account, it would extend the account 
to clear outstanding checks.
    In August 2000, the account was still open. On August 14, 
the sales team leader wrote to SAB and told bank officials that 
Chase would close the accounts by September 14 unless they were 
closed sooner by SAB. SAB requested a 30 day extension of the 
September 14 date. Chase refused and the accounts were closed 
on October 5, 2000.
    Efforts were made by the credit risk manager to monitor the 
relationship with SAB. However, his efforts were hampered by a 
number of factors. Because of the non-credit nature of the 
relationship, there was not a single individual who served as 
the relationship manager or central point of contact for the 
account. SAB was slow to convey information to Chase. Sales 
representatives did not closely monitor the relationship and at 
times did not act on important information that they received. 
The bank was unaware of controversial activities that were 
associated with the account, and was slow to respond to the 
proliferating account activity related to Internet gambling. 
These factors precluded a complete and coordinated review of 
the relationship. As a result, the relationship was maintained 
until late in the summer of 2000.

B. THE ISSUES

    SAB and SANB have had a long history of controversial 
leadership, questionable activity by corporate officers, 
accounts that served as repositories for funds from frauds and 
other illicit activities, and a reluctance to fully cooperate 
with efforts of enforcement officials to seize the proceeds of 
illicit activities that were in the bank. More recently, SAB 
has serviced accounts that are related to Internet gambling, an 
activity that is vulnerable to money laundering and illegal in 
the United States.
    Despite this history, until recently SAB and SANB have been 
able to maintain correspondent accounts at some of the largest 
and most prestigious U.S. banks, including Bank of New York, 
Bank of America, and Chase Manhattan Bank. These relationships 
can be characterized by failure of the U.S. correspondents to 
respond more quickly and decisively to patterns of problems and 
questionable activities in the relationship and inadequate due 
diligence and ongoing monitoring.
    Throughout their relationship with SAB and SANB, the U.S. 
banks were continually confronted with, or making inquiries 
about, problems and questionable activities associated with the 
SAB/SANB accounts. Yet, the relationships were allowed to 
continue for long periods of time--even years--after the 
problems began to surface. One bank--BNY--even experienced 
occasions when SANB was slow, or simply refused, to provide 
information relevant to important issues related to the 
correspondent banking relationship. The relationship managers 
for BOA and BNY stated that they should have terminated the 
relationships earlier than they did.
    The banks' failure to act more quickly and decisively 
stemmed in part from what appears to have been a general 
convention throughout the correspondent banking field--a 
reluctance to sever a relationship once it is established. This 
reluctance stems from both a sense of customer loyalty and a 
concern about liability for damages that may result from 
severing a relationship. When a correspondent account is also a 
significant revenue generator, there is even more incentive to 
give the client an opportunity to correct its problems before 
terminating a relationship. While there is no indication that 
the banks in these relationships knowingly ignored illegal 
behavior, these factors will often cause correspondent banks to 
repeatedly give their client the benefit of the doubt and to 
continue relationships in the hope that clients will correct 
problems, or repeatedly extend termination dates to allow 
clients time to find new correspondents. While this practice 
may be changing as the nature of international finance and the 
business strategies of major banks shift, it was certainly a 
factor in the SAB and SANB relationships.

      Chase was slow to address SAB about the large amount of 
Internet gambling proceeds that were flowing through SAB's 
correspondent account at its New York branch, even when 
numerous Internet gambling firms were indicted by U.S. 
Government officials and a Chase employee was called to testify 
at a criminal prosecution involving one of the Internet 
gambling establishments that used the SAB correspondent 
account.

      BNY apparently did little or no follow up on illegal 
activities through the SANB correspondent accounts at its New 
York branch, even though their personnel were directly 
contacted by prosecutors involved in the DeBella case.

      BOA made a determination to terminate its correspondent 
relationship with SAB in 1995. While it significantly reduced 
the services it offered to the bank at that time, the 
relationship continued for an additional 4 years after that 
decision was made.

      BNY-IMB, a foreign affiliate of BNY, has been serving as 
a conduit for SAB's Internet gambling clients, even though BNY 
does not want to service Internet gambling business.

      All three U.S. banks accepted SAB and SANB's account of 
their dispute with the U.S. Government regarding the Fitzgerald 
affair, with little or no effort to independently verify the 
facts.

    The history of the relationships with SAB and SANB also 
reveal weaknesses in the due diligence and ongoing monitoring 
practices of the U.S. correspondents. Fundamental issues 
regarding the management and structure of the banks appear to 
have been unknown to the relationship managers. While all three 
banks reviewed in this case study followed up on matters that 
came to their attention and one bank attempted to be pro-active 
in reviewing the relationship, initial due diligence and 
ongoing monitoring failed to identify key issues and major 
problems and controversies that involving SAB and SANB, 
resulting in an incomplete information base from which to 
assess the relationship.

      Chase and BOA initiated a correspondent relationship 
with SAB with little or no due diligence, relying on their 
previous connections with SANB. The banks failed to recognize 
the fact that SAB was an entirely different type of bank than 
SANB, with different clientele, different purposes and a 
different regulator. It presented a potentially different type 
of correspondent relationship from SANB and a different set of 
money laundering vulnerabilities.

      Although the banks knew that Rappaport was the 
beneficial owner of SAB and SANB, they did not know the 
identity of all of the entities in the ownership chain, nor did 
any inquire why the ownership of the bank was structured 
through a series of trusts and IBCs that were formed in secrecy 
jurisdictions.

      The banks apparently were unaware of the controversial 
history and activities of a number of board members of SAB and 
SANB, and made no inquiries about them.

      Banks appear to have been unaware of many of the major 
frauds and other illegal activities that used SAB or SANB as 
repositories for illicit funds, even when their own 
institutions had been used as the conduit for the flow of funds 
from a particular fraud to SAB or SANB.

      Chase was unaware that hundreds of web sites of Internet 
gambling clients of SAB were instructing customers to send 
wagers through the correspondent account at its bank, even 
though Internet gambling in the United States is illegal under 
U.S. law.

    Interviews with the correspondent banks related to the SAB 
and SANB relationships once again highlighted a pattern present 
in many of the case studies included in this report: non-credit 
foreign bank relationships do not receive the same level of 
attention and scrutiny as credit relationships, contributing to 
lapses and oversights in the due diligence and ongoing 
monitoring process.

      For example, the credit risk manager at Chase stated 
that the monitoring of non-credit relationships is generally 
reactive. Even when an attempt was made to be pro-active in the 
monitoring of the SAB account, because of the non-credit nature 
of the relationship there was not a single person who served as 
the focal point for the relationship. The result was that Chase 
did not receive timely information from its client, 
questionable activities and frauds associated with the account 
were not identified and the effort to conduct a coordinated and 
fully informed review of the relationship was hindered.

      The relationship manager at BNY explained that the bank 
did not press SANB to get more information about questionable 
account activity because in the early 1990's banks were more 
concerned with credit risk than vulnerability to money 
laundering.

    The discrepancy in the level of scrutiny given to the 
different types of relationships is underscored by the memo 
written by a BOA credit manager in response to a request to 
extend a fully collateralized revolving line of credit to SAB. 
His memo raised questions about the ownership, structure and 
purpose of the bank and who controls and monitors its 
activities. This reflected a level of scrutiny and evaluation 
that was often missing in the non-credit relationships that 
existed between SAB and SANB and their U.S. correspondent 
banks.
                      Case Histories Nos. 9 and 10


                               M.A. BANK


                              FEDERAL BANK

    M.A. Bank of the Cayman Islands and Federal Bank of the 
Bahamas are two offshore banks affiliated with larger 
commercial operations in Argentina. Federal Bank's license was 
suspended on February 13, 2001, by the Bahamian Government 
after 9 years of operation; M.A. Bank remains open for business 
after nearly 10 years of operation. Both banks were shell 
banks: they had no physical office for conducting banking 
business with customers, and they existed through their 
correspondent relationships. Neither bank had an Argentinian 
banking license despite cultivating an Argentinian clientele 
and Argentinian banking activities and neither ever underwent 
an examination by any banking regulator. Yet both offshore 
shell banks were able to open U.S. dollar accounts at Citibank 
New York, obtain Citibank automated systems for sending 
international U.S. dollar wire transfers, and move more than a 
billion dollars through their U.S. accounts. $7.7 million of 
that was illegal drug money in the case of M.A. Bank and $1 
million was bribe money in the case of Federal Bank.
    This case history examines the due diligence and monitoring 
failures of their U.S. correspondent bank, Citibank, which 
enabled these two high risk foreign banks to gain entry to the 
U.S. banking system. They include Citibank's failure to realize 
that both banks were essentially operating in Argentina without 
a license, its failure to realize that a $7.7 million seizure 
order for M.A. Bank targeted illegal drug proceeds from a 
Mexican drug cartel, its failure to realize that M.A. Bank 
operated without basic fiscal controls and far outside the 
parameters of normal banking practice, its failure to learn 
that Federal Bank had no anti-money laundering program, and its 
failure to provide accurate and complete answers to Argentinian 
bank regulators' questions about the ownership and activities 
of Federal Bank.
    Information pertaining to M.A. Bank was obtained from 
documents provided by the Government of the United States and 
Citibank, court pleadings, interviews of government officials 
and other persons in Argentina, Mexico, the United States and 
the Cayman Islands, and other materials. Key sources of 
information were interviews with an official from the U.S. 
Federal Reserve Board of Governors (March and November 2000), 
relationship managers and other officials from Citibank (May 
and October 2000), and copies of interviews of the principals 
of M.A. Bank conducted by agents of the U.S. Customs Service in 
June 1999. The U.S. Customs Service conducted an investigation 
of MAB and M.A. Casa de Cambio as a follow up to an undercover 
drug operation. The investigation included interviews, in June 
1999, with the principals of MAB and regulators in Argentina. 
Much of the Minority Staff's understanding of the operations of 
MAB was gained from the records of those interviews. The 
investigation also sent written questions to MAB officials, but 
they declined to provide any information.
    Information pertaining to Federal Bank was obtained from 
the bank records of Banco Republica, Federal Bank, and American 
Exchange Company, provided by Citibank pursuant to subpoena; 
interviews with Citibank officials; interviews with two Members 
of the National Congress of the Argentine Republic, Elisa 
Carrio and Gustavo Gutierrez, and their staffs; and copies of 
audits of Banco Republica conducted by the Central Bank of 
Argentina, one commenced in 1996, concluded in 1997, and 
reported on in July 1998 and the other commenced in July 1998 
and dated August 1998. The Minority Staff invited the owners of 
Federal Bank, both directly (by letter on September 15, 2000, 
to Jorge Maschwitz, attorney for the bank in Uruguay) and 
through their agents (by letter on January 8, 2001, to the 
bank's registered agent, Winterbotham Trust Company Ltd., of 
Nassau, Bahamas) to provide any information with respect to the 
bank and to answer Subcommittee questions. There has been no 
response. The Bahamas Central Bank revoked the license of 
Federal Bank Ltd. on February 13, 2001.

A. THE FACTS

                               M.A. BANK

    M.A. Bank is a shell bank licensed by the Cayman Islands 
with no physical office anywhere. M.A. Bank has never been 
examined by a regulatory body of any jurisdiction. The owners 
and officers of M.A. Bank (``MAB'') exploited the gaps in the 
regulation of offshore banks to structure a banking operation 
with poor controls and operating procedures that are an 
invitation for money laundering and tax evasion. This case 
study shows how inadequate due diligence and ongoing monitoring 
by M.A. Bank's correspondent bank enabled M.A. Bank to utilize 
its correspondent relationship to access the U.S. financial 
network and engage in highly suspicious financial transactions 
for more than 1\1/2\ years after assets in its account were 
seized for illegal activity.

  (1) M.A. Bank Ownership and Management

    M.A. Bank is part of a group of Argentine finance, 
investment and currency exchange entities, collectively known 
as Mercado Abierto Group (``the M.A. Group'' ).\34\ The M.A. 
Group is owned and managed by three individuals: Miguel 
Iribarne, Aldo Luis Ducler and Hector Scasserra. These 
individuals also hold positions as officers in other entities 
of the M.A. Group, including M.A. Bank. All three are former 
government officials. Iribarne worked in the Ministry of 
Economy for 14 years, attaining the position of Undersecretary 
for the Economy. Scasserra was the Director of the National 
Development Bank, Minister of the Interior and also worked in 
the Ministry of Economy. Ducler is a former Secretary of 
Finance.
---------------------------------------------------------------------------
    \34\ Entities that are part of the M.A. Group include: Mercado 
Abierto S.A., an over-the-counter securities broker-dealer that 
functions primarily as an asset management company, which is the major 
owner of all of the other entities in the M.A. Group; M.A. Casa de 
Cambio, a currency exchange house; M.A. Valores Sociedad de Bolsa, an 
entity that operates within the Buenos Aires stock market; M.A. Capital 
Markets, a merchant bank that deals with mergers and acquisitions. 
Mercado Abierto, S.A. owns the entities in the following proportions: 
MAB (60%); M.A. Casa de Cambio (97%); M.A. Valores Sociedad de Bolsa 
(97%); M.A. Capital Markets. [In the original publication of this 
report in February 2001, footnote read ``M.A. Capital Markets (97%). 
This percentage reported was an error. No percentage of ownership was 
reported in the documents cited.] Source: ``Basic Information Report,'' 
supplied by Citibank, translated from Spanish by CRS; M.A. Bank Limited 
Financial Statements and Independent Auditors' Report for 1998; and 
Mercado Abierto, S.A., Annual Report and Financial Statements as of 
June 30, 1998.
---------------------------------------------------------------------------
    According to its financial statements, MAB was registered 
in the Cayman Islands on September 23, 1991 as Petra 
Investments Bank, but one day later it changed its name to M.A. 
Bank. It was issued a Category ``B'' banking license (an 
offshore banking license) on October 22, 1991. M.A. Bank's main 
activities are listed as those related to securities trading 
and the administration of investment portfolios for its own 
accounts and its customers' accounts.
    In its financial statements, M.A. Bank reports that it is 
owned by Mercado Abierto, S.A., one of the entities that is 
part of the Mercado Abierto group, and Sigma Financial 
Corporation. During interviews of Ducler, Scassera and Iribarne 
conducted by agents of the U.S. Customs Service in June 1999, a 
review of MAB's articles of incorporation showed that 60% of 
MAB is owned by Mercado Abierto, S.A. and the remaining 40% is 
owned by Sigma Financial Corporation. Upon questioning by a 
Customs agent, Iribarne revealed that Sigma Financial 
Corporation, a Cayman Islands company, was owned by Iribarne, 
Scasserra and Ducler. According to the Customs interview, 
Iribarne said that this structure was created for ``tax 
purposes.'' Customs agent notes from the interview state:

      Miguel Iribarne explained that the Cayman Islands have 
rules about the amount of capital M.A. Bank must have in 
relation to deposits. Over the years M.A. Bank has increased 
their amount of capital. This makes the profits subject to 
taxation in Argentina. So, they received authorization from the 
Cayman authorities to establish another corporation that owns 
40% of M.A. Bank. This reduces their taxes in Argentina by 40%. 
Miguel Iribarne stated that Sigma Financial is only in the 
Caymans, so they do not have to pay the taxes in Argentina.

    Minutes of a Sigma Board of Director's meeting lists a 
former Mercado Abierto employee as the sole director of Sigma. 
According to the Customs interviews, Iribarne told the Customs 
agent, ``They did this for `tax purposes' so none of their 
names would appear on the documents for Sigma Financial.''
    MAB's administrative agent in the Caymans is Coutts and 
Company; MAB has no physical presence and conducts no business 
from the Cayman Islands. MAB also has a representative in 
Uruguay, Elenberg-Guttfraind & Associates.

  (2) Financial Information and Primary Activities

    The stated primary purpose of MAB is to provide offshore 
banking and investment services to clients of Mercado Abierto. 
As described above, the main activities of MAB are trading 
securities and the management of investment portfolios. MAB 
offers clients access to international markets for the 
acquisition of bonds or other investments that they could not 
acquire through Argentine-regulated investment firms and 
provides a vehicle for depositing funds outside of Argentina. 
According to Citibank officials, because of Argentine financial 
regulations, financial institutions that are licensed in 
Argentina are limited in the securities and bonds they can 
offer to clients. Therefore, most financial institutions, in 
order to provide their clients with a full range of 
international investment opportunities, establish foreign 
banking entities that are licensed in a jurisdiction other than 
Argentina and are therefore able to offer clients a broader 
range of investment opportunities. The MAB's 1998 financial 
statement reported that it had $37 million in assets and $26 
million in deposits at the end of 1998. The bank did not 
respond to a request for information about its primary 
activities and the number of clients and accounts it 
serviced.\35\
---------------------------------------------------------------------------
    \35\ In March 2000, Senator Levin wrote to the counsel for MAB and 
requested that the bank provide a general description of its activities 
and information on, among other things, its assets and the number of 
its clients and accounts. He asked that the bank provide answers to his 
inquiries by April 26. MAB never provided any information or answers to 
Senator Levin. In April, Senator Levin received a copy of a letter sent 
to Chairman Collins by MAB's new attorney in the United States. The 
attorney referred to Senator Levin's letter to MAB and stated:

    I am not in a position to address your inquiries at this time. I 
have just been retained on this case, which has been going on for 
several years. Obviously I am just now learning about the facts, and as 
I am sure you are aware this is a complex case which cannot be mastered 
in a moment's time. I will be meeting with my clients face to face in 
the very near future and I will continue in my efforts to review the 
extensive materials. I will write you again when I learn the facts of 
this case. Obviously I cannot comply with your April 26, 2000 deadline.

    To date, MAB has not supplied any information to the Subcommittee.
---------------------------------------------------------------------------

  (3) M.A. Bank's Correspondents

    MAB had U.S. correspondent accounts with Swiss Bank 
Corporation (now Union Bank of Switzerland) from January 1992 
to May 1995, and with Citibank from September 1994 to March 
2000. MAB also had additional correspondent accounts in Europe 
and South America for payments, transfers and settlements 
involving foreign currencies and securities.

  (4) M.A. Bank Operations and Anti-Money Laundering Controls

    An MAB official told a U.S. Customs agent that MAB does not 
accept unknown clients. To open an account at MAB, MAB said an 
individual must be referred by an existing client, already have 
an investment with Mercado Abierto or be someone who is known 
to the officers of MAB. According to an MAB official, the bank 
has know-your-customer (``KYC'') rules similar to those 
employed in banks in the U.S. The Minority Staff obtained a 
copy of a three-page MAB document titled ``Policies and 
procedures to prevent money laundering activities.'' The 
document identifies the policies and procedures for 
establishing new relationships and servicing accounts. They are 
organized under four topics: ``Know the Customer,'' ``Forbidden 
Transactions,'' ``Transactions to be closely monitored and 
reported to the management,'' and ``Considerations to be taken 
when analyzing suspicious transactions.'' The policies and 
procedures included the following: the customer's true identity 
must be known; all suspicious transactions must be immediately 
reported to the management; cash deposits and withdrawals are 
forbidden. However, as revealed through the interviews of MAB 
officials by the U.S. Customs Service, top officials at MAB 
were aware that these policies and procedures were not followed 
at MAB.

  (5) Regulatory Oversight

    MAB is licensed as a Class B (offshore) bank in the Cayman 
Islands. Other than its registered agent, it has no physical 
presence in the Cayman Islands, and it is prohibited from doing 
business with residents of the Cayman Islands.\36\ Offshore 
banks are required to submit annual audited financial 
statements to the Cayman Islands Monetary Authority (``CIMA''), 
the governmental entity that regulates banks in the country, 
but offshore banks are not required to keep their records in 
the Cayman Islands.
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    \36\ M.A. Bank's representative in Uruguay, Elenberg-Gotfraind & 
Assoc., informed the Minority Staff that MAB has a ``physical and legal 
presence and address in Georgetown, Grand Cayman (Coutts & Co. Cayman 
Ltd).'' However, this is nothing more than an agent's office. M.A. Bank 
has no office or staff in the Cayman Islands, and in interviews with 
the Customs Service, one of the owners of M.A. Bank stated that MAB had 
no offices in the Caymans.
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    In 1991, when M.A. Bank first received its offshore banking 
license, the Cayman Islands still permitted the licensing of a 
bank which was not a branch or subsidiary of another bank, 
which planned to keep its employees and banking records outside 
of the Cayman Islands, and which planned to have no physical 
presence on the island other than a mailing address at a local 
registered agent. The Cayman Islands has since discontinued 
issuing such bank licenses, but has allowed its existing 
offshore shell banks to retain their Cayman licenses. In 2000, 
for the first time, Cayman banking authorities began a bank 
examination process which requires bank examiners, acting on 
behalf of the government, to conduct an independent inspection 
of the bank records and operations of Cayman licensed banks. 
Prior to this program, Cayman banking authorities oversaw 
Cayman banks primarily by analyzing information submitted by 
those licensed banks or their auditors. The new Cayman 
examination program requires an independent review of records 
and includes sending Cayman examiners to conduct on-site visits 
of Cayman banks that keep employees and records outside of the 
Cayman Islands.\37\ However, M.A. Bank, despite nearly 10 years 
of operation, has yet to undergo any bank examination or site 
visit by any bank regulator, whether from the Cayman Islands, 
Argentina or any other country.
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    \37\ For a general description of the status of anti-money 
laundering efforts in Argentina, see the Regulatory Oversight section 
in the Federal Bank discussion.
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    MAB is required to have an agent that represents it in the 
Cayman Islands, and is responsible for accepting notices from 
CIMA and providing information required or requested by the 
regulatory authorities. MAB is represented by Coutts and 
Company. The Coutts official who handles the MAB account told 
the Minority Staff that Coutts' only function is to serve as a 
point of contact for government officials. Coutts does not 
maintain any records, nor does it perform any activities with 
respect to MAB's banking activities.
    Although the M.A. Group operates out of Argentina, MAB is 
not licensed to operate in Argentina and is not regulated by 
the Central Bank of Argentina. According to the Customs 
interviews, one of the principals told the U.S. Customs agent 
that:

      . . . they [MAB] do not need a license [in Argentina] 
because [MAB] is an offshore bank. Miguel Iribarne told [the 
Customs agent] that the administrative offices for M.A. Bank 
are located in Montevideo, Uruguay . . . When [the Customs 
agent] asked, why do they do this? Miguel Iribarne responded 
that M.A. Bank is an offshore bank, if they had offices in 
Argentina they would be subject to regulation by the Central 
Bank.

    MAB has an administrative office in Uruguay at an auditing/
consulting firm called Elenberg-Gutfraind & Associates. 
According to the principals of Elenberg-Gutfraind, the firm is 
registered with the Central Bank of Uruguay as a representative 
of MAB. However, it does not appear that any type of 
administrative activities related to banking or customer 
services takes place at that office. In a letter to the 
Minority Staff, the principals of Elenberg-Gutfraind explained 
that their relationship with the M.A. Group (including MAB), 
included consulting advice and technical assistance related to 
audits of the bank. Essentially, the firm ``received and sent 
documents and correspondence which are essential for the 
fulfillment of the audit.'' From the information provided, it 
appears as if MAB's administrative office in Uruguay is a 
representative or agent office that may maintain documents or 
records. Neither the principals of MAB nor the principals of 
Elenberg-Gutfraind made any suggestion or offered any 
information that MAB was licensed in, or regulated by, Uruguay.
    A Special Examiner from the U.S. Federal Reserve Board of 
Governors who accompanied a U.S. Customs agent during their 
interviews of MAB owners and officials in June 1999 told the 
Minority Staff that the investigation established that MAB did 
not have a physical presence anywhere other than Argentina. 
According to the Special Examiner, ``M.A. Bank is nothing more 
than an account holder at Citibank.'' The examiner noted that 
through that account, MAB can receive and make wire transfers, 
deposits and withdrawals. According to the examiner, its 
account is no different from any checking or savings account an 
individual would set up, and through that account MAB could 
process transactions for all of its customers.

  (6) Money Laundering and Fraud Involving M.A. Bank

  (a) Laundering of Drug Proceeds through M.A. Bank

    In May 1998, the Department of Justice announced the 
conclusion of a 3-year undercover drug operation called 
``Casablanca.'' In the undercover operation, U.S. Customs 
agents infiltrated the Amado Carillo Fuentes drug organization 
(``the Juarez cartel''), posing as money launderers. As part of 
the operation, the agents laundered money for the cartel 
through a number of Mexican and Venezuelan banks. As an 
outgrowth of the original operation, the agents also collected 
cash from cartel drug operations in the region of Chicago and 
laundered the money back to foreign banks and money houses 
through correspondent accounts maintained at banks operating in 
the United States. Over a period of one year (May 1997-May 
1998), $43 million was wire transferred to specific accounts 
identified to the undercover agents by members of the Juarez 
cartel.\38\
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    \38\ Records obtained from the Customs Department indicate that 
Jose Alvarez Tostado, a lieutenant in the Juarez cartel, had telefaxed 
the undercover agents a list of banks and accounts that had been 
established to receive the transfer of the funds. The fax identified 10 
different accounts, including two accounts at Citibank.
---------------------------------------------------------------------------
    The U.S. Government filed seizure warrants for the drug-
related funds in those accounts in May 1998. Among the affected 
accounts were two accounts in the New York branch office of 
Citibank, One belonged to M.A. Bank; the other belonged to M.A. 
Casa de Cambio. According to a government undercover agent, 
$7.7 million in drug proceeds had been deposited in the account 
of M.A. Bank and $3.9 million had been transferred into the 
account of M.A. Casa de Cambio.
    Between August 12, 1997, and January 7, 1998, a total of 
$3.983 million was transferred into the M.A. Casa de Cambio 
account at Citibank New York in eight separate transactions by 
U.S. Customs undercover agents acting under instructions from 
representatives of the Juarez cartel. Between August 12, 1997, 
and April 1, 1998 a total of $7.768 million was transferred 
into the M.A. Bank account at Citibank New York in 18 separate 
transactions by U.S. Customs undercover agents acting under 
instructions from representatives of the Juarez cartel. In 
seven of the eight transfers to the Citibank M.A. Casa de 
Cambio account and in nine of the 18 transfers to the Citibank 
M.A. Bank account, the wire instructed that the funds were for 
the benefit of Nicholas DiTullio. DiTullio is a real estate 
agent in Argentina and an account holder at M.A. Bank. His 
account was opened on July 10, 1997, approximately one month 
before the drug-related transfers started.\39\
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    \39\ According to the Complaint for Forfeiture filed by the U.S. 
Government, the account was opened up after DiTullio was approached by 
two individuals, named Jorge Iniguez and Jaime Martinez-Aryon, who 
wanted assistance in acquiring real estate in Argentina. Iniguez is a 
former Group Supervisor of the Mexican Federal Judicial Police. While 
in that position, he became involved in the distribution of marijuana 
in Mexico. In 1991 he was arrested in California and eventually 
convicted on Federal charges of conspiracy to import 800 pounds of 
marijuana into the United States. In order to facilitate the transfer 
of funds for the purchase of properties, DiTullio offered to open an 
account through which Mr. Iniguez could transfer funds from the U.S. to 
Argentina. DiTullio recommended that an account be opened with MAB and/
or M.A. Casa de Cambio and arranged a meeting between himself, Ducler 
and Iniguez. The account was opened in Mr. DiTullio's name because 
Ducler would not open an account in Mr. Iniguez' name because of the 
source of the funds to be laundered through the account. Instead, 
Ducler suggested that one or more accounts be opened in DiTullio's 
name, and that those accounts be used to transfer the funds to 
Argentina. Complaint for Forfeiture (U.S. District Court for the 
Central District of California, Western Division, No. cv 00-01493), 2/
10/00.
---------------------------------------------------------------------------
    When the U.S. Government presented seizure warrants for the 
accounts in question, only $1.569 million remained in the MAB 
account and $234,000 remained in the M.A. Casa De Cambio 
account. The remainder of the drug deposits had been wired 
transferred out of the accounts to Argentina. After the seizure 
of the $1.8 million remaining in the accounts on May 18, 1998, 
MAB sought return of this money, based on the defense that it 
was an innocent bank.\40\
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    \40\ Under current law, the funds deposited into a correspondent 
bank account do not belong to the depositor but to the bank. Therefore, 
the government cannot seize the funds based on the wrongdoing of the 
depositor. In order to seize the money from the bank's correspondent 
account, the government must show that the bank was facilitating the 
laundering of illicit gains. Otherwise the bank has an ``innocent 
bank'' defense. The only way for the government to seize the illicit 
funds, without proving culpability by the bank, is to file a complaint 
in the jurisdiction where the depositor has his account, and this is 
often a foreign jurisdiction.
---------------------------------------------------------------------------
    The U.S. Customs Service carried out an investigation of 
MAB and M.A. Casa de Cambio which included interviews, in June 
1999, with the principals of MAB and regulators in Argentina. 
As a result of the investigation, on February 10, 2000, the 
U.S. Government filed a complaint to seize the funds in the 
accounts of MAB and M.A. Casa de Cambio on the grounds that the 
officials of the bank and the Casa de Cambio were aiding the 
laundering of funds. The complaint alleged in part:

      . . . Dueler caused to be opened one or more accounts at 
M.A. Bank, M.A. Casa de Cambio and/or Mercado Abierto in the 
name of DiTullio. It was understood by Dueler, DiTullio and 
Iniguez that said accounts would be used to transfer drug 
proceeds from the United States to Argentina, and that said 
proceeds would then be paid out of the account(s) to DiTullio 
for delivery to Iniguez. The government is informed and 
believes and thereon alleges that the opening of the account(s) 
in DiTullio's name was designed to disguise the nature, source 
and ownership of the drug proceeds that were to be filtered 
through the account(s), and that Dueler was aware of the true 
nature and source of the funds, i.e., drugs. In opening the 
account(s), Dueler intentionally dispensed with virtually all 
of the standard internal controls and processes generally 
required to open accounts with M.A. Bank and/or M.A. Casa de 
Cambio.

      . . . Drug proceeds belonging to the Juarez Cartel would 
be picked up in Chicago, as set forth in paragraph 16 above, 
and then wire transferred to the Citibank accounts of M.A. Casa 
de Cambio and M.A. Bank, as set forth in paragraphs 17 (a) and 
(b) above. The monies would then be credited and paid by M.A. 
Casa de Cambio and M.A. Bank to DiTullio.

      . . . Despite the various names given as the 
beneficiaries of the money transfers listed above, all of the 
transferred funds were in fact paid by M.A. Bank and M.A. Casa 
de Cambio to Nicolas DiTullio (``DiTullio''), either in U.S. 
currency or by cashier's check. The government alleges that 
DiTullio, Dueler, Iniguez and Martinez-Ayon, among others, were 
participants in a money laundering conspiracy, the object of 
which was to convert drug proceeds from the Chicago pickups 
into currency and checks issued by M.A. Bank and M.A. Casa de 
Cambio in Argentina.

      . . . Based upon the above facts, there is probable 
cause to believe that M.A. Bank and M.A. Casa de Cambio 
knowingly used the Citibank accounts referred to in paragraphs 
17 (a) and (b) to launder money in violation of 18 U.S.C. 
Sec. Sec. 1956 (a)(1), 1956 (b) and 1957. Accordingly, there is 
further probable cause to believe that funds contained in the 
above-referenced accounts are subject to seizure and forfeiture 
to the United States pursuant to 18 U.S.C. Sec. 981(a) (1). 
Additionally, to the extent that the specific funds contained 
in the accounts are not the same monies that were involved in 
the money laundering transactions, there is probable cause to 
believe that those funds have merely replaced identical 
property previously on deposit in the accounts (which identical 
property was in fact involved in money laundering) and are 
therefore subject to seizure and forfeiture to the United 
States pursuant to 18 U.S.C. Sec. 984.

    On June 9, 2000, the U.S. Government and the owners of the 
M.A. Group reached a settlement on the disposition of $1.8 
million in seized funds. The U.S. Government retained $1.2 
million and the owners of the M.A. Group received $600,000. 
Subsequent to the settlement, Aldo Ducler, one of the owners of 
the M.A. Group and MAB, placed a full page advertisement in the 
Argentine newspaper, La Nacion. The advertisement, entitled, 
``The Truth of the Facts'' portrayed the settlement agreement 
with the United States as a vindication of the actions of MAB 
and its owners.\41\
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    \41\ It, in part, stated:
    The conclusions of this exhaustive investigation (by the U.S. 
Government) resulted in the signing of a bilateral agreement between 
the United States, the Department of Justice, and the Department of 
Treasury of the United States, and our entities and directors, signed 
June 9, 2000 and stamped (registered) in the judicial district of 
California June 18 by Judge Spencer. Under this agreement the 
Government of the United States desists of any judicial action, and 
expressly clarified that there was no culpability or fault by any side. 
More specifically it eliminates the possibility of any new legal claim 
in this case. In addition it implies the recognition and acceptance by 
the United States that:

    --The director of M.A. at all times acted within compliance of all 
legal applicable laws and with absolute good faith.
    --The lack of existence at all times of any knowledge or suspicion 
on our side about the alleged illicit origin of the funds, which came 
in all cases from first rate U.S. banking institutions operating within 
the territories of the United States.
    --The collaboration we gave with our lawyers since the beginning 
of the investigations, collaboration that has been underscored and duly 
appreciated by the United States. This was shown in a letter that 
[Assistant U.S. Attorney] Steven Welk sent our lawyer, in which (naming 
us explicitly) he transmitted to us his appreciation for the attention 
received in Buenos Aires and our cooperation in the investigation. This 
language in a letter that has a letterhead of the U.S. Justice 
Department and with a signature of who is acting in the name of the 
[U.S. Attorney for the Central District of California] (Alejandro 
Mayorkas) would be unthinkable if the government of the United States 
did not have the conviction that it had been dealing with honorable 
people that don't have anything to do with money laundering.
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    On December 26, 2000, the Acting Director of the Office of 
International Affairs of the U.S. Department of Justice sent a 
letter to Dr. Jose Nicasio Dibur of the Ministry of Justice in 
Argentina concerning the resolution of the action taken by the 
United States against MAB and its owners and refuting the claim 
of vindication by Ducler. In the letter, the Acting Director 
wrote:

      It was agreed that the consent judgment did not 
constitute an admission of liability or wrongdoing on the part 
of the claimants. Id. At lines 3-6. At the same time, however, 
the consent judgment did not constitute an agreement by the 
United States that the claimants committed no illegal acts, or 
that the claimants lacked guilty knowledge of the illegal acts 
described in the complaint.
      . . . The essential purpose of the consent judgment was 
to divide the seized funds while leaving open the question of 
whether the claimants committed or, were knowledgeable of, the 
illegal acts described in the complaint. This is not 
particularly unusual.

      . . . In essence, the parties ``agreed to disagree'' 
concerning that question. That being said, it should be noted 
that this office would not have entered into the consent 
judgment unless it believed that there was a valid factual 
basis for the forfeiture of the funds.

      . . . The consent judgment applied only to the civil 
forfeiture case in which it was entered. It did not provide for 
immunity for any party (corporate or individual) with respect 
to potential criminal conduct. The United States made no 
representations whatsoever about the further investigation or 
prosecution concerning the criminal conduct described in the 
complaint.

      . . . However, the consent judgment is not evidence that 
the United States exonerated the M.A. entities or their 
principals or that the government believed that the allegations 
or the complaint were not true.

  (b) Unsound and Illegal Banking Practices

    In June 1999, representatives of the U.S. Customs Service 
and the U.S. Federal Reserve Board of Governors traveled to 
Argentina and interviewed officials of the Argentine Central 
Bank (``BCRA''), MAB, and Nicolas DiTullio. MAB officials 
described to the Customs agent how MAB serviced its clients' 
accounts and, in particular, how it handled transactions of 
DiTullio. The explanations offered by the MAB owners reveal 
banking practices that were highly vulnerable to money 
laundering and far outside the parameters of normal banking 
practice.
    M.A. Group officials said that M.A. Bank had KYC procedures 
similar to those at U.S. banks and that individuals can only 
open accounts at MAB if they are referred from an existing 
client, are already an investment client of M.A. Group, or are 
known to the officers of MAB. DiTullio was not required to 
provide references or undergo a credit check because his name 
was well known in the real estate field, and he was a long-time 
acquaintance of Ducler, Iribarne and Scasserra.
    Operation in violation of Argentine banking law. According 
to the Customs agent's interviews, officials of the BCRA stated 
MAB is not licensed to operate as a bank in Argentina. They 
said it can operate as a client of another bank (an account 
holder like anyone else), but it is not allowed to conduct 
banking business in Argentina: It cannot take in deposits or 
dispense withdrawals. Yet, it appears that MAB did accept 
deposits and dispense withdrawals to its customers in Buenos 
Aires at the offices of the M.A. Group.
    During a tour of the Mercado Abierto offices, a Customs 
agent asked Iribarne, one of the owners and the President of 
MAB, if the teller window and the vault in the M.A. Casa de 
Cambio section of the offices was the place he, as a customer 
of MAB, would bring funds and have MAB wire the money somewhere 
else. According to the Customs interviews:

      Iribarne said yes that is correct. They, M.A. Bank, 
would keep the money in the vault until they could transport it 
to the bank, after which they would transport the money.

      . . . [The Customs agent] also asked if he received 
money from the United States as a customer of M.A. Bank, would 
someone from Mercado Abierto pick up the cash at the bank in 
Argentina, bring it to Mercado Abierto and place the money in 
the vault, and would he receive the money at the windows right 
here. Iribarne said that is correct.

    During the interviews, the Special Examiner from the 
Federal Reserve Board of Governors asked MAB officials how a 
customer could receive money in Argentina if MAB did not have a 
branch or an account in Argentina. According to the Customs 
record of the interview, Iribarne explained how the process 
worked:

      1) For example, Nicolas DiTullio sends the M.A. Bank 
account at Citibank in the United States $100,000.

      2) If Mercado Abierto has the cash in their vault in 
Argentina, Nicolas DiTullio comes into the Mercado Abierto 
offices and they would give him the $100,000 in cash at the 
teller window. Nicolas DiTullio signs the receipt and leaves.

      3) If Mercado Abierto does not have the cash, they 
contact a licensed bank or Cambio in Argentina that has a 
branch in the U.S. (For example purposes, Bank Boston). They 
tell Bank Boston that they (M.A. Bank) are going to wire 
$100,000 to the Bank Boston Branch in the U.S. Bank Boston 
receives the wire in the U.S. and holds the funds in a 
temporary account for M.A. Group Bank. Then someone from M.A. 
Bank officer [sic] goes into Bank Boston in Argentina. Bank 
Boston, Argentina, checks to make sure they have received the 
wire in the U.S. and then releases the $100,000 in cash to the 
M.A. Bank officer. The officer takes the cash back to Mercado 
Abierto and places the money in the vault until Nicolas 
DuTullio arrives to receive the $100,000.

    An MAB officer and accountant told the Customs agent that 
there is no account for MAB in Argentina, so they always use 
other institutions. When a Customs agent asked if records are 
kept for all MAB transactions of $10,000 or more, as required 
by the BCRA, Iribarne, according to the interview records, 
responded that:

      They do not have to report any of the M.A. Bank 
transactions to the Central Bank or keep a record . . . because 
the money does not come into Argentina . . . if a bank is 
licensed in Argentina they would have to report the transaction 
and keep the log, but an offshore bank like M.A. Bank does not. 
This is because the wire transfer activity takes place offshore 
using ``undeclared'' funds. The report would be the 
responsibility of Bank Boston, if and when they transferred the 
$100,000 to Argentina to cover the withdrawal.

    The account officer told the U.S. Customs agent that the 
financial transactions of all of M.A. Group's subsidiaries were 
run through a central treasurer's office. All transactions for 
all of the entities in the M.A. Group are conducted in bulk 
during the day and one company can lend money to another 
company as needed to help it meet commitments. At the end of 
the day the treasurer records the transactions in the proper 
set of books.
    The U.S. Government also obtained documentary evidence that 
M.A. Bank was conducting banking operations in Argentina. 
According to the Special Examiner from the Federal Reserve 
Board of Governors, the U.S. Government received material from 
MAB that included deposit and withdrawal tickets all signed by 
DiTullio. According to the examiner, when the examiner asked 
the MAB principals if they had a license to operate MAB in 
Argentina, they told the examiner that performing the 
transactions was a service they provided to their clients.
    Pseudonym accounts. Many of the wire transfers made to 
DiTullio's account at MAB were sent to MAB's correspondent 
account at Citibank. The affidavit of a Custom's agent, 
submitted in support of the seizure warrant for funds in MAB's 
account at Citibank New York, disclosed that many of the wire 
transfers that were credited to DiTullio's account at MAB 
identified entities other than MAB as the beneficiary of the 
transfer, and the entity identified in the ``for the benefit 
of'' column often was someone other than DiTullio. Oftentimes, 
the only correct information on the wire transfer documentation 
was MAB's correspondent account number. Despite these 
inaccuracies, Citibank did not reject the transfers or return 
the money to the originator but credited the funds to MAB's 
account. MAB then credited them to DiTullio's account.
    When the Customs agent asked the owners of MAB how they 
knew to credit the transfers to DiTullio's account and not to 
someone else's, Iribarne said that DiTullio had advised them in 
advance of the amounts that would be sent. When asked again by 
the Customs agent how the bank knew to credit DiTullio's 
account when the name of the party to be credited on the wire 
was a different name from DiTullio's, Iribarne said they were 
able to match the date and time of the transfers with letters 
DiTullio sent to M.A. Bank notifying the bank of incoming 
funds. Yet, the report of the Customs agent noted that the 
letters notifying MAB of forthcoming wire transfers to be sent 
by DiTullio were provided several days before the undercover 
operation wired the funds, and the letters did not list a date 
when the transfers would occur. These omissions raise a 
question of how the M.A. Bank officials knew to credit the 
DiTullio account.
    Moreover, MAB owners indicated that such transactions were 
regular occurrences at the bank. According to the Customs 
interviews, the owners of MAB stated that they regularly 
received ``fantasy names'' on wire transfers and used the 
amount and date to match them to client deposit notices:

      Iribarne went on to explain that they (M.A. Bank) 
normally receive many ``fantasy names'' on the wire transfers 
they receive, so they just use the amount and date to match 
them to the proper client. When [the Customs agent] asked about 
these ``fantasy names,'' Miguel Iribarne said clients do this 
so the funds are not ``regulated.'' Miguel Iribarne also 
explained that it is also normal for clients to wire transfer 
money to M.A. Bank and leave the beneficiary information 
completely off the wire transfer instruction, and M.A. Bank 
still matches the money to the client.

    According to the Special Examiner from the Federal Reserve 
Board of Governors, the practice described by the MAB owner 
violates normal banking practice. The examiner noted that if a 
bank received a wire transfer on which the name of the party to 
be credited was a different name from the name of the account 
holder who told the bank a wire transfer would be made to their 
account, the bank would generally call the account holder to 
confirm where the funds are to be credited. The bank would also 
ask the account holder why a third party would have money 
transferred into their account.
    Servicing illicit funds. In discussing how they handled 
accounts of DiTullio and others when the wire transfer 
contained incorrect or no beneficiary information, the bank 
owners were very clear that they believed that the clients were 
doing this to avoid taxes. According to the Customs interviews:

      [The Customs agent] asked, what if two clients claim the 
same amount of money, or some client claims that money had been 
sent and M.A. Bank could not find the transfer amid all the 
similar transfers? Miguel Iribarne said they have never had 
this problem. Miguel Iribarne stressed that their clients trust 
the bank, ``especially the non-declared funds.'' [The Customs 
agent] inquired if the funds were non-declared for tax 
purposes, and Miguel Iribarne said yes.

    At one point, Iribarne told the Customs agent that he 
believed that all offshore accounts belonged to people avoiding 
taxes and that the money may sometimes come from other illegal 
sources as well:

      [The Customs agent] mentioned the offshore, unregulated 
funds. Miguel Iribarne told [the Customs agent] that he 
believes that all offshore accounts belonged to people avoiding 
taxes. Miguel Iribarne said maybe the money sometimes comes 
from other illegal activities as well. [The Customs agent] 
asked him if he thought M.A. Bank's clients were hiding money 
to avoid taxes? Miguel Iribarne said sure, most of the 
customers have overseas account [sic] so they do not have to 
report income. Miguel Iribarne said he does not care. The 
customers are the ones not reporting, not him.

    Falsification of withdrawal records. One of the ways 
DiTullio withdrew money from M.A. Bank was in cash. According 
to Iribarne, DiTullio would call and tell M.A. Bank he would be 
coming in to withdraw money, and then he would show up and sign 
a withdrawal receipt when he withdrew the money. The owners of 
MAB provided the Customs agent with copies of the withdrawal 
slips that had been completed and signed by DiTullio. The 
Minority Staff received a copy of one of those slips. The form 
appeared as follows:

[GRAPHIC] [TIFF OMITTED] T1166.137

      
    As can be seen from the form, while MAB's name and address 
is included in the typewritten statement on the form, it is not 
imprinted on the form itself. The withdrawal slip is not a 
preprinted slip that banks generally produce and make available 
to all customers. Rather, it is a form that appears to have 
been produced on a typewriter or printer with places to insert 
the amount received and the name and account number of the 
client.
    In reviewing the withdrawal receipts signed by DiTullio, 
the Customs agent asked why the receipts looked different from 
the M.A. Casa de Cambio receipts, which appeared more official. 
According to the Customs interviews:

      Iribarne said that the M.A. Bank receipts are a private 
receipt. The transactions are not reportable to the government, 
so they can generate them any way they want. [The Customs 
agent] asked, why is Euro-American Finance printed on the 
receipts (it looks like a receipt Nicolas DiTullio generated)? 
Miguel Iribarne said the form is in the computer; Nicolas 
DiTullio can ask to have anything put on the receipt and they 
would do it, they did not care. [The Customs agent] asked about 
Euro-American Finance. Hector Scassera [one of the other owners 
of MAB] said Nicolas DiTullio did not want the local tax 
authorities to know about, and tax him on, the money coming 
from the United States. Euro-American is a company name Nicolas 
DiTullio uses to avoid the tax authorities.

    According to the Special Examiner from the Federal Reserve 
Board of Governors, several aspects of the withdrawal process 
described by the owner of MAB were not in accordance with 
standard banking practices. According to the examiner, 
typically the institution's name, address and other information 
about the bank would be preprinted on a withdrawal form. No 
such information was on the withdrawal forms signed by 
DiTullio. The form was simply a typewritten note. Apparently, 
MAB had no withdrawal slips. The Minority Staff learned that 
the examiner asked someone at the teller window at M.A. Group's 
offices for some deposit/withdrawal tickets and was told that 
they did not have any. The examiner also noted that in the case 
of DiTullio, the form was printed in English, even though 
DiTullio spoke only Spanish.
    The Special Examiner also noted that the forms were signed 
by DiTullio as if he were an individual authorized by the 
company, Euro-American Finance, to make withdrawals. This 
leaves the impression it is Euro-American Finance that has the 
account at MAB and is the entity making the withdrawal. 
However, the examiner pointed out and the owners of MAB 
acknowledged, that the funds were being withdrawn by DiTullio 
from his own account. The examiner stated that this was not 
typical banking practice, noting that in the United States, 
individuals do not sign withdrawal slips on behalf of an 
organization that does not have an account at the bank. The 
examiner said: ``it just isn't done.'' The examiner said that 
DiTullio told the Customs agent that he had signed a number of 
the withdrawal forms in advance of any withdrawal.

  (7) Correspondent Account at Citibank

    MAB maintained an account with Citibank from September 1994 
through March 2000. During that time period, $1.8 billion moved 
through its account. Citibank had maintained a relationship 
with the M.A. Group since 1989. Over the years, various 
subsidiaries of the M.A. Group had established accounts at 
Citibank. In addition to MAB, other M.A. subsidiaries, 
including Mercado Abierto, M.A. Casa de Cambio and M.A. 
Valores, had accounts at Citibank New York. All of the accounts 
with the M.A. Group and its subsidiaries were terminated in 
March 2000. The MAB account with Citibank in New York was 
limited to non-credit, electronic banking services.
    Citibank Organization for Correspondent Accounts in 
Argentina. Correspondent banking activities at Citibank are 
located in the Financial Institutions Group. Correspondent 
accounts in Argentina are located in the division covering 
Central and Eastern Europe, the Middle East, Africa, the Indian 
subcontinent and Latin America (``CEEMEA'') which is 
responsible for overseeing and administering correspondent 
banking relationships including support services in connection 
with wire transfer operations. According to the marketing head 
for the Latin American Unit in the Financial Institutions Group 
in New York, in the 1980s Citibank instituted the Troika system 
for account management to improve coordination and 
communication. Under that approach, responsibility for an 
account opened in the United States by a financial institution 
in a foreign country was shared between (1) an account officer 
in the country where the client institution is located, (2) an 
account officer in the New York office and (3) a service 
account officer in New York.
    The lead for the account is the country account officer in 
the country where the client is located. That officer is 
responsible for account opening, including due diligence and 
KYC information, and maintaining contact with the customer to 
ensure that the relationship is operating smoothly and to 
market new products and services. According to the marketing 
head, the New York officers focused on customer service, 
product information, and administration of account activities. 
In addition, it was the responsibility of the New York office 
to look at overdrafts and credit issues associated with the 
account. Such issues were supposed to be reported to the 
country account officer, who had the authority to approve 
overdrafts and credit. According to the marketing head, it was 
not the responsibility of the New York office to check monthly 
statements or verify transactions.
    Monitoring for money laundering and suspicious activity was 
the responsibility of the anti-money laundering unit in Tampa. 
As with overdraft and credit issues, any money laundering or 
suspicious activity issues are communicated to the country 
account officer, and the Financial Institutions compliance 
officer in New York might be notified and brought into the 
matter; the New York service officers may not hear of such 
matters. The anti-money laundering unit in Tampa had systems to 
identify high risk countries and generic high risk 
institutions, but not specific clients. According to the 
marketing head, until about one year ago, Citibank did not have 
a system in place to determine if correspondent clients should 
be classified as high risk. Citibank is now developing account 
profiles to identify high risk customers, who will be subjected 
to tighter monitoring and controls.
    According to an investigator assigned to Citibank's anti-
money laundering unit in Tampa, the unit reviews U.S. dollar 
based fund transfers that fall within parameters that Citibank 
establishes regarding dollar amounts, high risk countries and 
institutions that may be indicative of money laundering. All 
wire transfer activities falling within the parameters are sent 
to Tampa for review. The transactions are then sorted by 
different categories and reviewed for anomalous behavior. Tampa 
receives records of approximately 400,000 wire transfers per 
month that fall within the general parameters. They are then 
reviewed by two people for certain characteristics that would 
indicate anomalous behavior. When such behavior is identified 
and it is determined that further investigation is warranted, 
the unit will develop an investigative file. Investigative 
files may also be created if other events or activities cause 
the unit to decide to conduct a review of a client account.
    The unit head for Financial Institutions in Argentina told 
the Minority Staff that the bank in Argentina is divided into 
products and relationships. The relationship manager team is 
responsible for the coordination of the sale of products and 
has the primary responsibility for marketing products. The 
relationship managers also have responsibility for credit and 
KYC issues. The relationship managers report to the unit head 
for Financial Institutions. The unit manages approximately 70 
relationships with financial institutions whose main offices 
are located in Argentina. It also covers relationships with 
another 30 institutions located in Argentina whose main offices 
are in other foreign countries. (In those cases, the Citibank 
office in the country where the client's main office is located 
has the lead on the relationship). The largest number of 
relationships is with insurance companies and the second 
category of relationships is with banks.
    Daily operations of the client correspondent accounts are 
handled by the cash management and customer service units in 
Argentina, with assistance from Citibank in New York. Marketing 
and decisions on accepting and expanding relationships are the 
responsibility of the Argentine relationship managers, with 
approval from the unit head and the compliance department.
    According to the Financial Institutions unit head, the 
primary document reflecting the due diligence information for a 
client is the Basic Information Report (``BIR''), which 
contains information on the history and nature of the 
institution, its ownership and its financial condition. In 
addition, a client folder will contain a checklist of items or 
information that must be obtained. The Financial Institutions 
unit head said that Citibank also takes into consideration 
other, more qualitative factors that do not appear on any 
checklist and are not firm requirements, such as the 
institution's reputation, and expectation of a minimum of 5 
years of operating history in the market, audited balance 
sheets, certain minimum amounts of equity and whether the 
institution is known to some senior Citibank officials.
    Ongoing monitoring consists of annual updates of the BIR 
and visits with the client both over the telephone and in 
person. However, the Financial Institutions unit head told 
Minority Staff that Citibank Argentina does not review monthly 
account statements of the clients, that Citibank New York 
monitored the accounts. The market head in Citibank New York 
disagreed with that observation. He told Minority Staff that 
Citibank New York only monitored the account for overdrafts and 
credit issues, and Citibank New York did not monitor the 
monthly accounts. He said the Citibank office in Tampa was 
responsible for money laundering oversight. The head of the 
Financial Institutions unit in Citibank Argentina told the 
Minority Staff that he estimated that the relationship manager 
for MAB may have met personally with MAB officials four times 
per year and spoken with them over the telephone many other 
times. He noted that the amount of attention given to a client 
was related to the size of the relationship. He indicated MAB 
was a rather small client because it had only one product, 
electronic banking services.
    Citibank Policy on Shell and Offshore Correspondent 
Accounts. When Citibank was asked in the Minority Staff survey 
of correspondent banking whether Citibank would ``as a policy 
matter, establish a correspondent relationship with a bank (a) 
that does not have a fixed physical presence in any location, 
such as a shell bank,'' Citibank's response was:

      The GCIB [Global Corporate and Investment Bank] does not 
establish relationships with customer banks that have no fixed 
physical presence in a particular location or with banks whose 
licenses require them to operate exclusively outside the 
jurisdiction in which they are licensed.

    When Citibank was asked in the survey whether Citibank 
would ``establish a correspondent relationship with a bank (b) 
whose only license requires the bank to operate outside the 
licensing jurisdiction,'' Citibank's response was:

      The GCIB does not open bank accounts for banks that have 
no fixed physical presence in a particular location or with 
banks whose licenses require them to operate exclusively 
outside the jurisdiction in which they are licensed. However 
the GCIB may open a bank account for an existing customer 
bank's off-shore subsidiaries or affiliates.

    When asked how Citibank Argentina could have accepted the 
correspondent account of MAB (which is not an affiliate or 
subsidiary of a bank but of a securities firm) in light of 
Citibank's policies as expressed in its survey response 
prepared by its Vice President and Director of Compliance for 
the Global Corporate and Investment Bank, the Financial 
Institutions unit head said he did not know if what the Vice 
President reported as Citibank policy was correct. He noted 
that the opening of the MAB account was approved by the 
Citibank Compliance Department. Citibank representatives at the 
meeting also noted that as a subsidiary of M.A, MAB activities 
were included as part of M.A. Group's report to its Argentine 
regulators. However, the Minority Staff pointed out that the 
regulatory agency for a securities firm is different from a 
regulatory agency for a bank, and such reporting cannot 
guarantee an examination of the critical and potentially 
vulnerable areas of a banking operations.\42\
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    \42\ Approximately one month after this interview with the head of 
the Financial Institutions unit, an employee at Citibank in Argentina 
wrote the Vice President of Financial Institutions in New York that the 
Argentina office was implementing a strategy for all of its Financial 
Institution customers. The letter stated that Citibank Argentina was 
beginning to close all accounts for offshore vehicles that were not 
consolidated under a local bank, and consequently not regulated by the 
Central Bank of Argentina.
---------------------------------------------------------------------------
    Four months after this issue was discussed and Minority 
Staff had asked for a clarification of the policy, legal 
counsel for Citibank wrote to the Minority Staff on September 
29, 2000, to re-state Citibank's policy. Legal counsel informed 
Minority Staff that the policy presented in Citibank's survey 
response was ``incomplete and had created a misunderstanding 
about the circumstances under which Citibank has account 
relationships with offshore banks.'' Citibank's counsel went on 
to describe a modified policy with respect to offshore banks 
that have no physical presence in the offshore 
jurisdiction:\43\
---------------------------------------------------------------------------
    \42\ The concern expressed by the Minority Staff was with respect 
to banks that have no physical presence anywhere and are not branches 
or subsidiaries of another bank with a physical presence in another 
jurisdiction.

      I indicated that our response to question 11 (as well as 
question 10) should have made clear that Citibank would and 
does open accounts for off-shore subsidiaries or affiliates of 
existing customer financial institutions, not just existing 
customer banks as our response indicated, and that these off-
shore relationships could be established without regard to 
whether the offshore entity had a fixed physical presence in 
the off-shore location. M.A. Bank fits this scenario, as 
Mercado Abierto, S.A., an Argentine financial institution that 
has had an account with Citibank since 1989, is the parent of 
---------------------------------------------------------------------------
M.A. Bank . . .

      . . . We remain uncertain about whether attaching 
significance to physical presence is meaningful when one 
considers the nature of offshore banks.

      . . . Offshore affiliates typically service the existing 
customers of the parent institution; they do not do business 
with residents of the offshore jurisdiction or transact 
business in the local offshore currency, or seek to establish 
an independent customer base. Their function is to serve as 
registries or booking vehicles for transactions arranged and 
managed from onshore jurisdictions. Accordingly, there is 
little need for a staff or physical facility and there is 
nothing inherently suspicious about the failure of an offshore 
affiliate to have a physical presence in the offshore 
jurisdiction.

      Of course these vehicles are to be distinguished from 
banks with offshore licenses that are not affiliated with an 
onshore financial institution. For such banks, physical 
presence may be an indicator of a legitimate operation (and the 
absence of a physical presence may suggest that further inquiry 
into the legitimacy of such a bank's operations is warranted).

      In Citibank's view, the key to ensuring the viability 
and reputability of an offshore bank that is an affiliate of a 
financial institution is fulsome Know Your Customer due 
diligence with regard to the financial institution group. 
Regulatory oversight by offshore jurisdictions is uneven and 
cannot be relied on uniformly. Further, although financial 
institutions generally report the activities of their 
affiliates, including offshore affiliates, in consolidated 
financials that typically are presented to regulators, in cases 
where the parent financial institution is not a bank the 
oversight by the banking regulator in the onshore jurisdiction 
may not occur in these circumstances, although non-banking 
regulators may provide some limited oversight. For these 
reasons, careful review of the reputation and management of the 
parent or affiliated institution is likely to be the most 
important indicator of a legitimate offshore operation. And for 
these reasons it is Citibank's policy to avoid account 
relationships with offshore entities that are incorporated by 
an individual or entity that is unaffiliated with a larger, 
reputable bank or financial institution.

      Offshore entities that are primarily booking entities 
requiring minimal personnel or physical operations often are 
managed from a location that is closer to the jurisdiction of 
the parent institution than the offshore jurisdiction. Your 
staff have indicated skepticism about the legitimacy of such 
``back offices'' and inquired about the kinds of activity in 
which one might expect them to engage. Indeed, there seems to 
be some sense that a test of legitimacy might be whether a back 
office has the capacity to print and mail statements. The need 
to print and mail statements will depend on the customer base 
of the offshore and the nature of the business, and may defeat 
the purposes of offshore banking--confidentiality and tax 
planning. Mailing statements for activity in the private bank 
account of a customer, for example, risks breaches in the 
confidentiality as well as triggering a taxable event. Private 
bank customers often do not receive regular statements but 
rather rely on the personal relationship with the private 
banker for information about the status of their account.

      In sum, local banks and financial institutions establish 
offshore affiliates for a number of legitimate purposes. Where 
the affiliate is a booking vehicle, the transactions may be 
managed from an onshore jurisdiction and there may be no need 
for a physical presence in the offshore jurisdiction. Thus, in 
Citibank's view, instead of looking to the existence or non-
existence of a physical presence to determine the legitimacy of 
the offshore entity, it is more useful to look to the character 
and conduct of the larger institution with which it is 
affiliated.

    Opening the M.A. Bank account. When the MAB account was 
opened in 1994, Citibank had an existing relationship with 
MAB's parent, M.A. Group, since 1989. The Financial 
Institutions unit head told the Minority Staff that because of 
the existing relationship with M.A. Group, Citibank had relied 
on the due diligence and existing knowledge of the parent 
company to substitute for some of the due diligence it would 
normally perform on a new account. For example, Citibank did 
not ask MAB for references for its previous correspondent bank. 
It did not enforce the 5 year operating requirement because, as 
the head of the Financial Institutions unit explained, the 
requirement is designed to ensure the potential client has 
experience in the market place, and since MAB's parent had been 
in operation since 1983, that was fulfilled. The Financial 
Institutions unit head was not sure if Citibank received a copy 
of MAB's license. He explained that Citibank had received an 
audited financial statement that contained a note stating that 
MAB was incorporated in, and had a license from, the Cayman 
Islands.
    It is unclear whether Citibank fully understood the nature 
of MAB's operations. The July 1994 Basic Information Report 
filled out for MAB contains the statement: ``The entity appears 
in Mercado Abierto balance sheet as a subsidiary so it is 
regulated by Argentine Central Bank.'' However, an official of 
the Argentine Central Bank (``BCRA'') told U.S. Customs agents 
that MAB was not licensed in Argentina, it was not regulated by 
the BCRA, and it was not authorized to operate in Argentina. 
MAB's President, Iribarne, told Customs agents the same thing. 
Moreover, as the unit head had explained to the Minority Staff, 
MAB was specifically created as an entity that was not 
regulated by the Argentine authorities so that it could sell 
international securities and bonds that it would be precluded 
from purchasing and selling if it were subject to Argentine 
regulations.
    In light of Mr. Iribarne's statements to the Customs agents 
that indicated that MAB was operating out of M.A.'s 
headquarters in Buenos Aires, the Minority Staff asked the head 
of the Financial Institutions unit if Citibank believed that 
MAB had authority to operate in Argentina. The Financial 
Institutions unit head told the Minority Staff that he was not 
sure, that it was a legal matter. However he said he did not 
think that anyone at Citibank ever believed that MAB operated 
as a bank in Argentina.
    When asked if he knew or believed that MAB operated as a 
bank somewhere else, the Financial Institutions unit head 
stated that MAB operated with Argentine clients, but not in 
Argentina. He said that since he was not involved in the 
detailed matters of accounts he really did not know, but he 
believed MAB had a back office operation in Uruguay. He noted 
that most Argentine financial institutions have back office 
operations in Uruguay for their Cayman Island facilities. He 
said the main reason for banks selecting Uruguay is that it 
would be too expensive to license a bank in Argentina if 
banking was not the principle purpose of the financial 
institution, and operating out of the Cayman Islands would be 
too far from the customers. He said it was a matter of cost and 
proximity that attracted banks to Uruguay.
    The Financial Institutions unit head said he was not sure 
if anyone at Citibank had confirmed that MAB had a real 
operation in Uruguay. When asked, the Financial Institutions 
unit head stated that no one visited an MAB office in Uruguay 
as part of the initial due diligence on the bank. He said the 
decision makers of MAB were in Buenos Aires, so he did not 
think it made sense to look at a back office. Instead, Citibank 
had contact with the decision makers of the parent company.
    When asked if anyone from Citibank had ever gone to Uruguay 
to confirm that MAB had a back office operation in that 
country, the Financial Institutions unit head said ``no.'' The 
Minority Staff asked that Citibank try to confirm the existence 
of such an office, but Citibank never did so.\44\
---------------------------------------------------------------------------
    \44\ The market head from New York told the Minority Staff that 
when Citibank installed computer equipment for MAB to enable MAB to use 
certain Citibank banking services, the equipment was installed in 
Argentina. This could be a further sign that there was no back office 
operation in Uruguay.
---------------------------------------------------------------------------
    Citibank's Response to Seizure Warrants. As noted above, in 
May 1998 the U.S. Customs Service presented Citibank New York 
with seizure warrants for funds in the accounts of MAB and M.A. 
Casa de Cambio. $1.8 million was seized on May 18, 1998. The 
order was for the seizure of funds existing in the accounts at 
the time. There was no requirement or request for Citibank to 
freeze or close the accounts.
    Citibank documents show that at the time of the seizure, 
Citibank New York informed Citibank Argentina of the seizure, 
and Citibank Argentina asked MAB about the matter. According to 
the Financial Institutions unit head in Argentina, Citibank did 
not connect the seizure warrant with illegal activity. When 
Citibank representatives in Argentina spoke to MAB officials at 
the time, the MAB officials indicated that they were surprised 
by the action and did not know why the funds were seized.\45\
---------------------------------------------------------------------------
    \45\ The marketing head in New York told the Minority Staff that 
although records indicate that he, along with personnel in Argentina, 
were informed of the seizure shortly after it occurred in 1998, he did 
not recall being advised of the seizure at that time.
---------------------------------------------------------------------------
    According to the marketing head in New York and the 
Financial Institutions unit head in Argentina, neither Citibank 
New York nor Citibank Argentina learned that illegal funds were 
the basis for the seizure until November 1999, nearly 1\1/2\ 
years after the seizure took place.
    In August 1999, the Subcommittee subpoenaed Citibank 
records and statements of the MAB and M.A. Casa de Cambio 
accounts. As a result of the subpoena, the market head in New 
York called the Financial Institutions unit head in Argentina 
and reported that Citibank lawyers in New York were asking 
about the possibility of closing the MAB account because of the 
seizure in 1998. The market head in New York called Argentina 
to inquire about the account and why the Subcommittee would be 
subpoenaing its records. The Financial Institutions unit head 
in Argentina told the Minority Staff that as a result of the 
call from New York, he instructed the relationship manager of 
the MAB account to find out more about the seizure action. At 
that point both the market head in New York and the unit head 
in Buenos Aires were still unaware that the seizure was related 
to an undercover drug operation.
    In late October, MAB presented Citibank Argentina with a 
two page letter report on activities associated with the 
seizure. In the letter, MAB stated: ``Customs is investigating 
financial transactions within the United States which are 
thought to be related with illegal activities.'' MAB identified 
DiTullio as the client responsible for the transfers of the 
funds that were seized, but did not specifically mention that 
the activity was related to drug trafficking. MAB noted that it 
had met with and was cooperating with the U.S. Customs Service.
    Subsequent to the receipt of the report from MAB, Citibank 
Argentina sent an e-mail to the market head in New York. The e-
mail recounted the details of the seizure and passed on 
information that apparently had been received from MAB--that it 
had cooperated with the Customs Service, the matter was at that 
time an administrative not a judicial proceeding, and that a 
resolution was expected soon. The memo concluded with an offer 
to close the account:

      Notwithstanding this and even knowing that the 
shareholders are very well known in the market and the company 
has strict anti-money laundering control, we would be prepared 
to close the DDAs if you consider it necessary.

    A decision was made not to close the accounts. According to 
the Financial Institutions unit head in Argentina, Citibank had 
a long relationship with M.A. Group and there were never any 
problems with the account or the entities involved, M.A. Group 
had a good reputation in Argentina, and Citibank did not 
believe that the organization or its officials would knowingly 
be involved in illegal activities.
    The head of Financial Institutions in Argentina told the 
Subcommittee staff that he subsequently discussed the matter 
with two of his superiors in Argentina who instructed him to 
further investigate the matter and find out what the illegal 
activity was and what banks were involved. In November 1999, 18 
months after the seizure warrant was served on Citibank, 
Citibank Argentina asked MAB for a copy of the wire transfers 
that were under investigation and asked MAB to prepare a copy 
of all of their documents relating to the entire matter. The 
head of the Financial Institutions unit in Argentina informed 
the Minority Staff that when Citibank Argentina received the 
copies of the transactions, he reviewed them and noticed that 
the names of the parties involved in the transactions seemed to 
him to be strange names for investors in Argentina. He told the 
Minority Staff that combined with the information he already 
had that illegal activity had been involved, he decided to 
inform the client that Citibank was going to close the MA 
accounts in mid-November. At that time, he still did not know 
that the transfers in question were related to drug 
trafficking.
    Upon hearing that news, MAB and its attorneys asked to meet 
with Citibank officials. On the day of the meeting, Citibank 
Argentina finally received the information on the case from 
MAB, which revealed that the transactions in question were 
related to drug trafficking. At the meeting MAB requested 
Citibank to keep the account open and to keep the information 
confidential because closing the account or releasing the 
information to the public would harm their reputation and 
business. MAB officials also said that they were negotiating 
the sale of MAB to a European bank and any news on the closing 
of the correspondent account or the Customs investigation would 
damage the prospects for the sale. The Financial Institutions 
unit head asked for the name of the European bank, but MA 
officials would not provide it. MAB requested a meeting with 
Citibank New York. Citibank held off on closing the account. 
The Financial Institutions unit head responded that the issue 
was a compliance matter for the bank and he could not make a 
decision. Although initial efforts were made to arrange the 
meeting with Citibank New York, it never took place.
    On December 2, 1999, a few days after Citibank received the 
materials from MAB and held the meeting with its principals, 
newspaper articles revealed that MAB accounts were frozen 
because of drug trafficking. According to the head of the 
Financial Institutions unit the action taken by Citibank 
Argentina at that time was to send the material to New York and 
place the matter in the hands of compliance in New York. 
Although the Financial Institutions unit head told the Minority 
Staff that he had previously made the decision to close the 
account, that action was not taken.
    On December 2, 1999, the Financial Institutions unit head 
sent a memorandum to the head of compliance for Argentina. The 
memorandum recounted the history of the MAB case and the steps 
that had been taken by Citibank Argentina; it suggested that 
the closing of the account was delayed to allow public 
attention to dissipate. The memo included the following:

      From the standpoint of process Citibank Buenos Aires 
cannot exercise control over accounts at Citi New York. The 
follow-up of that is the task of AML [anti-money laundering] 
and we have never received any communication in that regard. 
The amounts involved are not very significant because these are 
individual transfers of US 500,000, insignificant in the 
movements of the client.

      The closing of the account is already decided but the 
present situation obliges us to wait a few days until the issue 
ceases to be public. The subject is being aired publicly 
because letters rotatory have come from the Mexican authorities 
seeking to recover properties purchased with these funds, since 
the funds apparently come from Mexican Banks.

      This case can be used politically to pressure the 
Congress for prompt passage of laws on money laundering.

      We still believe that MA acted in good faith in this 
case, but the public character it has taken on will mean 
hardship for that entity to the extent of having to close its 
operations.

    On December 3, Citibank formally blocked the MA accounts 
and its legal staff conducted an investigation of all of the MA 
accounts. Also, on December 3, 1999, the MAB relationship 
manager in Argentina e-mailed the New York marketing officer 
who handled the MAB account. Her communication included the 
following:

      As I anticipated yesterday, this issue has become 
public. We are in the middle of an ARR which will ask us about 
the following points:

      1) What AML [anti-money laundering] control procedures 
does Citibank New York have? Do we know that there is an AML 
unit that controls the transactions, among others those sent 
under PUPID. At the appropriate time the BIR of the client in 
which the average movements of each of the accounts is shown 
was sent. Are there such controls? Is the AML unit in Tampa the 
one in charge of doing it or each division in New York?

    The next day, Citibank New York responded:

      I have placed a call to [the investigator], AML Unit, 
Florida for confirmation of what aspects of AML they monitor.

      Citibank NY is currently in the process of establishing 
an AML procedure for your FI [Financial Institution] accounts 
located in New York. I will forward correspondence separately 
to you today to initiate this process.

    According to the head of the Financial Institutions unit, 
Citibank Argentina was told to close the accounts in February 
2000, nearly 21 months after the seizure took place. Between 
the time the seizure warrant was served on Citibank in 1998 and 
September 1999, MAB moved $304 million through its 
correspondent banking account at Citibank.
    Between the service of the seizure warrant in May 1998 and 
October 1999, Citibank did not follow up on information and 
communications available to it that would have revealed that 
the activities being investigated were related to drug 
trafficking. The seizure warrant served on Citibank in May 1998 
indicated the seizure was related to money laundering. Citibank 
informed the Minority Staff that it did not notice that 
information when the warrant was served. The press gave 
widespread attention to the indictments and warrants served on 
numerous U.S. and foreign banks as a result of Operation 
Casablanca. Citibank was identified as a recipient of some 
warrants. Apparently, those reports did not result in any 
review or investigation inside of Citibank, otherwise the 
connection with the MAB seizure warrant would have been 
discovered. In June 1998, MAB wrote to Citibank and asked that 
Citibank:

      Furnish us a report on the origin, cause [and] authority 
acting on the attachment order received, as well as all actions 
taken by you whose objective was to make disposition of Lloyds 
in our current account No. 361111386, as far as possible, 
providing us an exact copy of the documentary evidence 
attesting to the existence of such judicial order and of the 
transfers or other actions taken by you as a consequence 
thereof.

    Citibank can find no communications that responded to MAB's 
inquiry. The preparation of a response to MAB would likely have 
informed Citibank that the seizure warrant was related to money 
laundering associated with drug trafficking.
    In 1998 and early 1999, MAB raised the issue of the seizure 
several times in communications and meetings with Citibank. In 
May 1998, Scassera and Iribarne told the relationship manager 
that they did not know who ordered the transfers and were 
hiring an attorney in the United States to represent them in 
the investigations. In June Citibank received notice from MAB 
that the U.S. Customs Service would be requesting monthly 
statements and all related documentation from the MAB account. 
On four subsequent occasions (August, September and October 
1998 and March 1999) MAB informed Citibank of its 
communications and contacts with the Customs Service. None of 
these contacts caused Citibank to make additional inquiries or 
learn what the nature of the action was and why the Customs 
Service was so interested in the account.
    According to the Financial Institutions unit head, Citibank 
never made a connection that the involvement of the Customs 
Service suggested that there might be illegal activity 
involved. Moreover, he told the Minority Staff that he had 
asked the relationship manager to find out what was involved in 
the situation, but the client never told her what was really 
going on. He noted that in March MAB officials informed the 
relationship manager that they expected the money to be 
returned soon.
    When asked by the Minority Staff why Citibank did not 
threaten to close the account if MAB was not being responsive 
to its inquiries, the unit head remarked that the client was 
someone Citibank totally trusted and therefore never thought 
the seizure was related to anything illegal. Also, he told the 
Minority Staff that MAB told Citibank that the investigation 
involved one of it clients. He said under such circumstances he 
would have thought the warrant was related to a commercial 
matter.
    After MAB told Citibank in October 1999 that the Customs 
investigation involved financial transactions related to 
illegal activities, it took Citibank nearly one additional 
month to get the information that provided details on the 
matter.
    Additionally, Minority Staff informed Citibank counsel in 
late September or early October 1999 that the basis for the 
Minority Staff's interest in the matter was because the funds 
seized were the result of drug transactions related to 
Operation Casablanca. Apparently this information was not 
passed on to the market head in New York and the head of the 
Financial Institutions unit in Argentina, because in late 
October Citibank personnel in New York and Argentina still did 
not know the reason for the seizure.
    In September 2000, legal counsel for Citibank wrote a 
letter to Minority Staff to explain the bank's response to the 
seizure warrant. In the letter Citibank informed the Minority 
Staff that:

      Although there was nothing on the face of the warrants 
that linked the seizures to narcotics proceeds, the warrants 
did contain statutory references to 18 U.S.C. Secs. 981 and 984 
and to 18 U.S.C. Secs. 1956 and 1957.

      . . . The legal personnel who received the warrants 
apparently did not recognize that they were related to money 
laundering allegations and simply processed them without 
pursuing further inquiries.

      . . . Neither did the business people in New York 
recognize the statutory citations in the warrants as related to 
money laundering. Without the benefit of the affidavit, they 
assumed these seizure warrants, like the vast majority of those 
received by Citibank, were related to a civil dispute, which 
would not trigger an in-depth account review.

      . . . Citibank did not appreciate until late September 
1999 that the seizure warrants were linked to narcotics 
trafficking.

      . . . in response to this letter, members of the 
Minority Staff shared with Citibank counsel either a summary of 
the information contained in Agent Perino's affidavit or the 
affidavit itself.

      . . . Citibank lawyers made inquiries to the business 
people about the status of the M.A. Bank account.

      . . . However, . . . neither Mr. Norena or Mr. Lopez was 
informed that the inquiry related to allegations that the M.A. 
Bank account had been used to launder proceeds of narcotics 
trafficking. Mr. Lopez, who thought the seizure warrant was 
routine, did not understand the basis for the renewed interest 
in the seizure or the implication that the seizure should have 
triggered an account review.

      . . . Mr. Lopez . . . initiated an inquiry with the 
principals of Mercado Abierto who informed him of the 
allegations that M.A. Bank had been used to launder drug money 
and, on November 19, 1999, provided him with Agent Perino's 
affidavit. Thereafter, Mr. Lopez recommended that Citibank 
terminate all of its relationships with the Mercado Abierto 
group, even though the Mercado Abierto principals appeared to 
be cooperating with the Customs Service investigation and 
believed that the allegations that had led to the seizure of 
the accounts would be quickly resolved in their favor.

      . . . Citibank itself was not in a position to confirm 
that any suspicious account activity or pattern was in fact 
related to the laundering of drug money. The Mercado Abierto 
accounts were blocked on December 3, 1999, and were formally 
closed as of February 21, 2000.

      . . . In deciding to open the correspondent banking 
accounts that were the subject of May 18, 1998 seizure warrant, 
Citibank was dealing with an established customer who enjoyed 
an excellent reputation as a long-established and significant 
member of the Argentine financial community.

      . . . Mercado Abierto today manages an investment 
portfolio worth $400 million and in April of this year ranked 
seventh among brokers in the Buenos Aires stock exchange. 
Further, in the course of performing its Know Your Customer due 
diligence, Citibank reviewed anti-money laundering policies 
that had been adopted by Mercado Abierto.

      . . . But what may have happened here, as the Customs 
Service's Forfeiture Complaint speculates is that one of the 
principals ``intentionally dispensed with virtually all of the 
standard internal controls and processes generally required to 
open accounts with M.A. Bank and/or M.A. Casa de Cambio.''

      . . . In circumstances like these, in which a principal 
is alleged to have subverted his own institutions internal 
controls the most careful scrutiny by Citibank may not be 
enough to prevent an unscrupulous principal from attempting to 
abuse the correspondent banking system once a correspondent 
account has been established.

      . . . Although we believe that the opening of the M.A. 
Bank account was appropriate, Citibank's failure to undertake a 
complete account review in May 1998, when the seizure warrant 
was first received was not. As a result of the lessons learned 
from this episode, Citibank has adopted new procedures to 
process those seizure warrants that affect its relationships 
with correspondent banks in emerging markets, like the seizure 
warrants that Citibank received for M.A. Bank and M.A. Casa de 
Cambio.

    In March 2000, after the MA accounts had been closed, an 
investigator in Citibank's anti-money laundering unit conducted 
a self-initiated review of all of the MA Group accounts. The 
investigation was undertaken after the investigator saw an 
article about MAB in a local newspaper. In June he produced a 
report which included the following:

      According to an article taken from The Miami Herald 
dated March 1, 2000, ``Alejandro Ducler, [sic] a former vice 
minister of finance for Argentina, allegedly transferred $1.8 
million in drug cartel proceeds. Dulcer [sic] is one of the 
owners of the Argentine financial holding firm known as Mercado 
Abierto, which owns M.A. Casa de Cambio, M.A. Valores S.A. and 
M.A. Bank Limited. All four held accounts with Citibank. . . . 
After reviewing the funds transfer activity of the 
aforementioned from April 1997 through March 2000, a total of 
$84,357,473.21 was transferred to the entities mentioned below. 
The consecutive whole dollar amounts transferred and the nature 
of the business contributed to the rise in suspicious activity 
and ongoing monitoring.''

    The entities identified in that report include some that 
were engaged in a significant amount of transactions with MAB. 
Citibank representatives informed Minority Staff that it was 
not accurate to conclude that the $84 million in transactions 
identified in the AML review were suspicious. According to 
Citibank representatives, the review identified those 
transactions that involved dollar amounts and institutions that 
fell within parameters established by the anti-money laundering 
unit. Those parameters are based on information obtained 
through U.S. Government advisories and other expert opinion on 
where the bulk of money laundering occurs. According to 
Citibank representatives, the determination of whether the $84 
million worth of transactions falling within those parameters 
were anomalous or suspicious would require more investigation 
and analysis. That was not performed. The Minority Staff has 
since learned that Citibank did file a Suspicious Activity 
Report on the $84 million in transactions.

                              FEDERAL BANK


  (1) Grupo Moneta and Banco Republica

    Grupo Moneta, an economic group in Argentina, was, 
according to Citibank records, established in December 20, 
1977. According to Citibank documents,\46\ Grupo Moneta was 
owned equally (33% each) by Argentinians Raul Moneta, Benito 
Lucini, and Monfina, S.A., an entity owned by the members \47\ 
of the Moneta family. In October 1983, the Central Bank of 
Argentina approved the establishment of a wholesale bank in the 
group, Banco Republica. In March 1992, the Bahamas approved the 
establishment of an offshore bank in the group, Federal Bank 
Ltd. Federal Bank was understood by Citibank officials to be an 
offshore vehicle for customers of Banco Republica, and its 
correspondent relationship was handled by Citibank in that 
context.
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    \46\ See organizational charts from 1997 and 1999 at the end of 
this chapter.
    \47\ Monfina S.A. according to Citibank records is owned equally by 
Raul Moneta, Fernando Moneta, Alejandra Moneta de Moim, and Alicia 
Moneta de French. Jorge Rivarola held a 1% interest in Grupo Moneta as 
well.
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    Grupo Moneta was described in a Citibank memorandum in 
November 1996 as ``one of the most important groups in the 
country [of Argentina] with consolidated assets of 
approximately $500 million.'' According to Citibank documents, 
it owned at various times a number of financial entities in 
addition to Banco Republica and Federal Bank. These entities 
which were owned either directly or through other companies 
included Adamson Inc.; Republica Holdings,\48\ which, along 
with Citibank, owned stock in CEI Citicorp Holdings, a company 
which owns stock in various telecommunications and media 
companies in Argentina; Citiconstrucciones, a construction 
company unrelated to Citibank; and International Investments 
Union, Ltd. Banco Republica also owned a percentage of CEI 
Citicorp Holdings and several other entities, including a 
controlling percentage in two consumer banks, Banco Mendoza and 
Banco de Prevision Social.
---------------------------------------------------------------------------
    \48\ The name of Republica Holdings prior to January 28, 1998, was 
United Finance Company, or UFCO.
---------------------------------------------------------------------------
    Citibank had a long-term relationship with Grupo Moneta and 
the families of its owners, Raul Moneta and Benito Lucini. This 
relationship had two primary components: Citibank's 
correspondent relationship with Banco Republica, which included 
both cash management and credit services; and Citibank's 
ownership interest, together with Grupo Moneta, in CEI Citicorp 
Holdings. Citibank also maintained accounts for other Grupo 
Moneta entities, including its correspondent account with 
Federal Bank. The financial institutions division of Citibank 
Argentina, which had responsibility for correspondent 
relationships in Argentina, treated its relationship with Banco 
Republica and its relationship with Grupo Moneta in tandem and 
almost interchangeably, often including an assessment of the 
Grupo Moneta relationship as a whole when addressing the status 
of Banco Republica. Federal Bank was analyzed by Citibank as a 
subset of the Grupo Moneta and Banco Republica relationship.

  (2) Federal Bank Ownership

    According to the Central Bank of the Bahamas, Federal Bank 
was licensed in July 1992 ``to conduct unrestricted banking 
business from within The Commonwealth of the Bahamas.'' \49\ 
However the 1999 annual statement of Federal Bank says its 
license is restricted to ``conduct banking and trust business 
with non-residents,'' making it an offshore bank. This 
discrepancy was not explained, but the evidence is clear that 
Federal Bank did not act as a domestic bank in the Bahamas but 
confined itself to offshore banking activities. The Bahamas 
Central Bank said the registered office of the bank and the 
managing agents of the bank are the Winterbotham Trust Company, 
Limited, of Nassau.
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    \49\ Letter dated September 7, 2000, from the Manager of the Bank 
Supervision Department of the Central Bank of the Bahamas to the 
Subcommittee.
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    The Central Bank of the Bahamas provided the Subcommittee 
with a document claiming to show the ownership of Federal Bank. 
The owners on the document were identified as Abraham Butler, 
George Knowles, and Philip Beneby, each listed as a banker in 
Nassau, Bahamas. Butler is shown as holding 50,000 shares; 
Knowles as holding 1,650,000 shares; and Beneby as holding 
3,300,000 shares. When the Minority Staff inquired as to the 
identity of these three persons, the Central Bank said that 
each of the individuals is an employee of Lloyds TSP Bank in 
the Bahamas, which acted as Federal Bank's managing agent prior 
to the Winterbotham Trust Company. The Central Bank explained 
that Bahamas law used to allow individual officers of the 
registered agent to serve as nominee owners of the bank being 
managed. The Central Bank said that there was no good reason 
for this practice, it effectively disguised bank ownership, and 
the Bahamas no longer allows it. The Central Bank told the 
Minority Staff they expect that by the end of the year, the law 
will require bank records to reflect the names of the actual 
beneficial owners of all banks licensed in the Bahamas that 
conduct business with the public.\50\
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    \50\ When asked why Federal Bank's nominee owners had such a wide 
disparity in the number of shares each is recorded as owning, the 
Central Bank said it did not understand the reason for the records 
reflecting the differences in shares.
---------------------------------------------------------------------------
    In a telephone conversation with the head of the Central 
Bank of the Bahamas, the Central Bank confirmed to the Minority 
Staff that the actual ownership of Federal Bank is similar to 
that reported by Citibank for Grupo Moneta, with 33% of the 
shares owned by Raul Moneta; 33% owned by the members of the 
Moneta family; 30% owned by Benito Jaime Lucini; 3% owned by 
Paulo Juan Lucini; and 1% owned by Jorge Rivarola. But for the 
3% ownership by Paulo Lucini, this information comports with 
the ownership information contained in the Citibank documents 
for Grupo Moneta.\51\
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    \51\ Banco Republica did not itself have any direct ownership 
interest in Federal Bank. Both banks were entities owned by Grupo 
Moneta.
---------------------------------------------------------------------------
    In a claim directly contradicted by the information 
provided by Citibank and the Central Bank of the Bahamas to the 
Minority Staff, Raul Moneta is reported as having recently 
denied any ownership in Federal Bank in an interview with The 
Miami Herald.\52\
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    \52\ ``Miami Banks Used for International Money Laundering, 
Investigation Reveals,'' by Andres Oppenheimer, February 5, 2001.
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  (3) Financial Information and Primary Activities

    In a December 1998 analysis of Banco Republica by Citibank, 
in a document entitled a ``Commercial Bank Individual 
Analysis,'' the Resident Vice President of Citibank Argentina 
described the sources of Banco Republica's funding as follows:

      The principal source of funding for BR is its base of 
deposits, which represents 55% of its funding. Within the 
composition of its deposits, we find that the principal type of 
BR deposit is CD's of individuals with substantial assets who 
trust Raul Moneta [one of the owners of Banco Republica]. This 
represents a change with respect to the past, since the number 
of deposits of institutional investors has decreased.

      LSecond, 45%, is the lines of credit with foreign banks, 
which BR uses frequently for foreign trade transactions. In 
addition, BR has lines of credit with local banks such as 
Galicia, Deutsche, and Sudameris.\53\
---------------------------------------------------------------------------
    \53\ Translated from Spanish by the Congressional Research Service.

    Martin Lopez, Citibank's relationship manager for Grupo 
Moneta entities from 1995 to 2000, told the Subcommittee that 
his understanding of Banco Republica was that it was a 
wholesale bank in Argentina that dealt with corporate customers 
and private bank customers in Argentina. He described Federal 
Bank as an offshore vehicle ``to help private banking 
customers'' of Banco Republica.\54\ He added that Federal Bank 
was created to replace American Exchange Company, another 
offshore vehicle of Grupo Moneta incorporated in Panama with an 
office in Uruguay. American Exchange Company is discussed later 
in this chapter.
---------------------------------------------------------------------------
    \54\ By private banking customers, Lopez meant wealthy individual 
seeking wealth management services from the bank.
---------------------------------------------------------------------------
    Lopez explained that the purpose of Federal Bank was to 
help private banking customers of Banco Republica who wanted to 
keep their deposits out of Argentina for fear of the country's 
economic instability. He said domestic banks like Banco 
Republica, in order to compete with international banks, set up 
these kind of offshore banks. Lopez described Federal Bank as a 
small offshore bank with not more than 200 or 250 customers. He 
said the deposits in Federal Bank belong to customers of Banco 
Republica and that Grupo Moneta used these deposits to provide 
loans through Federal Bank to another Grupo Moneta entity, 
Republica Holdings.\55\
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    \55\ Republica Holdings, according to Lopez, has three holdings 
itself. Grupo Moneta's CEI shares, Telephonica Argentina shares, and 
Telecom shares. He added that sometimes when Republica Holdings has to 
pay interest on its money, it gives its shares in these entities to 
Federal Bank as collateral and Federal Bank loans Republica Holdings 
the money it requires.
---------------------------------------------------------------------------
    In a memo dated February 6, 1997, Lopez described the 
elements of the Federal Bank role in Grupo Moneta:

      The existence of this vehicle is justified in the 
group's strategy because of the purpose it serves:

      (a) To channel the private banking customers of Banco 
Republica to which they provide back-to-backs and a vehicle 
outside Argentina where they can channel their savings, which 
are then replaced in Banco Republica by Federal Bank, 
constituting one of the bank's most stable sources of funding 
(approximately US $34 MM). (b) To channel the cash flow of the 
partners of Banco Republica and serve, with these deposits and 
the assets of Federal Bank, as a bridge, financing loans aimed 
at companies associated with CEI. (c) To finance UFCO \56\ 
through swaps of their share positions giving it financing 
against the most liquid shares (Telefonica, Telecom) for US $20 
MM which, in turn, Federal matches with banks abroad.\57\
---------------------------------------------------------------------------
    \56\ UFCO changed its name to Republica Holdings in January 1998.
    \57\ Translation from Spanish provided by the Congressional 
Research Service.

    The financial statement for Federal Bank for the year 
ending 1999 shows total assets in 1998 of almost $252 million 
and in 1999 of almost $133 million. The main liabilities 
included about $50 million in deposits and $40 million due to 
banks each year; $64 million in 1998 and $8 million in 1999 
owed to creditors for purchases of securities; and $66 million 
in 1998 and $4 million in 1999 as ``forward sales of 
securities.'' The 1999 financial statement describes Federal 
Bank's ``line of business'' as ``placing short-term deposits 
with members of the international banking community and making 
loans to customers either in currencies or securities and 
trading in securities.''
    The Minority Staff reviewed the monthly statements of 
Federal Bank for its correspondent account at Citibank and 
determined that during the course of Federal Bank's 
correspondent account at Citibank New York, from November 1992 
through May 2000, over $4.5 billion \58\ moved through the 
account. This figure exceeds any other offshore bank examined 
by the Minority Staff for that period.
---------------------------------------------------------------------------
    \58\ The Minority Staff calculated that the total amount of money 
deposited in the Federal Bank correspondent account at Citibank New 
York from November 1992 through May 2000 was $4,317,646,934, excluding 
5 months for which the monthly statements are missing. When estimated 
amounts for the missing 5 months are added to the total, the result 
exceeds $4.5 billion.
---------------------------------------------------------------------------

  (4) CEI

    Citibank was not only the correspondent bank for Banco 
Republica and Federal Bank, Citibank was also a partner with 
Grupo Moneta and Banco Republica, and--for a brief time--with 
Federal Bank, in a holding company called CEI Citicorp 
Holdings, S.A. (originally named Citicorp Equity Investments, 
S.A.), referred to hereafter as CEI. To understand the 
correspondent banking relationships, it is necessary to also be 
familiar with this business collaboration.\59\
---------------------------------------------------------------------------
    \59\ See ``Remarks Grupo Republica,'' dated 2/6/97, by Citibank, 
PS018310. ``This association (CEI) means, both for Grupo Moneta and 
Citibank, a long-term strategic alliance which requires, because of the 
amount of the investment and the relative weight of Grupo Moneta 
therein, a very strong interrelationship between both and a commitment 
by both to maintain that relationship.'' (Translated from Spanish by 
the Congressional Research Service.) The Minority Staff's account of 
the ownership and operation of CEI is based on a briefing provided by 
Citibank attorneys.
---------------------------------------------------------------------------
    Citibank started CEI as a company to hold and manage the 
stock of companies in Argentina which Citibank came to own as a 
result of defaults on loans and conversion of its Argentinian 
bonds, using debt for equity swaps. Citibank owned its interest 
in CEI through a Delaware corporation Citibank established 
called International Equity Investments (IEI). Citibank's 
purchase of equity in Argentinian companies through its 
ownership of IEI and, in turn, CEI, was approved by the Office 
of the Comptroller of the Currency (OCC) in 1992,\60\ with the 
condition that Citibank reduce its ownership of CEI over time. 
For example, the OCC said Citibank could hold no more than 40% 
of CEI's shares by the end of 1997, at which time CEI was to be 
managed by a third party, and Citibank would, by a certain 
time, have to completely divest itself of any ownership 
interest in the company. The OCC also imposed a number of other 
relevant conditions on Citicorp's activities relative to CEI.
---------------------------------------------------------------------------
    \60\ Interpretive Letter No. 643, July 1, 1992, Frank Maguire, 
Acting Senior Deputy Comptroller.
---------------------------------------------------------------------------
    In 1992, when Citibank was in need of capital and pursuant 
to its agreement with the OCC, it looked for a purchaser of 
some of its CEI stock. It found that purchaser in Raul Moneta 
and his financial organization Grupo Moneta. While it is 
difficult to piece together exactly how the Grupo Moneta's 
shares in CEI were purchased and distributed, it appears that 
in July 1992 Citibank sold approximately 10% of its CEI stock 
to Grupo Moneta through United Finance Company Limited (UFCO); 
UFCO purchased an additional percentage of CEI in December 
1992.\61\ Out of its shares of CEI stock, UFCO sold a 4.27% 
interest in CEI to Banco Republica. Citibank loaned UFCO a 
substantial percentage of the funds it needed to purchase the 
CEI stock.
---------------------------------------------------------------------------
    \61\ Citibank's attorney wrote to the Subcommittee on February 25, 
2001, after reviewing a draft of this report and said that the sale to 
UFCO in December 1992 was an additional 10% of CEI. Documents in 
Citibank files, however, suggest that the 1992 sale was larger than 
10%.
---------------------------------------------------------------------------
    In 1998 Citibank sold additional shares of CEI stock to 
Grupo Moneta, and Grupo Moneta increased its overall ownership 
to 39.9%.\62\ Over time the ownership of CEI changed, and as of 
May 31, 2000, according to the June 30, 2000, annual report 
filed with U.S. Securities and Exchange Commission, the 
principal shareholders of CEI were Ami Tesa Holdings Ltd. (ATH) 
(67.7%) and Citibank New York (23%). Hicks, Muse, Tate and 
Furst, Inc. held approximately 40% of the ATH stock, and 
approximately 27% of the ATH stock was held in escrow by 
Citibank for Republica Holdings and ITC, both owned by Grupo 
Moneta.
---------------------------------------------------------------------------
    \62\ This increase in CEI shares for Grupo Moneta was accomplished 
through the purchase of the shares by Republica Holdings, formerly 
UFCO. It is uncertain when the Central Bank of Argentina became aware 
of the fact that UFCO or Republica Holdings was owned by Grupo Moneta.
---------------------------------------------------------------------------
    In its June 2000 report, CEI described itself to the 
Securities and Exchange Commission as ``a holding company 
primarily engaged through controlled companies and joint 
venture companies in the telecommunications business, the cable 
television business, and the media business in Argentina.''

  (5) Correspondent Account at Citibank

    Citibank opened its correspondent account for Banco 
Republica in 1989.\63\ It opened a correspondent account for 
Federal Bank in 1992. The Banco Republica account stayed open 
until 1999, and the Federal Bank account stayed open until 
2000, when both accounts were closed due to the collapse of 
Banco Republica because of a ``run'' on the bank in 1999. The 
``run,'' according to Lopez was due to the publication in the 
Argentine press of information that Banco Republica had 
received a CAMEL rating of 4 from the Central Bank of 
Argentina. CAMEL ratings are used to grade the financial 
stability, safety and soundness of a banking institution. The 
ratings range from 1 to 5, with 5 being the worst. A CAMEL 
rating of 4 is considered very poor, and both Lopez and Carlos 
Fedrigotti, President of Citibank Argentina, told the 
Subcommittee they would not open an account for a bank with a 
CAMEL rating of 4.
---------------------------------------------------------------------------
    \63\ It also opened an account for American Exchange Company at the 
same time. It appears Citibank used a common account opening document 
for both institutions.
---------------------------------------------------------------------------
    The account opening documentation produced by Citibank for 
the Banco Republica account is limited. It consists of a Legal 
Agreement dated August 30, 1989, regarding use of Citibank's 
Global Electronic Financial Network, the list of account 
numbers (there appear to be two), an account opening checklist 
that appears to be a reminder for sending information to 
various departments within Citibank, several apparently minor 
messages, an information sheet creating the accounts, and what 
appears to be a letter of request to Citibank Argentina to open 
an account signed by Jorge Maldera and Pablo Lucini, both 
directors of Banco Republica. The account opening documentation 
produced for the Federal Bank account is even less; it consists 
of a single signature card signed by Jorge Maschwitz as 
Director of Federal Bank. There is no documentation in the 
Citibank account opening records for either bank with respect 
to: Ownership, an audited financial statement, references from 
regulators or others about the bank's reputation, or a copy or 
discussion of anti-money laundering procedures.
    Although Federal Bank is a shell bank with an offshore 
license, Citibank told the Subcommittee that it had a 
correspondent relationship with Federal Bank because Federal 
Bank was part of the larger financial enterprise of Grupo 
Moneta and was the offshore vehicle for Banco Republica, the 
owners of which Citibank said they knew very well. For example, 
one Citibank document written in March 1997 states: ``There is 
a close relationship between our Senior Management and R. 
Moneta. This, added to the association that exists between this 
group and CEI, means that Citibank has profound knowledge of 
the corporate structure, details of its organization, and the 
operation of Grupo Moneta and Banco Republica.'' Another 
Citibank document states that Raul Moneta ``has easy access to 
our Senior Management (John Reed, Bill Rhodes, Paul Collins, 
etc.).'' \64\
---------------------------------------------------------------------------
    \64\ Several Citibank reports on Grupo Moneta and Banco Republica 
note specifically the close relationship Citibank Argentina has with 
the owners of Grupo Moneta. A credit report from August 1997 states: 
``We have excellent contacts at the Senior level. . . . This close 
relationship gives us access to confidential internal Bank 
information.'' And a Commercial Bank Analysis of Banco Republica dated 
December 1998 states: ``The bank's Senior Management has a strong 
relationship with Raul Moneta, who is No. 1 in this group. The 
relationship came about as a result of the `shareholder' relationship 
Citibank has with Grupo Republica in CEI (Citicorp Equity Investment). 
Raul Moneta has easy access to our Senior Management (John Reed, Bill 
Rhodes, Paul Collins, etc.).'' John Reed is the former Chairman of 
Citibank; Bill Rhodes is a Vice Chairman, and Paul Collins is a retired 
Vice Chairman.
---------------------------------------------------------------------------
    Although Federal Bank was an offshore shell bank licensed 
in a country known for weak banking and money laundering 
controls, Citibank documentation does not indicate any steps 
taken to ensure enhanced scrutiny of this bank. To the 
contrary, Citibank appeared to ignore even basic due diligence 
requirements it had in place for correspondent accounts. For 
example, although Citibank normally requires an on-site annual 
visit to its bank clients, Lopez said that as the relationship 
manager for Federal Bank, he never visited it and doesn't know 
anyone from Citibank who has. When asked where the bank is 
located, Lopez said he ``has a feeling'' it is in Uruguay in 
the offices of ``some representative or attorney.'' When asked 
about the absence of a physical location for its customers, 
Lopez said it is like M.A. Bank; ``they only need a booking 
unit that receives deposits and could make loans.''
    Lopez said that he knew Federal Bank was not permitted to 
conduct banking business in Argentina and that it did not have 
any other correspondent accounts other than Citibank, apart 
from its correspondent relationship with Banco Republica. Since 
Federal Bank is a shell bank and thus totally dependent upon 
its correspondent relationships, it appears that all of Federal 
Bank's transactions were conducted either through its 
correspondent account at Citibank or its correspondent account 
at Banco Republica.

  (6) Regulatory Oversight

    The regulatory authority for Banco Republica is the Central 
Bank of Argentina, also known as BCRA. According to Carlos 
Fedrigotti, the President of Citibank Argentina, the BCRA 
``gets good reviews'' from both the banking industry in 
Argentina and outside parties such as the World Bank and the 
International Monetary Fund. Fedrigotti said the BCRA has 
``done a good job in cleaning up'' the banking industry in 
Argentina and that the industry is far safer than it was 6 or 7 
years ago. Fedrigotti said Citibank Argentina gets audited on 
an annual basis; and the Minority Staff learned that Banco 
Republica was subject to two audits that took place from 1996 
through 1999.
    The Financial Action Task Force on Money Laundering 
(``FATF'') and the U.S. State Department's most recent 
International Narcotics Control Strategy Report (``NCSR 2000'') 
report indicate that Argentina's anti-money laundering efforts 
are mixed. Argentina did not have a comprehensive anti-money 
laundering law until the year 2000.\65\ Based upon passage of 
this new law, FATF recognized Argentina as a full member for 
the first time in 2000. However, FATF's latest annual report 
(2000) states:
---------------------------------------------------------------------------
    \65\ The Minority Staff has been advised that the effective date of 
the new anti-money laundering law (law 25.246) was actually February 7, 
2001, because it was awaiting the approval of the President of 
Argentina before it could be implemented.

      Recent high-profile investigations have shown evidence 
that drug cartels are active in Argentina, and underlined fears 
that it could become a growing international money laundering 
center. While there was no indication of other sources of 
illegal proceeds, it is believed that bribery and contraband 
could also contribute to the money laundering which occurs in 
---------------------------------------------------------------------------
Argentina.

    The regulatory authority for Federal Bank is the Central 
Bank of the Bahamas. In June 2000, the Bahamas was one of 15 
countries named by FATF for weak anti-money laundering controls 
and inadequate cooperation with international anti-money 
laundering efforts. The INCSR 2000 report describes the Bahamas 
as a country of ``primary'' money laundering concern due to 
``bank secrecy laws and [a] liberal international business 
company (IBC) regime [which] make[s] it vulnerable to money 
laundering and other financial crimes.'' While banking and 
money laundering experts interviewed by the Minority Staff 
described the Bahamas as having good intentions and making 
important improvements, during the 1990's it provided weak 
oversight and inadequate resources to regulate its more than 
400 offshore banks.
    Because Federal Bank and Banco Republica were both owned by 
Grupo Moneta, Federal Bank might also be expected to be subject 
to oversight by the Central Bank of Argentina as an affiliate 
of Banco Republica. As Citibank Argentina President Fedrigotti 
told the Subcommittee, if Federal Bank had been linked to Banco 
Republica, it would have been reviewed by BCRA. But that link 
was not made, however, because Banco Republica did not directly 
own Federal Bank, and, although Citibank knew that Federal Bank 
was owned by the same persons who owned Banco Republica (Grupo 
Moneta), the Central Bank of Argentina did not.
    Ironically, in fact, Citibank officials expressed concern 
internally about the weak regulatory oversight of Federal Bank, 
because they knew the Central Bank of Argentina was not aware 
of the common ownership of Federal Bank and Banco Republica. In 
an internal memo,\66\ Lopez, the relationship manager for Grupo 
Moneta entities, wrote, ``Its [Federal Bank's] existence is not 
reported as linked to BCRA despite being a banking vehicle 
(offshore category D in our policy), which makes it a risky 
vehicle per se because of having only the control of the 
Central Bank of the Bahamas.'' Yet, as discussed later, when 
the Central Bank asked Citibank about Federal Bank's ownership, 
Citibank chose to keep silent about the offshore bank's links 
to Banco Republica and Grupo Moneta. In addition, Citibank 
failed to give any heightened scrutiny to what its own 
relationship manager characterized as ``a risky vehicle per 
se.''
---------------------------------------------------------------------------
    \66\ See ``Remarks on Grupo Republica'' dated 2/6/97, PS018309. 
``Federal Bank Ltd.: Located in the Bahamas with US $25 MM in capital. 
Its existence is not reported as linked to BCRA [Central Bank] despite 
being a banking vehicle (offshore category D in our policy), which 
makes it a risky vehicle per se because of having only the control of 
the Central Bank of the Bahamas.''
---------------------------------------------------------------------------

  (7) Central Bank of Argentina Concerns

    Resolution No. 395/96. The Central Bank of Argentina has 
established limits with respect to the amount of stock a bank 
can hold in a company to which it is related and the amount of 
loans a bank can make to related companies. In 1996 the Central 
Bank became concerned about the extent of Banco Republica's 
ownership (4.27%) in CEI. That amount represented more than 15% 
of Banco Republica's computable equity, which is the limit 
previously established by the Central Bank. Banco Republica 
asked the Central Bank for a waiver of the 15% limit for 3 
years. The Central Bank granted that waiver on the condition 
that Banco Republica ``refrain from carrying out any 
transaction that involves, even temporarily, directly or 
indirectly increasing the financing of CEI or assuming any risk 
connected with said company.'' It went on to require that Banco 
Republica not ``increase its stake in other companies, except 
those that may eventually be associated with Banco de Mendoza 
S.A.,'' a retail bank Banco Republica was in the process of 
purchasing.\67\
---------------------------------------------------------------------------
    \67\ See Resolution No. 395, Buenos Aires, August 28, 1996, Central 
Bank of Argentina.
---------------------------------------------------------------------------
    During the 1996/7 audit, the Central Bank expressed concern 
that Banco Republica had increased its shares of CEI. The 
auditors referred to a conflict between what it was being told 
by Banco Republica, that the bank owned 4.27% of CEI, and what 
it had learned from the media and another inspection, that 
Banco Republica owned 33-35% of CEI. The references in the news 
media to a larger share of CEI are likely the ownership 
interest of UFCO (discussed above), also owned by Grupo Moneta. 
It is uncertain whether the Central Bank at the time of the 
1996/7 audit knew that UFCO was owned by Grupo Moneta. The 
Central Bank appears to suggest that another entity linked to 
Banco Republica may hold the CEI shares, but it does not 
mention UFCO in that context. The Central Bank apparently tried 
to resolve the discrepancy by asking CEI for the ownership 
information directly, but it appears that at the time of the 
audit, it did not have a response from CEI. The Central Bank 
put as its first item for its next inspection, ``Fulfillment of 
Resolution No. 395/96''.
    In August 1998, according to Citibank documents,\68\ Grupo 
Moneta ``increased its stake in CEI to 39.9% . . . and at the 
same time Raul Moneta was named president of CEI. . . .'' The 
1998 increase in shares in CEI was, it appears, in the name of 
Republica Holdings (formerly UFCO). If the Central Bank were to 
treat affiliated ownership as subject to the restrictions of 
Resolution 395/96, then, this increase in CEI ownership by 
Grupo Moneta would be a violation of the Central Bank's 
Resolution 395/96.
---------------------------------------------------------------------------
    \68\ See FITS Argentina memo dated April 1997.
---------------------------------------------------------------------------
    In addition, under the Resolution it appears Banco 
Republica was prohibited from lending money to CEI related 
entities. Yet in the Citibank internal documents assessing the 
activities of Federal Bank, Citibank notes that one of the 
purposes of Federal Bank is ``(t)o channel the cash flow of the 
partners of Banco Republica and serve, with these deposits and 
the assets of Federal Bank, as a bridge, financing loans aimed 
at companies associated with CEI.'' This activity appears to be 
an end-run around the conditions imposed on Banco Republica by 
the Central Bank Resolution. Since Banco Republica is 
apparently prohibited from loaning money to companies 
associated with CEI, it appears Grupo Moneta was using Federal 
Bank to do what Banco Republica could not do. But because the 
Resolution prohibits Banco Republica loans ``directly or 
indirectly'' to CEI related companies, it may reach the 
activity of Federal Bank, as an affiliated entity, as well.
    Audits. In 1996/7 and 1998, the Central Bank of Argentina 
conducted audits of Banco Republica, and copies of these audits 
were made available to the Subcommittee. These audits identify 
numerous concerns by the Central Bank about the management and 
operations of Banco Republica, and both resulted in a CAMEL 
rating of 4 for the bank. Although Citibank had, according to 
its records, ``access to confidential internal bank 
information'' about Banco Republica and had ``profound 
knowledge'' of its structure, organization and operation, 
Citibank said it was unaware until 1999 that Banco Republica 
had been given a CAMEL 4 rating by the Argentine Central Bank. 
A comparison of the information obtained by the Central Bank 
during these audits with the information Citibank Argentina had 
as a result of its correspondent relationship raises additional 
serious discrepancies and questions about the effectiveness of 
Citibank's due diligence and ongoing monitoring.
    a. Operations and Anti-Money Laundering Controls. Citibank 
Argentina repeatedly notes in its analyses of Banco Republica 
that the bank has an anti-money laundering program. In a FITS 
memo (a brief financial analysis of a bank with which Citibank 
Argentina has a credit relationship) of April 1997, Citibank 
notes: ``BR has internal procedures to prevent money 
laundering, including KYC policies. This matter is overseen by 
Banco Central de la Republica Argentina. We have no evidence or 
information from third parties that BR was or is carrying out 
illicit money laundering transactions with the knowledge of its 
management or shareholders.'' But in the BCRA audit of 1998, 
the BCRA notes with concern: ``The entity under examination 
[Banco Republica] does not have a manual containing the 
programs against laundering money from illicit activities,'' 
despite early requirements that it do so and ``despite the fact 
that the internal Auditor, in his report on the work performed 
between July 1997 and June 1998, pointed out that `It is 
necessary to set up a manual of rules and procedures regarding 
precautionary measures with respect to laundering. . .' ''
    The Subcommittee asked Lopez whether he had obtained from 
Banco Republica a copy or documentation of Banco Republica's 
anti-money laundering program. Lopez said he discussed the 
anti-money laundering program with Banco Republica management 
during his annual reviews and was told by the management that 
Banco Republica had such a program. He said he was satisfied 
with that response and assumed the same program would apply to 
Federal Bank. Lopez said he had not seen the BCRA report prior 
to his preparation for the Subcommittee interview, that it 
``was disturbing'' and `` shocking'' to see the BCRA finding 
that no written procedures existed and that Banco Republica 
``never disclosed'' to Citibank Argentina that they had a 
problem with the BCRA. Lopez said that sometimes his office 
asks to see a bank's anti-money laundering manual and sometimes 
they ``trust the customer.'' He noted Citibank had a 20 year 
relationship with Grupo Moneta, and that ``now I see a customer 
of 20 years can lie to you.''
    When asked about the extent to which Citibank Argentina 
reviewed the anti-money laundering policies of Federal Bank, 
Lopez said that because Federal Bank had the same management as 
Banco Republica, Citibank assumed they had the same procedures. 
When asked whether Citibank had ever asked Federal Bank about 
its anti-money laundering procedures, Lopez said he did and 
that is reflected, he said, in the comments in the annual 
reviews when discussing Grupo Moneta as a whole. The 
Subcommittee was not able to find any reference in the Citibank 
documents to the anti-money laundering program or procedures of 
Federal Bank.
    b. Federal Bank Transactions with CEI Related Companies. 
Resolution 395/96 appears to prohibit Banco Republica not only 
from increasing its ownership in CEI, but also from loaning 
money to CEI related entities. From Citibank documents, 
however, it appears that Banco Republica used Federal Bank as a 
way to get around that limitation and that Citibank was aware 
of this effort. An October 23, 1995, call memorandum from Lopez 
describes the utility of Federal Bank to Banco Republica. It 
says, ``Strategically, the group needs a vehicle to which to 
channel its private banking and to create for it a nexus 
between its investment in CEI booked in UFCO and Banco 
Republica's financial activity.'' In describing the assets of 
Federal Bank, Lopez writes that $30 million of Federal Bank's 
assets are ``deposits of the Banco Republica members 
themselves, which are lent to target-name customers of Banco 
Republica and to businesses linked to CEI whose loans cannot be 
processed through Banco Republica.''
    In a September 1996 memo on Banco Republica Lopez writes 
that the significance of Federal Bank to Banco Republica is to, 
``[c]hannel the liquidity of the shareholders of Banco 
Republica and, with these deposits and the assets of Federal 
Bank, support the acquisitions or grant loans to CEI companies. 
. .''
    The Minority Staff was not able to determine whether the 
BCRA regulations prohibit a bank from using an entity with 
common ownership as a vehicle to do what BCRA has prohibited 
the regulated bank from doing, but such an activity appears to 
be at odds with the import of BCRA's restrictions on Banco 
Republica in Resolution 395/96.
    c. Withholding Information from the Central Bank. The 
Central Bank also made several observations in the 1998 audit 
that information requested of Banco Republica about certain 
issues regarding Federal Bank was not provided despite repeated 
requests. The Central Bank said in the 1998 audit: ``. . . 
everything related to the Federal Bank Limited, Republica 
Propiedades S.A., CEI Citicorp holdings S.A., among others, had 
to be claimed several times via memos or directly to the 
officers in several meetings held during the inspection and 
afterwards. It must be stated that the information given in 
those cases was contradictory or kept back and had to be 
requested over again.'' \69\
---------------------------------------------------------------------------
    \69\ Annex I of 1996 Audit, Folio 28.
---------------------------------------------------------------------------
    d. Misleading the Central Bank as to the Ownership of 
Federal Bank. The 1998 audit suggests that the Central Bank was 
not aware at the time that Federal Bank was actually owned by 
Grupo Moneta, which also owned Banco Republica. The Central 
Bank's discussion of Banco Republica's operations with Federal 
Bank does not mention the common ownership, and in fact in its 
closing paragraph \70\ of that discussion it seems to indicate 
that it was told by Banco Republica officials that ``Federal 
Bank Limited had discontinued its operations with Banco 
Republica S.A.''
---------------------------------------------------------------------------
    \70\ 1996 Audit. Folio 133.
---------------------------------------------------------------------------
    In 1997 and 1998 according to the audit documents, Federal 
Bank applied to the Central Bank for the opportunity to open an 
office in Argentina. The Central Bank appeared to be very 
concerned about the fact that Federal Bank was licensed in the 
Bahamas and was without any consolidated banking supervision 
system. Again, the Minority Staff could find no mention of the 
bank's common ownership with Banco Republica. The Central Bank, 
in the end, denied the request by Federal Bank.
    In the 1998 audit, the Central Bank investigators reported, 
``At a meeting on November 17, 1998, with Pablo Lucini, [one of 
Citibank's principal contacts at Banco Republica] he denied any 
`economic group' relationship between BR [Banco Republica] and 
Federal B.L. [Bank Limited].''
    This apparent misinformation by Pablo Lucini to the Central 
Bank of Argentina was compounded when the Central Bank 
specifically asked Citibank Argentina in April 1999 to provide 
the Central Bank with any information Citibank Argentina had 
with respect to the ownership of Federal Bank.\71\ Despite 
repeated references in their own documents and records to the 
fact that Federal Bank was 100% owned by Grupo Moneta,\72\ and 
that it knew Grupo Moneta so well, Citibank Argentina responded 
to the Central Bank that their ``records contain no information 
that would enable us to determine the identity of the 
shareholders of the referenced bank.'' \73\
---------------------------------------------------------------------------
    \71\ See the exchange of letters on this subject at the back of 
this chapter.
    \72\ See, for example, Citibank Basic Information Reports for 
November 1996, August 1997, and May 1999, report Federal Bank as owned 
100% by Grupo Moneta.
    \73\ May 1999 letter from Carlos Fedrigotti, CEO of Citibank 
Argentina to the Central Bank.
---------------------------------------------------------------------------
    The Subcommittee asked relationship manager Martin Lopez to 
explain Citibank's response to the Central Bank. Lopez said he 
did not see the letter before it went out, but he knew the 
Central Bank was looking for information about Federal Bank. He 
said he had the impression that the Central Bank ``was trying 
to play some kind of game,'' that it was ``trying to get some 
legal proof of ownership.'' When the Subcommittee asked why he 
thought the request for information about Federal Bank's owners 
from the Central Bank was a ``game,'' Lopez said because one of 
the signers of the letter had previously been a relationship 
manager or unit head of financial institutions in Bank of 
Boston, and he must have known the owners of Federal Bank. 
Lopez said he thought maybe the Central Bank was put in an 
``awkward position'' and was ``looking for legal proof.'' At 
one point he said, ``We [Citibank Argentina] don't have 
information in Argentina; it's in New York.'' However, the 
Subcommittee was later told that the annual reports on Banco 
Republica containing the organizational structure and ownership 
were, in fact, maintained in Citibank Argentina. Lopez also 
said he had a conversation with the counsel for Citibank 
Argentina and with the Chief of Staff to Fedrigotti about how 
to respond to the letter. Lopez said he told them he did not 
think Citibank should respond. He said following the 
conversation, Fedrigotti wrote the letter and sent it. He said 
Fedrigotti definitely knew at the time that Federal Bank was 
owned by Grupo Moneta. At the same time, Lopez argued that the 
letter is ``technically true,'' because Citibank Argentina did 
not have any ``legal'' documents showing the ownership of 
Federal Bank and that any such information would have been kept 
in Citibank New York. When asked whether he called Citibank New 
York to ask them or let them know of the request, he said he 
did not and he did not know if anyone else did.
    The Minority Staff also asked Citibank Argentina President 
Carlos Fedrigotti about Citibank's response. Fedrigotti said he 
got the letter from the Central Bank in April 1999 and that the 
letter was ``within the context of what I knew was going on out 
in the market,'' referring to the restructuring of Banco 
Republica and Grupo Moneta at that point in time. He said he 
read it, understood the gist of what was being requested, and 
handed it to his deputy. He said he told his deputy to consult 
with Citibank Argentina General Counsel and to prepare a 
response. He said a few days later a response was prepared for 
his signature; he said he looked at it quickly, and he did not 
consult the original letter. He said he saw the first 
paragraph, asked if it was accurate, and was told it was. He 
said he looked at the second paragraph that referred BCRA to 
Citibank in New York because that ``is where the Federal Bank 
account was domiciled.'' He said he was satisfied with the 
content, approved it, and spent no more than 15 seconds on it.
    Apparently nothing occurred with respect to the BCRA 
request and Citibank Argentina's response for more than a year, 
according to Fedrigotti. Then in July 2000, when the 
Subcommittee requested information with respect to Federal Bank 
from Citibank, ``another review of the documents and papers was 
made.'' Fedrigotti said the question was asked, ``how is this 
letter (Citibank's response to BCRA) consistent with 
information in Citibank files.'' He said it was brought to his 
attention, and he got involved. He said he was told the 
response to BCRA was in keeping with the policy at the bank 
that if information is requested for an account in another 
jurisdiction, the person making the request should be referred 
to that jurisdiction. In this case, Fedrigotti said, although 
Citibank Argentina handled all of the due diligence and day-to-
day relationships with Federal Bank, the actual account was 
held at Citibank New York. Fedrigotti said that it was also 
true that the ownership information sought by the BCRA that 
Citibank Argentina had was ``rebuttable''--that is, it ``wasn't 
information that could legally demonstrate the ownership'' of 
Federal Bank and so the ``letter was legally correct.''
    Lopez said that he now knows Citibank should have answered 
the letter ``in a different way,'' that Citibank ``should have 
done more.'' He said in July 2000 when Citibank New York 
learned about the letter as a result of the Subcommittee's 
investigation, the ``compliance people were very upset'' with 
the answer provided in the letter. Once Citibank New York 
decided the first response was ``a mistake,'' Lopez said, then 
a second letter was drafted and sent telling the Central Bank 
that Citibank has ``information prepared internally by our 
[Citibank] institution regarding Federal Bank Limited [that] 
includes references to the identify of its [Federal Bank's] 
shareholders.'' The second letter is dated July 27, 2000.
    Fedrigotti said that during his review of the matter in 
July 2000, ``having myself been exposed more deeply to the type 
of information that was contained and nature of informal 
working papers that reflected our understanding of the 
connection between these entities, and keeping with our policy 
with being fully open with our regulators, I took the step to 
give information to the regulators.'' Fedrigotti added that he 
wanted to make clear that in doing so, he was not 
``invalidating the legality'' of the first letter. He said, 
``We were supplementing the [earlier] information.'' But even 
in this second letter, Citibank Argentina does not provide 
complete and accurate information. For example, the Citibank 
letter does not acknowledge to the Central Bank that Citibank 
New York has a correspondent account with Federal Bank that was 
initiated and managed by Citibank Argentina, and it tells the 
Central Bank that Citibank Argentina has no account with 
Federal Bank.
    When asked whether he remembered any conversation with 
Citibank officials with respect to the BCRA request about 
``playing games,'' Fedrigotti said he did not. He added that it 
was ``not a fair assumption'' to say the BCRA was ``playing 
games.''
    After receiving information about Federal Bank's ownership 
from Citibank Argentina, Fedrigotti said that BCRA recently 
(February 7, 2001) asked Citibank Argentina to ``justify the 
apparent discrepancy'' between Citibank Argentina's first 
letter and its second letter, and Fedrigotti did so.
    e. Other Central Bank Concerns. The Central Bank audits 
identify other concerns about the operation and management of 
Banco Republica. The Central Bank claimed that Banco Republica 
was providing financing with preferential conditions for 
``their linked clients'' both with respect to interest rates 
and terms. The Central Bank was concerned that there was no 
organization manual for Banco Republica and that the procedure 
manuals for the bank had not been approved by the Board of 
Directors. It questioned a 10-year rental contract with 
Citibank for office property that it said was possibly 
prohibited by Argentine law. It said the work done by the 
external auditors of Delloite & Touche for Banco Republica was 
`` `insufficient' regarding both the depth of the developed 
procedures and the level of the conclusions which do not accord 
with the observations and verifications determine in the 
inspection.'' It said the controls put in place from the bank's 
internal audit ``are not totally appropriate'' because ``the 
procedures implemented lack the necessary depth.'' In the 1998 
audit, the Central Bank said, ``To sum up, the present 
structure of the business is impossible.'' As a result of its 
audits, the Central Bank in the 1996/7 audit and in the 1998 
audit assigned a CAMEL rating to Banco Republica of 4.
    During this same time, Citibank Argentina analyzed Banco 
Republica quite differently. Citibank gave Banco Republic an 
internal rating of ``IA.'' ``I'' is the highest rating a bank 
in a credit relationship can get from Citibank and ``IV'' is 
the worst. ``IA,'' according to Lopez, means Citibank 
recognizes some potential risk in the customer which requires 
more frequent follow ups. But Lopez and the Citibank Argentina 
team saw Banco Republica as a normal banking operation with 
apparently limited matters of concern. In a 1996 Basic 
Information Report, Lopez noted that Banco Republic was a 
``leading wholesale bank,'' that it had ``shareholders' 
financial soundness,'' and that it was ``managed with 
recognized record and experience.''
    Citibank New York closed its correspondent account with 
Banco Republica on September 27, 1999, after Banco Republica's 
collapse. Citibank closed its correspondent account with 
Federal Bank in June 2000. When asked why there was a lengthy 
delay between the closing of the two accounts, Lopez told the 
Subcommittee that Federal Bank had requested the extended 
opening in order to clear out its account.

  (8) American Exchange Company

    American Exchange Company, according to Martin Lopez and 
Citibank documents, was created by Grupo Moneta prior to 
Federal Bank and was the first offshore vehicle of Grupo 
Moneta. Its account with Citibank was opened at the same time 
the correspondent accounts with Banco Republica were opened. At 
that time, Lopez said, Grupo Moneta did not need an offshore 
bank, because the intended activity was only to trade 
securities and conduct foreign exchange for customers; the 
offshore entity, according to Lopez did not need to hold 
deposits. Most of the activities of American Exchange, Lopez 
told the Subcommittee, were absorbed by Federal Bank over the 
years. He said it was his understanding that American Exchange 
continued after Federal Bank came into existence but with 
little activity.
    American Exchange Company, although referred to in Citibank 
documents several times as an offshore bank, is not a bank, 
according to Lopez, but ``more like an asset management and 
brokerage house.'' It is, according to Lopez, incorporated in 
Panama, with a representative in Uruguay and owned by Grupo 
Moneta. Citibank's monthly statements for American Exchange 
show its address to be in Punta Del Este, Uruguay. Lopez said 
he does not know how many employees American Exchange has but 
that maybe the company needs ``one person to administer the 
book entries.'' He said the same people he worked with from 
Grupo Moneta represented American Exchange to Citibank 
Argentina. Lopez did not know whether American Exchange is 
licensed to do business in Argentina.
    When asked who regulates American Exchange, Lopez said no 
one does, because American Exchange does not hold deposits. He 
said the money placed with the company does not stay in 
American Exchange for more than 1 or 2 days.
    With respect to the extent of an anti-money laundering 
program at American Exchange, Lopez said Citibank Argentina 
believed American Exchange had the same program and procedures 
as the other entities in the Moneta Group. The Subcommittee has 
learned from reviewing the Central Bank audits, however, that 
Banco Republica, and other entities owned by Grupo Moneta, did 
not have any anti-money laundering program.
    The Subcommittee subpoenaed Citibank for its documents with 
respect to American Exchange. The results were limited. One 
account opening document appears to be a signature card with 
the name Jorge Videla. Lopez said he did not know the identity 
of Videla and there was no due diligence information on him in 
the file. A second document appears to assign an account number 
to American Exchange. A third document appears to provide basic 
data on American Exchange, such as country of location and 
provides several codes apparently internal to Citibank. The 
investigation was unable to locate any customer profile or 
substantive information on American Exchange in the Citibank 
records.
    The American Exchange account was closed on June 30, 2000. 
The closing appears to be part of a policy established by 
Citibank in the Spring of 2000 to close all demand deposit 
accounts for offshore vehicles of Argentinian financial 
entities ``that are not consolidating under a local bank, and 
consequently regulated by the Local Central Bank.'' \74\
---------------------------------------------------------------------------
    \74\ E-mail dated 6/16/2000 from Martin Ubiema to James A. Forde, 
et al. CA001371.
---------------------------------------------------------------------------

  (9) Suspicious Activity at Federal Bank

    Money Laundering and the IBM Scandal. In January 1994, IBM 
Argentina made a successful bid on a contract in Argentina to 
install software and provide training for Banco Nacion, a 
government owned bank. The amount of the bid was $300 million. 
It turned out that $37 million of that amount was for a 
nonexistent subcontractor, Computacion y Capacitacion Rural 
S.A. or CCR, for the purpose of providing kickbacks to 
Argentine public officials involved in the contract. To date it 
appears IBM paid approximately $21 million of the $37 million, 
half of which has been traced to Swiss bank accounts of 
Argentine officials. The scandal has been called ``one of the 
biggest political-financial scandals'' in Argentina's 
history.\75\ Part of that bribe money moved through Federal 
Bank. On May 10, 1994, Compania General De Negocios, a bank in 
Uruguay, ordered $1 million to be taken from its Credit Suisse 
account and deposited in Federal Bank's correspondent account 
at Citibank. The $1 million proved to be part of the $21 
million payoff from the IBM kickback scandal.
---------------------------------------------------------------------------
    \75\ ``IBM Scandal That Rocked Argentina Far From Resolved,'' The 
Miami Herald, May 16, 1999, by Andres Oppenheimer.
---------------------------------------------------------------------------
    Movement of Money. In its 1998 audit, the Central Bank 
expressed concern about the volume of the transactions taking 
place between Banco Republica and Federal Bank. In the 1998 
audit, the Central Bank noted that ``the operation carried out 
by [Banco Republica] with the Federal Bank Ltd. presents 
peculiar characteristics due to its close relationship to the 
companies linked to the bank. . . .'' The 1996/7 audit noted 
that ``during November and December 1996, 8.88% and 13.53% 
respectively'' of the money moving through Banco Republica's 
correspondent account in Citibank New York ``were accredited by 
the Federal Bank Limited.'' The Central Bank said that while 
the amounts were not significant, it was worth noting that the 
majority of such money was ``related to operations with 
companies linked with Banco Republica. . . .'' The 1998 audit 
concluded with the suggestion that the next inspection do an 
``analysis of the operations with Federal Bank Limited.''
    The Central Bank also noted transactions through Banco 
Republic and Federal Bank with respect to four offshore 
companies created in the Bahamas on the same date, March 18, 
1997. The Central Bank noted that these companies have the same 
representative, and they have the same address in Uruguay as 
Federal Bank. These four companies are: Ludgate Investments 
Ltd., South Wark Asset Management Ltd., Lolland Stocks Ltd., 
and Scott & Chandler Ltd. The Banco Republica monthly 
statements from the Citibank New York correspondent account 
show the movement of millions of dollars each month between the 
accounts of these entities at Federal Bank and the accounts at 
Banco Republica. Out of its concern for the transactions 
involving these four companies, the Central Bank auditors 
apparently recommended obtaining more information about them 
from the Central Banks of the Bahamas and Uruguay.
    The Minority Staff reviewed the monthly statements of Banco 
Republica, Federal Bank and American Exchange Company. In many 
instances large sums of money moved on the same day from Banco 
Republica's correspondent account at Citibank New York to 
American Exchange's correspondent account at Citibank New York, 
and then to Federal Bank's correspondent account at Citibank 
New York. Other amounts moved in the reverse direction, from 
Federal Bank to American Exchange to Banco Republica. All of 
the accounts through which the money moved were U.S. dollar 
accounts in Citibank New York. The first chart, below, shows 
just a few of the many instances of the movement of such sums 
in these accounts. It summarizes some of the activity in 1995 
and in January and February 1996. The second chart shows a 
similar movement of money in 2000 after Banco Republica had 
collapsed. In lieu of Banco Republica it appears the money 
began moving to or through Eurobanco.

    MOVEMENT OF MONEY THROUGH BANCO REPUBLICA, AMERICAN EXCHANGE, AND
                              FEDERAL BANK
                              1995 and 1996
------------------------------------------------------------------------
      DATE          AMOUNT         FROM            TO            TO
------------------------------------------------------------------------
January 31,       $3,000,000  Banco          American       Federal Bank
 1995                          Republica      Exchange
------------------------------------------------------------------------
October 12,       $5,000,000  Banco          American       Federal Bank
 1995                          Republica      Exchange
------------------------------------------------------------------------
December 14,        $500,000  Banco          American       Federal Bank
 1995                          Republica      Exchange
------------------------------------------------------------------------
December 18,      $1,000,000  Banco          American       Federal Bank
 1995                          Republica      Exchange
------------------------------------------------------------------------
December 20,        $700,000  Banco          American       Federal Bank
 1995                          Republica      Exchange
------------------------------------------------------------------------
January 23,         $500,000  Banco          American       Federal Bank
 1996                          Republica      Exchange
------------------------------------------------------------------------
January 25,         $300,000  Federal Bank   American       Banco
 1996                                         Exchange       Republica
------------------------------------------------------------------------
January 31,         $600,000  Banco          American       Federal Bank
 1996                          Republica      Exchange
------------------------------------------------------------------------
February 1,         $200,000  Federal Bank   American       Banco
 1996                                         Exchange       Republica
------------------------------------------------------------------------
February 6,         $200,000  Federal Bank   American       Banco
 1996                                         Exchange       Republica
------------------------------------------------------------------------
February 7,         $200,000  Federal Bank   American       Banco
 1996                                         Exchange       Republica
------------------------------------------------------------------------
February 26,        $549,778  Verwaltungs    American       Key West
 1996                                         Exchange       Ltd.
------------------------------------------------------------------------
February 28,        $600,000  Federal Bank   American       Banco
 1996                                         Exchange       Republica
------------------------------------------------------------------------
February 29,        $200,000  Federal Bank   American       Banco
 1996                                         Exchange       Republica
------------------------------------------------------------------------
Prepared by the Minority Staff of the Permanent Subcommittee on
  Investigations, February 2001.


MOVEMENT OF MONEY THROUGH FEDERAL BANK, AMERICAN EXCHANGE, AND EUROBANCO
                                  2000
------------------------------------------------------------------------
      DATE          AMOUNT         FROM            TO            TO
------------------------------------------------------------------------
January 27,         $300,000  Federal Bank   American       Eurobanco
 2000                                         Exchange
------------------------------------------------------------------------
February 9,         $300,000  Federal Bank   American       Eurobanco
 2000                                         Exchange
------------------------------------------------------------------------
February 29,        $300,000  Federal Bank   American       Eurobanco
 2000                                         Exchange
------------------------------------------------------------------------
March 3, 2000       $300,000  Federal Bank   American       Eurobanco
                                              Exchange
------------------------------------------------------------------------
March 15, 2000      $200,000  Federal Bank   American       Eurobanco
                                              Exchange
------------------------------------------------------------------------
March 27, 2000      $200,000  Federal Bank   American       Eurobanco
                                              Exchange
------------------------------------------------------------------------
April 3, 2000       $200,000  Federal Bank   American       Eurobanco
                                              Exchange
------------------------------------------------------------------------
May 23, 2000        $292,343  Federal Bank   American       Eurobanco
                                              Exchange
------------------------------------------------------------------------
May 23, 2000         $50,250  Federal Bank   American       Eurobanco
                                              Exchange
------------------------------------------------------------------------
Prepared by the Minority Staff of the Permanent Subcommittee on
  Investigations, February 2001.

    As the 1995/1996 chart shows, for example, on January 31, 
1995, $3 million was wired from Banco Republica's correspondent 
account in Citibank New York to the account in Citibank New 
York of American Exchange Company. It was then, on that same 
day, wired from the Citibank New York account of American 
Exchange to the Citibank New York correspondent account of 
Federal Bank. On October 12, 1995, $5 million was wired 
following the same route.
    These same-day transactions appeared to be at their height 
in 1996. For example, it happened some 17 times in the first 2 
months of 1996. The Minority Staff consulted several experts 
with respect to wire transfers and money laundering and not one 
of the five persons consulted could explain a reasonable 
business justification for this pattern of transfers. All five 
suggested that the only reason for the transactions going 
through American Exchange was to layer the transactions, since 
all of the accounts involved were dollar accounts in the United 
States.
    Contrary to Lopez' description of Federal Bank taking the 
place or business of American Exchange Company for Grupo 
Moneta, the monthly statements of Federal Bank and American 
Exchange Company show years of activity involving tens of 
millions of dollars going back and forth between the two 
entities.
    Lopez told the Subcommittee that Citibank Argentina in 
general, and he as relationship manager in particular, never 
saw the monthly statements of Federal Bank or Banco Republica. 
He said the monthly statements were handled by Citibank New 
York which held the correspondent account. Lopez said it would 
be Citibank New York's responsibility to monitor the movement 
of money through the Banco Republica and Federal Bank accounts. 
Yet Citibank New York told the Subcommittee it did not have 
that responsibility. The market head in New York told Minority 
Staff that Citibank New York only monitored the account for 
overdrafts and credit issues, and New York did not monitor the 
monthly accounts. He said the Citibank office in Tampa was 
responsible for money laundering oversight.
    While the Central Bank of Argentina was concerned about the 
movement of money between Federal Bank and Banco Republica, and 
the movement of money involving the four Bahamanian companies 
established in 1997, the Subcommittee found no written evidence 
in the materials subpoenaed from Citibank that Citibank New 
York or any Citibank office noticed or expressed any concern 
with respect to either issue. Nor was there any documentation 
expressing any concern about or observation of the same-day 
movement of money through the three accounts of Banco 
Republica, American Exchange, and Federal Bank.
    Citibank's failure to question the transactions and unusual 
movements of money through the Federal Bank, American Exchange, 
and Banco Republica accounts is even more troubling in light of 
the large sums involved. Movements of $200,000, $500,000, even 
$3 million in even sums were routine. In one exceptional 
transaction occurring on April 29, 1994, one transfer of $28 
million occurred. This was four to five times the size of even 
the larger transactions among these accounts.
    In the 9 years of monthly statements reviewed by the 
Minority Staff, deposits of hundreds of thousands of dollars 
were common; the largest month saw total deposits of over $173 
million. The magnitude of these monthly statements far exceeds 
any other offshore bank reviewed by the Minority Staff 
investigation. Yet Citibank asked few questions why a shell 
offshore bank in the Bahamas would have access to such sums and 
chose to move its funds in the patterns it did.

B. THE ISSUES

    M.A. Bank and Federal Bank are shell offshore banks, 
licensed in jurisdictions that have had weak anti-money 
laundering controls. Citibank accepted both banks as 
correspondent clients because they were affiliated with large 
commercial operations in Argentina. In the case of M.A. Bank, 
Mercado Abierto was a large financial institution that was a 
customer of Citibank; with Federal Bank, the relationship was 
even stronger. Citibank was a business partner with Grupo 
Moneta and had been doing business with Grupo Moneta entities 
for a number of years. Citibank reported in its internal 
analysis of these entities that the principals of both groups 
were persons with excellent reputations.
    What Citibank overlooked or failed to see was that no past 
or current relationship with, and no level of confidence in the 
reputations of, these financial groups can replace the need for 
independent regulatory oversight. And as shell offshore banks, 
neither of these banks was subject to that oversight. With 
respect to M.A. Bank, Citibank failed to address the fact that 
the financial entity of which M.A. Bank was a part was not 
subject to any bank regulatory authority. Mercado Abierto, 
because it was a securities firm and not a bank, was not 
subject to oversight by the Central Bank of Argentina, and 
hence, M.A. Bank, as an affiliate, was never brought within the 
Central Bank's purview. In the case of Federal Bank, Citibank's 
conduct is more disturbing, because it was both aware of and 
concerned about the fact that the Central Bank of Argentina did 
not know Federal Bank was owned by Grupo Moneta, and yet it 
misled the Central Bank about Federal Bank's ownership when it 
was asked for information. Had the Central Bank known that 
Federal Bank was also owned by Grupo Moneta, Federal Bank, as 
an affiliate, might have come under the purview of the Central 
Bank.
    These shell offshore banks appear to have achieved exactly 
what they set out to do--avoid independent regulatory 
oversight, and the structure they used to do so should have set 
off alarm bells at Citibank. In fact, M.A. Bank's owners 
acknowledged as much when they said that M.A. Bank set up 
administrative operations in Uruguay to avoid regulation. At 
least two banking experts have indicated to Minority Staff that 
any institution set up in a manner similar to M.A. Bank would 
raise red flags, and they would expect that the bank would be 
reviewed very closely before a correspondent relationship was 
established.
    M.A. Bank. MAB employed banking practices that were 
characterized by a Special Examiner for the Federal Reserve 
Board of Governors as inconsistent with typical banking 
operations and not indicative of safe and sound banking 
practice. These practices were highly vulnerable to money 
laundering and, as revealed by the investigation by the U.S. 
Customs Service, facilitated the concealment and movement of 
illicit funds. These practices included accepting deposits and 
dispensing withdrawals in Argentina, in violation of Argentine 
banking law; accepting deposits from unidentified sources for 
unknown destinations; and using withdrawal forms that did not 
contain the name of the bank.
    The practices implemented by MAB--with the full knowledge 
of the owners of the bank--appear to have violated Argentine 
banking law, violated anti-money laundering principles and 
created an environment that facilitated money laundering and 
tax evasion. In restating its policy regarding opening accounts 
for shell banks, Citibank noted that ``the character of the 
institution'' is ``key.'' The description of MAB's structure 
and banking practices that Iribarne provided to the U.S. 
Customs agent shows the questionable character and conduct of 
both MAB and the larger financial institution with which it is 
affiliated. Yet, there were no examinations and reviews of 
MAB's practices and policies, and the due diligence and ongoing 
monitoring by Citibank in the case of MAB was poor.

      *There was confusion at Citibank over the appropriate 
roles of the account managers that created a lack of 
coordination with respect to ongoing monitoring and lack of 
attention to activities in the MAB account. The Financial 
Institutions unit head in Argentina told the Minority Staff 
that New York was responsible for monitoring the account. The 
market head in New York said that the New York office only 
monitored for credit and overdraft issues. As of December 1999, 
the account officers in both New York and Argentina were 
uncertain about what, if any, review of the account was being 
conducted by the anti-money laundering unit in Florida. It 
appears that Citibank did not have in place account profiles to 
identify high risk customers that should be subjected to 
tighter monitoring. One was established for the Argentina 
financial institution accounts only after the bank learned that 
the assets seized in the MAB account were related to drug 
trafficking. The anti-money laundering unit in Tampa did not 
initiate a review of the M.A. entities until late 1999 or early 
2000, more than 1\1/2\ years after the assets in the account 
were seized. At that point, it discovered a series of possible 
suspicious transactions that spanned nearly 3 years of account 
activity.

      * Citibank was slow to follow up on the seizure warrant 
and did not firmly press its client for answers to obvious 
issues related to the seizure of the accounts' assets. Customs 
issued a seizure warrant on the M.A. Bank correspondent account 
at Citibank for the Casablanca drug money in August 1998. 
Citibank, however, never took any action to review the account 
in light of the seizure, nor did it require its client to 
explain the reason for the seizure. Consequently, it was nearly 
16 months before Citibank learned the reason for the seizure 
and began to take action. During that time period--June 1998 
through September 1999--over $300 million moved through the 
M.A. Bank correspondent account at Citibank.

    Federal Bank. With respect to Federal Bank, Citibank 
remained acutely aware throughout the correspondent 
relationship of the fact that Grupo Moneta was a partner with 
Citibank in CEI. The extent to which this colored Citibank's 
judgment in opening and monitoring the three correspondent 
accounts discussed in this case history cannot be isolated, but 
it clearly had some effect. Citibank Argentina, which had 
responsibility for the due diligence in opening correspondent 
accounts in Argentina and in maintaining the correspondent 
relationships, accepted Grupo Moneta's oral assurances that it 
had an anti-money laundering program in place. It did not 
attempt to confirm that by requesting a copy of the program or 
the anti-money laundering requirements. No one at Citibank 
apparently identified any of the activity in the accounts or 
among the accounts as suspicious or worthy of further review, 
despite the many same-day transaction among Federal Bank, Banco 
Republica, and American Exchange Company.
    But most troubling is Citibank's participation in keeping 
from the Central Bank information on the ownership of Federal 
Bank. Citibank's files are replete with references to Grupo 
Moneta's ownership of Federal Bank. In fact, Citibank's stated 
rationale for opening the account with Federal Bank, which is 
an offshore shell bank, and therefore an exception to 
Citibank's policy, is specifically because Federal Bank was 
part of a larger financial group with what Citibank thought was 
a good reputation. Citibank has told the Subcommittee that it 
would avoid any correspondent account with an offshore shell 
bank not connected with a larger financial institution with 
which Citibank already had a relationship. So, Federal Bank's 
ownership was not only something with which Citibank was 
totally familiar; it was central to Citibank's relationship 
with Federal Bank.
    At the time Citibank received the request from the Central 
Bank for ``all information'' Citibank Argentina ``may have 
about Federal Bank Limited, especially the identify of its 
shareholders,'' Citibank knew the Central Bank did not know 
Federal Bank was connected to Grupo Moneta and Banco Republica. 
If it had known, the Central Bank might have included the 
Federal Bank in its audits, perhaps due to its common ownership 
with Banco Republica. The fact that such audits were not taking 
place was noted by Martin Lopez, the relationship manager, in 
1996 as making Federal Bank ``a risky vehicle per se because it 
is controlled only by the Central Bank of the Bahamas.'' Yet in 
1999 when the Central Bank of Argentina specifically asked the 
President of Citibank Argentina, Carlos Fedrigotti, for ``all 
information'' about Federal Bank, Fedrigotti said ``our records 
contain no information that would enable us to determine'' who 
owns Federal Bank.
    Because of this unusual response, the question arises as to 
why Citibank would be less than forthright in answering the 
Central Bank's inquiry. One answer may be it was responding to 
a request from Grupo Moneta to maintain confidentiality about 
its activities. Another answer may be that since, according to 
Citibank internal documents Federal Bank was being used by 
Grupo Moneta to loan money to CEI related entities, it was 
helping Grupo Moneta avoid sanction from the Central Bank for 
violating the Central Bank's limitations on lending to related 
entities. A third answer may be that Citibank did not want to 
trigger Central Bank oversight of Federal Bank. The reason for 
Citibank's misleading response to the Central Bank of Argentina 
remains a troubling mystery.
    For both of these banks, perhaps the biggest failing for 
Citibank was that Citibank did not believe the nature of these 
banks--an offshore bank with no physical presence and no 
regulation--was an important factor. Therefore it did not give 
the banks heightened scrutiny or attention, where more timely 
and thorough reviews of their operations and transactions may 
have identified the unsound practices and suspicious 
transactions that occurred in the accounts, much earlier than 
when they were finally discovered.

                                 M.A. BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
                                           February 1995-December 1996
----------------------------------------------------------------------------------------------------------------
                                                    OPENING                                           CLOSING
                     MONTH                          BALANCE         DEPOSITS       WITHDRAWALS        BALANCE
----------------------------------------------------------------------------------------------------------------
February 1995                                           ($681)         $162,283         $148,296         $13,304
----------------------------------------------------------------------------------------------------------------
March 1995                                             $13,304       $4,187,984       $4,151,288         $50,000
----------------------------------------------------------------------------------------------------------------
April 1995                                             $50,000       $5,080,782       $5,001,453        $129,328
----------------------------------------------------------------------------------------------------------------
May 1995                                              $129,328       $4,387,155       $4,466,484         $50,000
----------------------------------------------------------------------------------------------------------------
June 1995                                              $50,000       $8,113,597       $8,113,597         $50,000
----------------------------------------------------------------------------------------------------------------
July 1995                                              $50,000      $11,998,916      $11,998,016         $50,000
----------------------------------------------------------------------------------------------------------------
August 1995                                            $50,000      $17,161,739      $17,132,380         $79,359
----------------------------------------------------------------------------------------------------------------
September 1995
----------------------------------------------------------------------------------------------------------------
October 1995                                           $50,000      $10,536,298      $10,536,298         $50,000
----------------------------------------------------------------------------------------------------------------
November 1995                                          $50,000      $12,374,605      $12,324,187        $100,418
----------------------------------------------------------------------------------------------------------------
December 1995                                         $100,418      $31,905,451      $31,955,869         $50,000
----------------------------------------------------------------------------------------------------------------
Total 1995                                                         $105,908,810     $105,828,768
================================================================================================================
January 1996                                           $50,000      $15,435,676      $15,435,676         $50,000
----------------------------------------------------------------------------------------------------------------
February 1996                                          $50,000      $18,288,394      $18,244,033         $94,361
----------------------------------------------------------------------------------------------------------------
March 1996                                             $94,361      $29,737,386      $29,781,747         $50,000
----------------------------------------------------------------------------------------------------------------
April 1996                                             $50,000      $27,652,732      $27,652,732         $50,000
----------------------------------------------------------------------------------------------------------------
May 1996                                               $50,000      $70,351,181      $70,351,181         $50,000
----------------------------------------------------------------------------------------------------------------
June 1996                                              $50,000     $113,705,149     $113,690,140         $65,008
----------------------------------------------------------------------------------------------------------------
July 1996                                              $65,008      $56,838,539      $56,861,922         $41,625
----------------------------------------------------------------------------------------------------------------
August 1996                                            $41,625      $77,623,351      $77,804,976      ($140,000)
----------------------------------------------------------------------------------------------------------------
September 1996                                      ($140,000)      $67,787,876      $67,597,876         $50,000
----------------------------------------------------------------------------------------------------------------
October 1996                                           $50,000      $74,085,484      $74,085,484         $50,000
----------------------------------------------------------------------------------------------------------------
November 1996
----------------------------------------------------------------------------------------------------------------
December 1996                                          $50,000      $59,039,012      $59,059,759         $29,252
----------------------------------------------------------------------------------------------------------------
Total 1996                                                         $610,544,780     $610,565,526
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, February 2001.
 
Blanks indicate missing or illegible statements.


                                 M.A. BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
                                           January 1997-December 1998
----------------------------------------------------------------------------------------------------------------
                                                    OPENING                                           CLOSING
                     MONTH                          BALANCE         DEPOSITS       WITHDRAWALS        BALANCE
----------------------------------------------------------------------------------------------------------------
January 1997                                           $29,252      $53,303,323      $53,282,576         $50,000
----------------------------------------------------------------------------------------------------------------
February 1997                                          $50,000      $52,151,036      $52,151,036         $50,000
----------------------------------------------------------------------------------------------------------------
March 1997                                             $50,000      $61,535,040      $61,441,073        $143,967
----------------------------------------------------------------------------------------------------------------
April 1997                                            $143,967      $51,890,047      $51,969,615         $64,400
----------------------------------------------------------------------------------------------------------------
May 1997                                               $64,400      $65,409,697      $65,424,097         $50,000
----------------------------------------------------------------------------------------------------------------
June 1997                                              $50,000     $123,432,889     $123,432,889         $50,000
----------------------------------------------------------------------------------------------------------------
July 1997                                              $50,000      $77,893,843      $77,893,843         $50,000
----------------------------------------------------------------------------------------------------------------
August 1997                                            $50,000      $69,659,609      $69,648,709         $60,900
----------------------------------------------------------------------------------------------------------------
September 1997                                         $60,900      $34,261,446      $34,272,346         $50,000
----------------------------------------------------------------------------------------------------------------
October 1997                                           $50,000      $63,395,384      $63,395,384         $50,000
----------------------------------------------------------------------------------------------------------------
November 1997                                          $50,000      $29,626,805      $29,547,543        $129,262
----------------------------------------------------------------------------------------------------------------
December 1997                                         $129,262      $32,116,655      $32,195,917         $50,000
----------------------------------------------------------------------------------------------------------------
Total 1997                                                         $714,675,774     $714,655,028
================================================================================================================
January 1998                                           $50,000      $22,477,997      $22,477,997         $50,000
----------------------------------------------------------------------------------------------------------------
February 1998                                          $50,000      $21,638,729      $21,656,626         $32,102
----------------------------------------------------------------------------------------------------------------
March 1998                                             $32,102      $52,967,821      $52,898,526        $101,397
----------------------------------------------------------------------------------------------------------------
April 1998                                            $101,397      $36,678,415      $36,729,813         $50,000
----------------------------------------------------------------------------------------------------------------
May 1998                                               $50,000      $14,723,277      $14,772,243          $1,033
----------------------------------------------------------------------------------------------------------------
June 1998                                               $1,033          $88,437          $83,915          $5,555
----------------------------------------------------------------------------------------------------------------
July 1998                                               $5,555         $809,708         $803,435         $11,828
----------------------------------------------------------------------------------------------------------------
August 1998                                            $11,828         $477,493         $487,567          $1,754
----------------------------------------------------------------------------------------------------------------
September 1998                                          $1,754      $13,864,214      $13,851,106         $14,862
----------------------------------------------------------------------------------------------------------------
October 1998                                           $14,862      $17,297,364      $17,271,129         $41,098
----------------------------------------------------------------------------------------------------------------
November 1998                                          $41,098      $25,007,496      $25,041,389          $7,205
----------------------------------------------------------------------------------------------------------------
December 1998                                           $7,205      $22,307,275      $22,285,826         $28,654
----------------------------------------------------------------------------------------------------------------
Total 1998                                                         $228,338,226     $228,359,572
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, February 2001.


                                 M.A. BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
                                           January 1999-September 1999
----------------------------------------------------------------------------------------------------------------
                                                    OPENING                                           CLOSING
                     MONTH                          BALANCE         DEPOSITS       WITHDRAWALS        BALANCE
----------------------------------------------------------------------------------------------------------------
January 1999                                           $28,654      $15,456,337      $15,465,042         $19,949
----------------------------------------------------------------------------------------------------------------
February 1999                                          $19,949      $12,091,326      $12,022,305         $88,971
----------------------------------------------------------------------------------------------------------------
March 1999                                             $88,971      $24,896,503      $24,878,009        $107,465
----------------------------------------------------------------------------------------------------------------
April 1999                                            $107,465      $30,695,291      $30,752,757         $50,000
----------------------------------------------------------------------------------------------------------------
May 1999                                               $50,000      $17,330,081      $17,344,307         $35,773
----------------------------------------------------------------------------------------------------------------
June 1999                                              $35,773      $37,675,161      $37,672,550         $38,384
----------------------------------------------------------------------------------------------------------------
July 1999                                              $38,384      $13,204,280      $13,227,554         $15,109
----------------------------------------------------------------------------------------------------------------
August 1999                                            $15,109      $32,415,839      $32,380,949         $50,000
----------------------------------------------------------------------------------------------------------------
September 1999                                         $50,000      $40,784,536      $40,809,836         $24,699
----------------------------------------------------------------------------------------------------------------
Total 1999                                                         $224,549,354     $224,553,309
----------------------------------------------------------------------------------------------------------------
Total 1995-1999                                                  $1,884,016,944   $1,883,962,203
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, February 2001.


                                     M.A. BANK ACCOUNT ACTIVITY AT CITIBANK
                                      AFTER SERVICE OF THE SEIZURE WARRANT
                                            June 1998-September 1999
----------------------------------------------------------------------------------------------------------------
                                                    OPENING                                           CLOSING
                     MONTH                          BALANCE         DEPOSITS       WITHDRAWALS        BALANCE
----------------------------------------------------------------------------------------------------------------
June 1998                                               $1,033          $88,437          $83,915          $5,555
----------------------------------------------------------------------------------------------------------------
July 1998                                               $5,555         $809,708         $803,435         $11,828
----------------------------------------------------------------------------------------------------------------
August 1998                                            $11,828         $477,493         $487,567          $1,754
----------------------------------------------------------------------------------------------------------------
September 1998                                          $1,754      $13,864,214      $13,851,106         $14,862
----------------------------------------------------------------------------------------------------------------
October 1998                                           $14,862      $17,297,364      $17,271,129         $41,098
----------------------------------------------------------------------------------------------------------------
November 1998                                          $41,098      $25,007,496      $25,041,389          $7,205
----------------------------------------------------------------------------------------------------------------
December 1998                                           $7,205      $22,307,275      $22,285,826         $28,654
----------------------------------------------------------------------------------------------------------------
January 1999                                           $28,654      $15,456,337      $15,465,042         $19,949
----------------------------------------------------------------------------------------------------------------
February 1999                                          $19,949      $12,091,326      $12,022,305         $88,971
----------------------------------------------------------------------------------------------------------------
March 1999                                             $88,971      $24,896,503      $24,878,009        $107,465
----------------------------------------------------------------------------------------------------------------
April 1999                                            $107,465      $30,695,291      $30,752,757         $50,000
----------------------------------------------------------------------------------------------------------------
May 1999                                               $50,000      $17,330,081      $17,344,307         $35,773
----------------------------------------------------------------------------------------------------------------
June 1999                                              $35,773      $37,675,161      $37,672,550         $38,384
----------------------------------------------------------------------------------------------------------------
July 1999                                              $38,384      $13,204,280      $13,227,554         $15,109
----------------------------------------------------------------------------------------------------------------
August 1999                                            $15,109      $32,415,839      $32,380,949         $50,000
----------------------------------------------------------------------------------------------------------------
September 1999                                         $50,000      $40,784,536      $40,809,836         $24,699
----------------------------------------------------------------------------------------------------------------
TOTAL                                                              $304,401,341     $304,377,676
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, February 2001.


                                FEDERAL BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
                                           November 1992-December 1994
----------------------------------------------------------------------------------------------------------------
                                                    OPENING                                           CLOSING
                     MONTH                          BALANCE         DEPOSITS       WITHDRAWALS        BALANCE
----------------------------------------------------------------------------------------------------------------
November 1992                                               $0       $5,330,633       $5,328,982          $1,650
----------------------------------------------------------------------------------------------------------------
December 1992                                           $1,650      $14,368,856      $14,285,770         $84,736
----------------------------------------------------------------------------------------------------------------
January 1993                                           $84,736      $19,293,049      $19,376,530          $1,255
----------------------------------------------------------------------------------------------------------------
February 1993                                           $1,255      $11,915,523      $11,917,691          ($912)
----------------------------------------------------------------------------------------------------------------
March 1993                                              ($912)      $41,857,850      $41,851,575          $5,362
----------------------------------------------------------------------------------------------------------------
April 1993                                              $5,362      $12,360,188      $12,329,939         $35,611
----------------------------------------------------------------------------------------------------------------
May 1993                                               $35,611      $36,299,282      $36,339,371        ($4,477)
----------------------------------------------------------------------------------------------------------------
June 1993                                             ($4,477)      $37,703,801      $37,699,349           ($25)
----------------------------------------------------------------------------------------------------------------
July 1993                                                ($25)      $88,234,741      $88,251,972       ($17,256)
----------------------------------------------------------------------------------------------------------------
August 1993                                          ($17,256)      $52,691,342      $52,682,873        ($8,787)
----------------------------------------------------------------------------------------------------------------
September 1993                                        ($8,787)      $73,444,093      $73,438,767        ($3,461)
----------------------------------------------------------------------------------------------------------------
October 1993                                          ($3,461)      $51,118,708      $51,126,460       ($11,213)
----------------------------------------------------------------------------------------------------------------
November 1993                                        ($11,213)     $149,155,112     $149,143,898              $0
----------------------------------------------------------------------------------------------------------------
December 1993 .                                             $0      $79,902,823      $79,917,429       ($14,605)
----------------------------------------------------------------------------------------------------------------
January 1994                                         ($14,605)     $119,180,140     $119,170,186        ($4,652)
----------------------------------------------------------------------------------------------------------------
February 1994
----------------------------------------------------------------------------------------------------------------
March 1994                                            ($1,079)     $128,860,126     $128,874,553       ($15,506)
----------------------------------------------------------------------------------------------------------------
April 1994                                           ($15,506)     $173,589,317     $173,582,384        ($8,573)
----------------------------------------------------------------------------------------------------------------
May 1994
----------------------------------------------------------------------------------------------------------------
June 1994
----------------------------------------------------------------------------------------------------------------
July 1994                                             ($2,376)      $75,126,638      $75,154,291       ($30,029)
----------------------------------------------------------------------------------------------------------------
August 1994                                          ($30,029)     $104,071,925     $104,095,369       ($53,474)
----------------------------------------------------------------------------------------------------------------
September 1994                                       ($53,474)     $104,015,463     $103,973,061       ($13,130)
----------------------------------------------------------------------------------------------------------------
October 1994
----------------------------------------------------------------------------------------------------------------
November 1994
----------------------------------------------------------------------------------------------------------------
December 1994                                        ($24,173)     $131,987,104     $131,953,077          $9,853
----------------------------------------------------------------------------------------------------------------
TOTAL                                                            $1,510,506,794   $1,510,493,527
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee of Investigations, February 2001.
 
Blanks indicate missing or illegible statements.


                                FEDERAL BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
                                           January 1995-December 1996
----------------------------------------------------------------------------------------------------------------
                                                    OPENING                                           CLOSING
                     MONTH                          BALANCE         DEPOSITS       WITHDRAWALS        BALANCE
----------------------------------------------------------------------------------------------------------------
January 1995                                            $9,853      $77,902,327      $77,812,083        $100,097
----------------------------------------------------------------------------------------------------------------
February 1995                                         $100,097      $37,320,409      $37,420,510            ($2)
----------------------------------------------------------------------------------------------------------------
March 1995                                                ($2)      $40,146,626      $40,128,623         $18,000
----------------------------------------------------------------------------------------------------------------
April 1995                                             $18,000      $64,907,222      $64,925,222              $0
----------------------------------------------------------------------------------------------------------------
May 1995                                                    $0      $66,135,773      $66,135,773              $0
----------------------------------------------------------------------------------------------------------------
June 1995                                                   $0      $53,132,809      $53,132,809              $0
----------------------------------------------------------------------------------------------------------------
July 1995                                                   $0      $38,592,158      $38,498,750         $93,407
----------------------------------------------------------------------------------------------------------------
August 1995                                            $93,407      $35,547,949      $35,535,402        $105,954
----------------------------------------------------------------------------------------------------------------
September 1995                                        $105,954      $36,033,726      $36,056,731         $82,950
----------------------------------------------------------------------------------------------------------------
October 1995                                           $82,950      $24,221,051      $24,304,001              $0
----------------------------------------------------------------------------------------------------------------
November 1995                                               $0      $36,479,258      $36,479,258              $0
----------------------------------------------------------------------------------------------------------------
December 1995                                               $0     $113,992,702     $113,992,702              $0
----------------------------------------------------------------------------------------------------------------
January 1996                                                $0      $54,200,617      $54,129,753         $70,864
----------------------------------------------------------------------------------------------------------------
February 1996                                          $70,864      $62,305,676      $61,707,140        $669,400
----------------------------------------------------------------------------------------------------------------
March 1996                                            $669,400      $75,194,172      $75,778,277         $85,295
----------------------------------------------------------------------------------------------------------------
April 1996                                             $85,295      $48,112,851      $48,125,529         $72,617
----------------------------------------------------------------------------------------------------------------
May 1996                                               $72,617      $56,509,422      $56,555,268         $26,771
----------------------------------------------------------------------------------------------------------------
June 1996                                              $26,771      $55,312,054      $55,314,825         $24,000
----------------------------------------------------------------------------------------------------------------
July 1996                                              $24,000      $53,429,086      $53,436,486         $16,600
----------------------------------------------------------------------------------------------------------------
August 1996                                            $16,600      $63,314,748      $63,331,348              $0
----------------------------------------------------------------------------------------------------------------
September 1996                                              $0      $39,876,070      $39,876,070              $0
----------------------------------------------------------------------------------------------------------------
October 1996                                                $0      $46,031,435      $45,979,735         $51,700
----------------------------------------------------------------------------------------------------------------
November 1996                                          $51,700      $58,088,719      $58,140,419              $0
----------------------------------------------------------------------------------------------------------------
December 1996                                               $0      $81,790,876      $81,741,676         $49,200
----------------------------------------------------------------------------------------------------------------
TOTAL                                                            $1,318,577,736   $1,318,538,390
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee of Investigations, February 2001.


                                FEDERAL BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
                                           January 1997-December 1998
----------------------------------------------------------------------------------------------------------------
                                                    OPENING                                           CLOSING
                     MONTH                          BALANCE         DEPOSITS       WITHDRAWALS        BALANCE
----------------------------------------------------------------------------------------------------------------
January 1997                                           $49,200      $43,274,452      $43,323,652              $0
----------------------------------------------------------------------------------------------------------------
February 1997                                               $0      $52,501,155      $52,501,155              $0
----------------------------------------------------------------------------------------------------------------
March 1997                                                  $0      $61,630,109      $61,630,109              $0
----------------------------------------------------------------------------------------------------------------
April 1997                                                  $0      $72,857,583      $72,853,383          $4,200
----------------------------------------------------------------------------------------------------------------
May 1997                                                $4,200      $62,792,675      $62,796,875              $0
----------------------------------------------------------------------------------------------------------------
June 1997                                                   $0      $75,546,117      $75,546,117              $0
----------------------------------------------------------------------------------------------------------------
July 1997                                                   $0      $97,272,324      $97,272,324              $0
----------------------------------------------------------------------------------------------------------------
August 1997                                                 $0      $85,765,292      $85,765,292              $0
----------------------------------------------------------------------------------------------------------------
September 1997                                              $0      $74,203,479      $74,203,479              $0
----------------------------------------------------------------------------------------------------------------
October 1997                                                $0      $51,146,255      $51,008,730        $137,525
----------------------------------------------------------------------------------------------------------------
November 1997                                         $137,525      $70,438,211      $70,575,736              $0
----------------------------------------------------------------------------------------------------------------
December 1997                                               $0      $80,512,574      $80,512,574              $0
----------------------------------------------------------------------------------------------------------------
January 1998                                                $0      $31,683,853      $31,683,853              $0
----------------------------------------------------------------------------------------------------------------
February 1998                                               $0      $57,012,817      $57,012,817              $0
----------------------------------------------------------------------------------------------------------------
March 1998                                                  $0      $69,827,366      $69,827,366              $0
----------------------------------------------------------------------------------------------------------------
April 1998                                                  $0      $22,084,470      $22,084,470              $0
----------------------------------------------------------------------------------------------------------------
May 1998                                                    $0      $61,855,635      $61,841,635         $14,000
----------------------------------------------------------------------------------------------------------------
June 1998                                              $14,000      $58,670,711      $58,663,711         $21,000
----------------------------------------------------------------------------------------------------------------
July 1998                                              $21,000      $43,087,986      $42,220,686        $888,300
----------------------------------------------------------------------------------------------------------------
August 1998                                           $888,300      $71,361,949      $71,873,449        $376,800
----------------------------------------------------------------------------------------------------------------
September 1998                                        $376,800      $55,974,848      $56,334,848         $16,800
----------------------------------------------------------------------------------------------------------------
October 1998                                           $16,800      $25,500,166      $25,489,966         $27,000
----------------------------------------------------------------------------------------------------------------
November 1998                                          $27,000       $8,989,479       $9,014,979          $1,500
----------------------------------------------------------------------------------------------------------------
December 1998                                           $1,500      $22,857,608      $22,859,108              $0
----------------------------------------------------------------------------------------------------------------
Total                                                            $1,356,847,114   $1,356,896,314
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee of Investigations, February 2001.


                                FEDERAL BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK
                                              January 1999-May 2000
----------------------------------------------------------------------------------------------------------------
                                                    OPENING                                           CLOSING
                     MONTH                          BALANCE         DEPOSITS       WITHDRAWALS        BALANCE
----------------------------------------------------------------------------------------------------------------
January 1999                                                $0      $35,205,145      $35,205,145              $0
----------------------------------------------------------------------------------------------------------------
February 1999                                               $0      $19,695,910      $19,695,910              $0
----------------------------------------------------------------------------------------------------------------
March 1999                                                  $0      $22,251,472      $22,251,472              $0
----------------------------------------------------------------------------------------------------------------
April 1999                                                  $0       $8,226,070       $8,226,070              $0
----------------------------------------------------------------------------------------------------------------
May 1999                                                    $0      $12,425,893      $12,424,393          $1,500
----------------------------------------------------------------------------------------------------------------
June 1999                                               $1,500       $3,045,581       $3,047,081              $0
----------------------------------------------------------------------------------------------------------------
July 1999                                                   $0       $2,905,798       $2,905,798              $0
----------------------------------------------------------------------------------------------------------------
August 1999                                                 $0       $7,559,454       $7,559,454              $0
----------------------------------------------------------------------------------------------------------------
September 1999                                              $0         $813,164         $813,164              $0
----------------------------------------------------------------------------------------------------------------
October 1999                                                $0       $1,902,299       $1,902,299              $0
----------------------------------------------------------------------------------------------------------------
November 1999                                               $0       $3,780,819       $3,779,819          $1,000
----------------------------------------------------------------------------------------------------------------
December 1999                                           $1,000       $1,313,588       $1,314,588              $0
----------------------------------------------------------------------------------------------------------------
January 2000                                                $0         $344,609         $344,609              $0
----------------------------------------------------------------------------------------------------------------
February 2000                                               $0         $797,156         $797,156              $0
----------------------------------------------------------------------------------------------------------------
March 2000                                                  $0       $1,372,541       $1,372,541              $0
----------------------------------------------------------------------------------------------------------------
April 2000                                                  $0       $6,386,905       $6,386,905              $0
----------------------------------------------------------------------------------------------------------------
May 2000                                                    $0       $3,688,886       $3,660,165         $28,721
----------------------------------------------------------------------------------------------------------------
TOTAL                                                              $131,715,290     $131,686,569
----------------------------------------------------------------------------------------------------------------
Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee of Investigations, February 2001.

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                                APPENDIX

    This appendix summarizes a number of money laundering 
scandals and financial frauds referenced in the report, 
concentrating on how each utilized U.S. correspondent bank 
accounts. Included are:

      L(1) Bank of New York scandal;
      L(2) Koop fraud;
      L(3) Cook fraud;
      L(4) Gold Chance fraud;
      L(5) $10 million CD interpleader;
      L(6) other suspect transactions at the British Trade and 
Commerce Bank;
      L(7) Taves fraud and the Benford account; and
      L(8) IPC fraud.

  (1) Bank of New York Scandal

    The Bank of New York scandal became public news during the 
summer of 1999, with media reports of $7 billion in suspect 
funds moving from two Russian banks through a U.S. bank to 
thousands of bank accounts throughout the world.
    Pleadings from subsequent criminal cases describe what 
happened.\311\ They indicate that, during a 4-year period from 
1995-1999, two Russian banks, Depositamo-Kliringovy Bank 
(``DKB'') and Commercial Bank Flamingo, deposited over $7 
billion into correspondent bank accounts at the Bank of New 
York (``BNY'') in the United States. After successfully gaining 
entry for these funds into the U.S. banking system, on multiple 
occasions, the Russian banks transferred amounts from their BNY 
correspondent accounts to commercial accounts at BNY that had 
been opened for three shell corporations, Benex International 
Co. Inc. (``Benex''), Becs International L.L.C. (``Becs''), and 
Lowland, Inc. These three corporations, in turn, transferred 
the funds to thousands of other bank accounts around the world, 
using electronic wire transfer software provided by BNY. In 
aggregate, from February 1996 through August 1999, the three 
corporations completed more than 160,000 wire transfers.
---------------------------------------------------------------------------
    \311\ United States v. Berlin (U.S. District Court for the Southern 
District of New York Criminal Case No. S1-99-CR-914 (SWK)), information 
filed 2/16/00; United States v. Kudryavtsev (U.S. District Court for 
the Southern District of New York Criminal Case No. S1-00-CR-75 (JSR)), 
information filed 3/29/00.
---------------------------------------------------------------------------
    In February 2000, guilty pleas were submitted by Lucy 
Edwards, former vice president of BNY's Eastern European 
Division, her husband Peter Berlin, and the three corporations 
to conspiracy to commit money laundering, operating an unlawful 
banking and money transmitting business in the United States, 
and aiding and abetting Russian banks in conducting unlawful 
and unlicensed banking activities in the United States. The 
defendants admitted that their money laundering scheme had been 
designed in part to help Russian individuals and businesses 
transfer funds in violation of Russian currency controls, 
customs duties and taxes. The three corporations agreed to 
forfeit more than $6 million in their BNY bank accounts.
    In August 2000, a Federal court held that the United States 
had alleged sufficient facts to establish probable cause to 
seize an additional $27 million from two BNY correspondent 
accounts belonging to DKB and its part owner, another Russian 
bank called Sobinbank.\312\ The judge expressed skepticism 
regarding Sobinbank's claim to be protected from seizure of its 
funds due to its status as an innocent bank, observing in a 
footnote:
---------------------------------------------------------------------------
    \312\ United States v. $15,270,885.69 (2000 U.S. Dist. LEXIS 12602, 
2000 WL 1234593 SDNY 2000).

    The Court cannot fathom how billions of Sobinbank's 
dollars could have been transferred out of its constantly 
replenished BONY Account, to accounts in the United States, 
without Sobinbank's knowledge or willful blindness to the 
scheme.\313\
---------------------------------------------------------------------------
    \313\ Id. at footnote 11.

    While denying criminal liability for its own actions, BNY 
committed itself in a February 2000 agreement with the Federal 
Reserve Bank of New York and the New York State Banking 
Department to revamping its correspondent banking practices and 
anti-money laundering controls. In particular, BNY agreed to 
strengthen its due diligence reviews and its systems for 
reporting suspicious activity. BNY subsequently ended 
correspondent relationships with about 180 Russian banks.
    The BNY scandal caused other U.S. banks to review their 
correspondent accounts with Russian banks as well. Information 
provided in response to the Subcommittee's correspondent 
banking survey indicates that, from 1998 to 2000, Deutsche 
Bank's U.S. operations reduced the number of its correspondent 
relationships with Russian banks from 149 to 57, while HSBC 
Bank USA ended almost 230 relationships with Russian banks, 
going from 283 to 57.
    The BNY scandal also led to a wider review of Russian money 
laundering activities utilizing international payment systems 
to move funds.\314\ The State Department's 1999 International 
Narcotics Control Strategy Report, a leading analysis of 
international anti-money laundering efforts, reported that 
according to the Central Bank of Russia, $78 billion was sent 
by Russians to offshore accounts in 1998 alone, and $70 billion 
of that amount went through banks chartered in Nauru, a small 
island in the Pacific. In response, several U.S. banks 
determined in 1999 that they would no longer open correspondent 
accounts or process wire transfers for banks licensed by Nauru 
or certain other small South Pacific islands. Nauru is reported 
to have licensed 400 banks in recent years, including Sinex 
Bank which, according to the court order in the BNY civil 
forfeiture case, was the ordering party ``responsible for over 
$3 billion in transfers to the Benex and Becs Accounts'' at the 
Bank of New York.
---------------------------------------------------------------------------
    \314\ See, e.g., 1999 hearings on Russian Money Laundering before 
House Banking Committee.
---------------------------------------------------------------------------
    The BNY money laundering scandal, the revelations regarding 
Russian correspondent banking practices, and the $7 billion and 
$78 billion figures reflecting possibly illegal Russian funds 
moving through the U.S. and international correspondent banking 
systems, drive home the money laundering vulnerabilities 
present in the correspondent banking field.

  (2) Koop Fraud

    In February 2000, William H. Koop, a U.S. citizen from New 
Jersey, pleaded guilty to conspiracy to commit money laundering 
in violation of 18 U.S.C. 1957.\315\ Koop was the key figure in 
a financial fraud which, over 2 years, bilked hundreds of U.S. 
investors out of millions of dollars. As part of this fraud, 
Koop made frequent use of U.S. correspondent accounts utilized 
by three offshore banks, Overseas Development Bank and Trust 
(ODBT), Hanover Bank and British Trade and Commerce Bank 
(BTCB). He moved about $13 million in illicit proceeds through 
U.S. accounts associated with these banks,\316\ and used their 
services to launder these funds and otherwise advance his 
fraudulent activity.
---------------------------------------------------------------------------
    \315\ United States v. Koop (U.S. District Court for the District 
of New Jersey Criminal Case No. 00-CR-68), criminal information dated 
2/4/00.
    \316\ As set out in the case histories for each bank, Koop moved 
about $4.3 million through ODBT, nearly $5 million through Hanover 
Bank, and about $4 million through BTCB. He moved additional millions 
through other banks in the United States and elsewhere.
---------------------------------------------------------------------------
    Nature of Koop Fraud. Court pleadings, documents, 
videotapes, and interviews \317\ provide the following 
information about Koop's illicit activities.\318\ In or around 
the summer of 1997, Koop, a retired swimming pool contractor 
with no financial credentials or education beyond high school, 
began to represent himself as an experienced investment 
advisor. Koop claimed he had a high yield investment program 
that could produce returns as high as 489% over a 15-month 
period, allegedly with little or no risk. He also admitted in 
his criminal proceedings that he had represented himself as 
specializing in ``prime bank notes,'' which he acknowledged are 
fictitious financial instruments. On a number of occasions, 
Koop appeared before groups of small investors urging them to 
pool their funds into amounts of $1 million to $5 million, for 
placement into his investment program. Over 200 U.S. investors 
appear to have placed funds with Koop. With rare exceptions, 
none has recovered any of their principal or promised returns.
---------------------------------------------------------------------------
    \317\ Key interviews included a March 30, 2000 interview of Koop; a 
June 26, 2000 interview of Hanover Bank's sole owner, Michael Anthony 
(``Tony'') Fitzpatrick, an Irish citizen who voluntarily cooperated 
with the investigation; a October 13, 2000 interview of ODBT's sole 
owner L. Malcolm West, a British citizen who also voluntarily 
cooperated; and a July 23, 2000 interview of Terrence S. Wingrove, a 
British citizen fighting extradition to the United States to stand 
trial on criminal charges related to the Koop fraud. Wingrove also 
voluntarily cooperated with the investigation and was interviewed at 
Wormwood Scrubs prison in London.
    \318\ Many of the documents in this matter were provided by a 
defrauded investor who filed suit against Koop, Schmidt v. Koop (U.S. 
District Court for the District of New Jersey Civil Case No. 978-CIV-
4305), in an attempt to recover a $2.5 million investment.
---------------------------------------------------------------------------
    Koop called his investment program the ``I.F.S. Monthly 
`Prime' Program.'' Koop operated this program through several 
entities he controlled, all of which he referred to as ``IFS.'' 
These entities included: (1) International Financial Solutions, 
Ltd., which was incorporated in Dominica by OBD, and changed 
its name on 11/28/97, to Info-Seek Ltd.; (2) Info-Seek Asset 
Management Trust, which was established by BTCB in Dominica on 
4/20/98; and (3) Info-Seek Asset Management S.A., which was 
established by BTCB in Dominica on the same day, 4/20/98.
    Koop prepared and distributed a large packet of information 
about the IFS investment program to potential investors. His 
promotional materials explained the IFS investment program as 
follows:

      This program will pay you up to 489% plus principal on 
your investment, and your initial investment is guaranteed. . . 
. Receive a check for 5% of your initial investment each month 
while your balance grows to the rate chosen in any one of the 
following listed programs. Your first check starts after the 
first 90 days. . . . If you are worried about whether IFS will 
really pay what is promised, please be advised that IFS has 
never failed to payout on any program that it has ever entered 
into with any and all clients. [Emphasis in original text.]

    In a section entitled, ``Frequently asked questions,'' the 
IFS materials explained how IFS could offer such large returns:

      Your investment in the form of money will be held in a 
trust offshore. There is a very large demand offshore for large 
blocks of money that are certified and cleared as clean funds. 
By joining group funds together and committing large blocks of 
funds, we are able to command the returns that are normal for 
these transactions.

    In response to a question about the safety of the funds, 
the IFS materials stated:

      All of the monies go into the trust where they are 
disbursed through lines of credit and promissory notes. This is 
done through a credit line that IFS has been able to establish 
with many of the prime banks of the world. The money never 
leaves the trust. The truth of the matter is that these funds 
are safer than mutual funds, real estate and the stock market.

    When asked about taxes, the materials stated, ``It is up to 
you to report your income to Uncle Sam as you see fit to do so. 
Due to the fact that IFS is setup as a pure private trust, we 
do not report it to anyone.''
    Koop worked with a number of other persons who served as 
intermediaries in organizing individuals into investment groups 
and soliciting investment funds. Koop worked, for example, with 
a minister in South Carolina, Johnny Cabe, who formed his own 
company called Hisway International Ministries, and solicited 
investments primarily from church members.\319\ He worked with 
Hank A. Renovato Jr. who formed a Nevada corporation, Capital 
Fortress, Inc., and solicited investors in Alabama and 
Colorado. He worked with Glenn Cruzen who formed a company 
called Effortless Prosperity and solicited investments in Texas 
and California; Richard Olit who solicited investors in 
California; Leighton L.K.L. Suganuma who formed a Nevada 
corporation called Aloha ``The Breath of Life'' Foundation, 
Inc.; and Mark A. Meyerdirk in Kansas. Koop also worked with 
two individuals living in England, Terrence Wingrove and 
Winston Allen. Koop has indicated that he typically paid an 
intermediary 10% of the funds they were responsible for 
directing into the IFS investment program.\320\
---------------------------------------------------------------------------
    \319\ See United States v. Johnny William Cabe and Shelton Joel 
Shirley (U.S. District Court for the District of South Carolina 
Criminal Case No. 0:00-301) and United States v. Terrence Stanley 
Victor Wingrove (U.S. District Court for the District of South Carolina 
Criminal Case No. 0:00-91).
    \320\ Schmidt v. Koop, Koop deposition (12/10/98) at 121.
---------------------------------------------------------------------------
    Koop's Use of Offshore Banks. Koop utilized numerous bank 
accounts in the commission of his illicit activities. At first, 
he directed fraud victims to send money to his personal bank 
account at Interchange State Bank in Saddle Brook, New Jersey. 
Later he directed funds to banks in other States such as 
Illinois, Missouri, and Oregon. In 1997, he began using 
offshore banks. Koop used the offshore banks examined in this 
investigation to further his fraudulent activities in four 
ways: (1) to establish offshore companies to conduct business 
transactions; (2) to open offshore accounts where co-
conspirators and investors could send funds and he could start 
to launder them; (3) to generate revenue and perpetrate his 
fraud by offering investors the opportunity, for a fee, to open 
their own offshore bank accounts where promised investment 
returns could be deposited; and (4) to increase his wealth by 
earning interest on deposits or using the offshore banks' 
investment programs.
    Overseas Development Bank and Trust. ODBT was the first 
offshore bank Koop used in his fraud. ODBT established Koop's 
initial offshore corporation, International Financial 
Solutions, Ltd., which would become one of Koop's primary 
corporate vehicles for the fraud. ODBT opened five accounts for 
Koop and allowed millions of dollars in illicit proceeds to 
move through them. It allowed Koop to open at least 60 more 
accounts for third parties--who turned out to be the defrauded 
investors, before ODBT liquidity problems caused Koop to switch 
his offshore banking to Hanover Bank and BTCB.
    According to Koop, he first became involved in offshore 
banking when, in 1997, he saw a fax advertising offshore 
services at American International Bank (AIB) in Antigua and 
Barbuda. Koop said that he quickly and easily established his 
first offshore corporation and opened his first offshore 
account at AIB, without ever actually speaking to anyone at the 
bank. He said he simply exchanged faxed materials with the 
bank, including an application form requesting minimal due 
diligence information, and his corporation and account were 
established.
    Koop said in his interview that he later learned that AIB 
had been taken over by ODBT and so began dealing with ODBT. 
However, account documentation indicates that he dealt with 
directly with ODBT from the beginning, and that ODBT appears to 
have handled his accounts from their inception.\321\ The 
documentation indicates that Koop had accounts at ODBT for 
almost 2 years, from August 1997 until April 1999, which was 
also the key time period for his fraudulent activity.\322\
---------------------------------------------------------------------------
    \321\ For example, the investigation obtained copies of faxes dated 
8/12/97, which were written by Koop, were addressed specifically to 
ODBT, and referred to the initial opening of Koop-related accounts at 
the bank. A key account statement covering an 18-month period from 8/97 
until 3/99, was also issued by ODBT. The investigation found no similar 
documentation addressed to AIB. Because, from its inception in 1996 
until late 1997, ODBT had a correspondent account at AIB, Koop may have 
mistakenly thought that he was dealing with AIB. Much of the 
documentation related to the Koop accounts at ODBT was collected in 
discovery proceedings related to Schmidt v. Koop, after Koop provided 
written authorization for ODBT to produce all documentation related to 
his accounts at the bank. Some of the documents refer to Overseas 
Development Bank, or Overseas Development Banking Group, rather than 
Overseas Development Bank and Trust. But because the vast majority 
refers to ODBT, this discussion refers to ODBT throughout the text.
    \322\ ODBT also appears to have kept the Koop-related accounts 
after it terminated its association with AIB in the spring of 1998, 
possibly because Koop was one of the few AIB depositors with 
substantial assets.
---------------------------------------------------------------------------
    ODBT documentation indicates that the bank established at 
least the following five Dominican corporations for Koop and 
opened bank accounts in their names:

      (a) account numbered 010-001-988 for International 
Financial Solutions, Ltd.; \323\
---------------------------------------------------------------------------
    \323\ The incorporation papers for Koop's key offshore company, 
International Financial Solutions, Ltd., indicate it was incorporated 
in Dominica on 10/21/94, although later documents claim the 
incorporation date was 10/21/97. Since the ODBT account documentation 
shows transactions as early as August 1997, however, the 1994 
incorporation date appears more likely to be authentic. On November 28, 
1997, Koop changed the name of his company from International Financial 
Solutions, Ltd. to Info-Seek Ltd. He referred to both companies as 
``IFS.''
---------------------------------------------------------------------------
      (b) account numbered 010-002-285 for International 
Financial Solutions, Ltd.; \324\
---------------------------------------------------------------------------
    \324\ This account was associated with a Visa credit card that ODBT 
had provided to Koop's company and was apparently used to pay the 
company's substantial Visa charges.
---------------------------------------------------------------------------
      (c) account numbered 010-003-844 for Info-Seek Ltd.;
      (d) account numbered 010-003-753 for Charity-Seek 
International Ltd.; \325\ and
---------------------------------------------------------------------------
    \325\ Charity-Seek International Ltd. was incorporated as a 
Dominican bearer-share company by ODBT at Koop's request in December 
1997. Koop told the bank that the company would be owned by Charity-
Seek International Trust, which Koop described as a trust he had 
previously established in Belize and which was controlled by him and 
his associates, Hank Renovato, Leighton Suganuma and Mark Meyerdirk. 
Professional Fund Raisers International Ltd. was incorporated by ODBT 
on the same day as a bearer-share company that Koop said would be owned 
by a Belizian trust, Professional Fund Raisers International Trust, 
controlled by the same individuals. Koop requested the establishment of 
both companies and their accounts in a 12/2/97 memorandum he sent to 
West at ODBT. He asked ODBT to establish the companies and accounts 
within 24 hours of his request. Koop also made the unusual request that 
ODBT serve as the account signatory for both accounts, apparently to 
avoid identification of the accounts if a subpoena were to request all 
accounts for which Koop were a signatory. In response, ODBT established 
both accounts within 24 hours, although it is unclear whether ODBT 
agreed to act as the signatory for them. West indicated in his 
interview that he did not recall either account and did not believe 
that ODBT would have agreed to act as the signatory since that would 
have been ``very unusual.'' He said that his normal course of action 
would have been to forward the Koop requests to AIMS for processing. He 
promised to research the matter and provide copies of the account 
opening documentation if they could be located, but no such documents 
were provided to the Minority Staff investigation.
---------------------------------------------------------------------------
      (e) account numbered 010-003-754 for Professional Fund 
Raisers International Ltd.

    The investigation obtained only one, fairly complete 
account statement for these five accounts. It lists all 
transactions for IFS account numbered 010-001-988, from August 
1997 when it opened, until March 17, 1999, about a month before 
the account closed. Most of the deposits and withdrawals were 
in large round numbers, such as $10,000, $50,000 or $100,000. 
Many of the deposits were made by Koop, his fraud victims or 
co-conspirators.\326\ Over a dozen transactions, mostly 
withdrawals, exceeded $100,000.\327\ Altogether over almost 18 
months, the account statement shows deposits totaling more than 
$4.3 million and withdrawals of nearly the same amount.
---------------------------------------------------------------------------
    \326\ ODBT also opened accounts for some of the persons working 
with Koop, in particular account numbered 010-003-026 for Effortless 
Prosperity, a company associated with Glenn Cruzen.
    \327\ The largest transactions were:

      --$1.2 million withdrawal on 9/8/97 to Bank of America for 
George Bevre;
      --$800,000 transfer on 11/5/97 to the second IFS account 
numbered 010-002-285;
      --$800,000 withdrawal on 12/3/97 to Arab Bank in Dubai, U.A.E.; 
and
      --$500,000 withdrawal on 3/6/98 to Measures Frank & Co.
---------------------------------------------------------------------------
    The investigation also obtained a single page from an 
account statement for the IFS account numbered 010-002-285, 
covering the first month this account was opened. It shows an 
initial deposit of $800,000, all of which was transferred from 
the original IFS account; two withdrawals totaling $700,000, 
which were wire transferred on December 3, 1997 to Arab Bank in 
Dubai, and a closing balance of about $100,000. On November 26, 
1997, Overseas Development Banking Group issued a letter ``To 
Whom It May Concern'' stating that Koop was the sole signatory 
for the IFS account and the account balance was in excess of 
$1.5 million.\328\ All of this money was related to Koop's 
self-confessed financial fraud and money laundering.
---------------------------------------------------------------------------
    \328\ This balance apparently reflects both IFS accounts open at 
the time, account 101-001-988 with about $783,000, and account 010-002-
285 with about $800,000.
---------------------------------------------------------------------------
    The IFS account statement also includes four entries 
showing that Koop paid $300 per account to open 60 additional 
accounts at ODBT, apparently for fraud victims who wished to 
open their own offshore accounts.\329\ Koop apparently was 
charging his investors a much higher fee than $300 for each 
account he opened. The investigation obtained copies of faxes 
sent by 16 individuals in nine States in the United States to 
ODBT, inquiring about the status of their ODBT accounts and 
whether Koop or IFS had deposited any funds into them. When 
asked, West indicated during his interview that he had been 
unaware of the 60 accounts opened by Koop for third parties. He 
said that, in 1999, ODBT had closed numerous accounts with 
small balances due to a lack of information about the 
beneficial owners of the funds, and guessed that the 60 
accounts were among the closed accounts. While he promised to 
research the 60 accounts, he did not provide any additional 
information about them.
---------------------------------------------------------------------------
    \329\ These account entries were:

      --$7,500 on 11/7/97 for 25 accounts;
      --$4,500 on 11/12/97 for 15 accounts;
      --$4,500 on 1/16/98 for 15 accounts;
      --$1,800 on 2/13/98 for 6 accounts.
---------------------------------------------------------------------------
    Because the Minority Staff investigation was unable to 
obtain account statements for the 60 accounts, the other four 
accounts opened for Koop, and the accounts opened for other 
persons involved in the IFS investment scheme, the total 
deposited into ODBT accounts in connection with the Koop fraud 
is unknown. The facts indicate, however, that it is certain to 
collectively involve millions of dollars.
    Koop directed his co-conspirators and fraud victims to send 
funds to his ODBT accounts through various U.S. correspondent 
accounts. For example, account statements for Jamaica Citizens 
Bank Ltd. (now Union Bank of Jamaica, Miami Agency) show 
numerous Koop-related transactions from October 1997 into early 
1998. Wire transfer documentation shows repeated transfers 
through Barnett Bank in Jacksonville. In both cases, the funds 
went through a U.S. account belonging to AIB, and from there 
were credited to ODBT and then to Koop. In January 1998, Koop 
also issued wire transfer instructions directing funds to be 
sent to Bank of America in New York, for credit to Antigua 
Overseas Bank, for further credit to Overseas Development Bank, 
and then to one of his five accounts at ODBT.
    In the spring of 1998, ODBT began experiencing liquidity 
problems and failing to complete Koop's wire transfer requests. 
Koop materials from this time period state:

      We are currently transacting our banking business with 
the Overseas Development Bank and Trust Company, which is 
domiciled in the island of Dominic[a] in the West Indies. We 
have witnessed a slowness in doing business with this bank as 
far as deposit transfers and wire transfers are concerned. 
Because of these delays, we have made arrangements with the 
Hanover Bank to open accounts for each of our clients that are 
currently with ODB, without any charge to you. If you are 
interested in doing so, please send a duplicate copy of your 
bank reference letter . . . passport picture . . . [and] 
drivers license. . . . IFS will then open an account for you in 
the Hanover Bank, in the name of your trust.

    By April 1998, Koop began directing his co-conspirators, 
and fraud victims to deposit funds in U.S. correspondent 
accounts being used by Hanover Bank or BTCB, and generally 
stopped using his ODBT accounts. In a document sent to Koop 
investors entitled, ``A Personal Letter from the Desk of 
William H. Koop,'' dated June 22, 1998, Koop stated that, due 
to the problems encountered at ODBT, IFS had made the 
``changeover'' to Hanover Bank. Koop finally closed his ODBT 
accounts in April 1999.
    Hanover Bank. Koop's subsequent use of Hanover Bank is 
detailed in that bank's case history, earlier in this report.
    Koop and BTCB. Koop stated that he began his relationship 
with BTCB in mid-1998, after a chance meeting in Washington, 
D.C. with Charles Brazie, a BTCB vice president, who told him 
about the bank's high yield investment program and faxed him 
account opening forms.\330\ BTCB documentation indicates that 
Koop opened his first BTCB bank account on April 20, 1998.
---------------------------------------------------------------------------
    \330\ See account opening documentation, 4/9/98 document signed by 
Brazie on how to structure BTCB relationship. See also Schmidt v. Koop, 
Koop deposition (12/10/98) at 130.
---------------------------------------------------------------------------
    Over the course of 1998, BTCB documentation indicates that 
the bank established the following five Dominican corporations 
for Koop and opened bank accounts in their names:

      (a) account numbered 101-011089-0 for Info-Seek Asset 
Management S.A.;
      (b) account numbered 101-011079-2 for Hanover B Ltd.;
      (c) account numbered 101-011117-3 for Cadogan Asset 
Management Ltd.;
      (d) account numbered 101-011107-5 for Atlantic Marine 
Bancorp Ltd.; and
      (e) an account for Starfire Asset Management S.A.

    The Info-Seek Asset Management S.A. account was the 
successor to Koop's three IFS accounts at ODBT. Hanover B Ltd. 
was incorporated on May 21, 1998. The Hanover B account was 
opened in an apparent attempt by Koop to mimic a correspondent 
account for Hanover Bank. Koop has stated in a sworn deposition 
that the name ``Hanover B Ltd.'' was chosen ``to correspond to 
Hanover Bank.'' \331\ Another person indicted in the Koop 
fraud, Terrence Wingrove has said that he understood the 
Hanover B account was opened to ``mirror'' the real Hanover 
Bank account and make fraud victims think they were sending 
funds to either IFS or to their own Hanover Bank offshore 
accounts that Koop, for a fee, had pretended to open for them. 
In a letter dated 12/10/98, BTCBs own legal counsel referred to 
the Hanover B account as the ``Hanover Bank'' account.\332\
---------------------------------------------------------------------------
    \331\ Schmidt v. Koop, Koop deposition (3/2/99) at 431.
    \332\ Both BTCB and Hanover Bank have told the investigation that 
they never dealt directly with each other, and Hanover Bank never 
opened a correspondent account at BTCB. While the documentation 
supports that representation, the documentation also makes it clear 
that Hanover B Ltd. was confused on more than one occasion with Hanover 
Bank.
---------------------------------------------------------------------------
    BTCB account statements covering most of 1998,\333\ show 
that in a 6-month period from April to October 1998, over $2.6 
million was transferred into and out of the IFS account, while 
about $1.3 million passed through the Hanover B account in the 
same period.\334\ These funds, which were deposited into BTCB's 
U.S. accounts at BIV and Security Bank, total almost $4 
million. All of this money is related to Koop's self-confessed 
financial frauds and money laundering.
---------------------------------------------------------------------------
    \333\ These statements were produced by BTCB in response to Schmidt 
v. Koop discovery requests.
    \334\ BTCB account statements for the Cadogan and Atlantic Marine 
Bancorp accounts show they were opened in July 1998, with the $6,500 
minimum in deposits allowed, and experienced no further activity 
through December 9, 1998. No account statement was produced for the 
Starfire account. The deposits into the IFS and Hanover B accounts came 
from co-conspirators in the Koop fraud and from defrauded investors. 
BTCB records show, for example, that Koop's co-conspirator, Cabe, sent 
payments of $450,000, $150,000 and $499,990 to the Hanover B account. 
Several IFS investors wired funds to the IFS account.
---------------------------------------------------------------------------
    Most IFS investors, when sending money to IFS directly, 
transferred amounts in the range of $5,000 to $50,000. The 
largest single IFS investor appears to have been Glenn Schmidt, 
of California, who sent $2.5 million. This money was sent by 
wire transfer on 4/22/98, 2 days after Koop opened his first 
account at BTCB. Schmidt transferred the funds from his bank in 
California to BTCBs correspondent account at BIV in Miami, for 
further credit to IFS. It was the largest single deposit into 
BTCB's account at BIV. Koop admitted in his criminal case that 
he had convinced Schmidt to invest these funds, failed to 
invest the money as promised, and failed to repay any funds to 
Schmidt despite repeated assurances. Instead, he used the $2.5 
million to provide funds to his co-conspirators, establish four 
more accounts at BTCB, and make Ponzi payments to a few IFS 
investors awaiting returns. He also transferred $1 million to a 
Bank of America account in Oregon for ``CPA Services,'' a 
company run by the Christian Patriot Association, an 
organization which is associated with militia groups and which 
Koop said he sometimes used to make cash payments to third 
parties.\335\
---------------------------------------------------------------------------
    \335\ Schmidt v. Koop, Koop deposition (12/10/98) at 66, 73.
---------------------------------------------------------------------------
    In September 1998, Schmidt filed a civil suit in federal 
court in New Jersey to recover his $2.5 million.\336\ That suit 
named as defendants Koop, several of his companies, BTCB, BIV 
and Hanover Bank. BTCB sought to be dismissed from the suit, 
claiming among other arguments that the suit had failed to 
state a claim against the bank and the U.S. court lacked 
jurisdiction over it. BTCB also, at first, seemed to deny any 
relationship with Koop. A 10/29/98 ``certification'' filed by 
BTCB president Requena stated in part: ``[T]here is not, nor 
has there been an account opened in BTCB . . . for `William H. 
Koop' or for `International Financial Solutions Ltd.' '' \337\ 
Despite this certification, plaintiffs counsel sent BTCB a 
written authorization by Koop to provide documentation related 
to ``any BTCB account'' controlled by or related to him. In 
response, on 12/10/98, BTCB disclosed that Koop had, in fact, 
five accounts at the bank and provided account statements and 
other information. In return, plaintiff's counsel voluntarily 
dismissed BTCB from the civil suit ``without prejudice,'' 
meaning that it could petition to rejoin the bank again, if 
appropriate.
---------------------------------------------------------------------------
    \336\ This is the Schmidt v. Koop case.
    \337\ Schmidt v. Koop ``Certification of Rudolfo Requena,'' dated 
10/29/98.
---------------------------------------------------------------------------
    Koop has pleaded guilty to conspiracy to launder the fraud 
proceeds. BTCB records show that virtually all of the $4 
million deposited into the IFS and Hanover B accounts in 1998 
was withdrawn within about 6 months. Much of the money was 
transferred to bank accounts controlled by Koop or his 
accomplices, including in Mississippi, the United Kingdom, and 
at CPA Services. In two instances in June 1998, a total of over 
$30,000 was paid to third parties to help purchase and furnish 
a New York apartment. In another instance, on 7/21/98, BTCB 
issued a certified check for $294,000 to Bergen County in New 
Jersey, enabling Koop to purchase a house there.\338\ According 
to Koop, what is omitted from the records provided by BTCB in 
the civil suit is another $1.3 million in illicit proceeds that 
he placed in BTCB's high yield investment program.
---------------------------------------------------------------------------
    \338\ Schmidt v. Koop, Koop deposition (3/2/99) at 433.
---------------------------------------------------------------------------
    Koop Investment in BTCB High Yield Program. Koop told the 
investigation that, on June 29, 1998, he transferred $1,325,000 
to a BTCB subsidiary, Global Investment Fund, for investment in 
BTCB's high yield program.\339\ He said that BTCB had contacted 
him repeatedly about investment opportunities. He provided a 
copy, for example, of a BTCB document promising annual returns 
on certificates of deposit as high as 79%. He also provided 
copies of BTCB documents setting out specific terms for an 
investment in its high yield program, including a letter of 
intent, corporate resolution for a private placement of funds, 
and cooperative venture agreement. Koop said that he pursued 
only one of the offered BTCB investments, in which BTCB's 
subsidiary, Global Investment Fund, promised to pay him a 100% 
return on the $1.3 million each week for 40 weeks, for a total 
of more than $50 million.
---------------------------------------------------------------------------
    \339\ See also Schmidt v. Koop, Koop deposition (12/10/98) at 58-
59, 143-46, 149-57; and (3/2/99) at 406; and evidence of $1 million 
transfers from the BTCB account at Security Bank to a Global Investment 
Fund on 7/3 and 7/6/00.
---------------------------------------------------------------------------
    U.S. bank records for BTCB's account at Security Bank show 
transfers of millions of dollars in July and August 1998 to 
accounts associated with Global Investment Fund, any one of 
which could have included Koop's investment funds. These 
transactions included:
      --7/3/98 wire transfer of $1 million from BTCB's account 
at Security Bank to Bank One in Columbus, Ohio, for further 
credit to Bank One in Houston, Texas, for further credit to 
``Global Investment Fund S.A.''--these funds were initially 
rejected and successfully re-transmitted on 7/6/98;

      --8/14/98 wire transfer of $170,000 from BTCB's account 
at Security Bank to Banque National de Paris in New York for 
Sundland States ``Ref. Global Investment Fund/Outlast'';

      --8/14/98 wire transfer of $830,000 from BTCB's account 
at Security Bank to the Royal Bank of Scotland in the Bahamas 
for Highland Financial Corp. ``Ref. Global Investment Fund'';

      --8/26/98 wire transfer of $1,006,918.31 from Bank One 
Trust Company N.A. in Columbus, Ohio, to BTCB's account at 
Security Bank for further credit to ``Global Investment Fd 
SA''; and

      --8/31/98 wire transfer of $1 million from BTCB's 
account at Security Bank to U.S. Bank in Aurora, Colorado, for 
Global Investment Fund S.A.

    These transactions alone establish transfers of $3 million 
to Global Investment Fund during the summer of 1998, which was 
when Koop alleged he made his investment into BTCB's high yield 
program. Koop noted in his interview that, as of March 2000, 
BTCB had yet to make a single payment or to return any of his 
principal. He stated that BTCB still had $1,325,000 of his 
proceeds, together with any interest or profits accumulated 
over the last 2 years. If true, BTCB would still have 
possession of over $1.3 million in fraud proceeds that ought to 
be returned to Koop's defrauded investors.
    The Koop fraud provides a detailed illustration of how 
criminals can use offshore banks and their U.S. accounts to 
launder funds and perpetuate financial frauds. It also 
demonstrates how inadequate bank controls and money laundering 
oversight contribute to the ability of criminals to carry out 
their activities. The impact on the United States includes 
hundreds of defrauded investors, prosecutions in New Jersey and 
South Carolina, extradition proceedings in the United Kingdom, 
civil litigation, and the ongoing depletion of law enforcement 
and court resources.

  (3) Cook Fraud

    In March 1999, Benjamin Franklin Cook III was named in 
civil pleadings filed by the Securities and Exchange Commission 
(SEC) in Texas as a key figure in a fraudulent high yield 
investment program which, in the course of less than 1 year, 
bilked over three hundred investors out of more than $40 
million. In August 2000, a criminal indictment in Arizona 
charged Cook with 37 counts of racketeering, fraud and theft. 
U.S. bank records indicate that at least $4 million associated 
with this fraud passed through U.S. correspondent accounts 
belonging to BTCB, and BTCB was directly involved in investment 
activities undertaken by persons and companies associated with 
the Cook fraud.
    Nature of Cook Fraud. On March 16, 1999, the SEC filed a 
complaint and other pleadings before a Federal court in Texas 
requesting emergency relief against Cook, his company Dennel 
Finance Ltd. (``Dennel''), International Business Consultants 
Ltd. (``IBCL''), and a number of other individuals and 
entities, for engaging in a ``fraudulent scheme to offer and 
sell unregistered `prime bank' securities throughout the United 
States.''\340\ The complaint alleged that the defendants raised 
funds primarily by ``target[ing] religious and charitable 
groups and persons investing retirement funds.'' It alleged 
``numerous misrepresentations and omissions of material fact'' 
by defendants, including that investor funds would be ``secured 
by a bank guarantee,'' would serve as ``collateral to trade 
financial instruments with top 50 European Banks,'' and would 
earn ``annual returns of 24 to 60 percent.'' The complaint 
alleged that, ``[i]n reality, the prime bank program . . . 
[did] not exist,'' and defendants had ``misappropriated 
investment funds for personal and unauthorized uses, including 
making Ponzi payments to existing investors with funds provided 
by new investors.''
---------------------------------------------------------------------------
    \340\ SEC v. Cook (U.S. District Court for the Northern District of 
Texas Civil Case No. 399-CV-0571), complaint and other pleadings dated 
3/16/99. See also legal pleadings compiled at www.dennelfinancial.com.
---------------------------------------------------------------------------
    The U.S. district court in Texas issued orders in March and 
April 1999, prohibiting Cook from making false statements to 
investors, freezing his assets, appointing a receiver, 
requiring expedited discovery, and affording other emergency 
relief requested by the SEC. To recover investor funds, the SEC 
appointed Lawrence J. Warfield as its official receiver charged 
with locating and taking control of assets belonging to Cook 
and others involved in the fraud. The receiver quickly froze 
about $11 million in assets, began reconstructing business and 
financial records, and began subpoenaing records from 142 U.S. 
bank accounts used in the Cook fraud.
    Cook and his associates refused to cooperate with the 
investigation. In September, the court issued an order 
requiring Cook to show cause why he should not be held in 
contempt, and on October 8, 1999, ordered him imprisoned for 
contempt of court. On October 20, Cook was arrested and 
confined to a Texas detention facility.
    On August 20, 2000, the Arizona Attorney General indicted 
Cook on 37 counts of racketeering, fraud and theft. The 
indictment, which was sealed pending Cook's extradition from 
Texas, was described by the Arizona Attorney General as 
alleging that Cook defrauded 300 investors out of more than $41 
million through a fraudulent investment program. The indictment 
allegedly asserted that only $635,000 of the $41 million had 
ever been invested, and most of these funds were lost. The 
complaint also allegedly stated that Cook used much of the $41 
million on personal expenses, including a luxury home, 
automobiles, airplanes and jewelry, and to purchase real 
estate.
    Cook and BTCB. After reviewing U.S. bank records and other 
information, the investigation determined that at least $4 
million in illicit proceeds from the Cook fraud moved through 
accounts at BTCB, and that BTCB itself was directly involved in 
investment activities undertaken by persons and entities 
associated with the Cook fraud.
    An analysis of BTCB's U.S. correspondent bank records by 
Minority Staff investigators uncovered documentary evidence 
linking 100 wire transfers to defrauded investors or entities 
associated with the Cook fraud, including Dennel and IBCL.\341\ 
These transactions moved funds totaling $4,086,152 over a 2-
year period from 1998 until 2000, suggesting BTCB accounts were 
an active conduit for funds associated with the Cook fraud. The 
100 wire transfers included the following:
---------------------------------------------------------------------------
    \341\ See chart entitled, ``BTCB Transactions Related to Cook 
Fraud,'' in BTCB case history.

      --BIV records disclosed 34 deposits totaling over $1.4 
million from April 6 until May 28, 1998, when BIV closed the 
BTCB account. All were wire transfers directed to BTCB for 
further credit to IBCL. The first deposit, on 4/6/98, was for 
$634,982, which increased the bank's total deposits at the time 
---------------------------------------------------------------------------
by 23%.

      --Security Bank records disclosed 34 deposits totaling 
over $2.3 million, and 24 withdrawals totaling over $2 million 
from June 22, 1998 until February 14, 2000. These transactions 
involved wire transfers to or from Security Bank's U.S. 
correspondent account for BTCB, accompanied by directions to 
credit or debit an entity associated with the Cook fraud. The 
transactions involved primarily IBCL or Dennel, but also Global 
Investments Network Ltd., Trans Global Investments, Wealth & 
Freedom Network LLC, and Premier Gold Fund Ltd. The transfers 
included 14 deposits in 1998 with directions to credit the 
funds to Dennel, suggesting the existence of a Dennel account 
at BTCB at least during that year.

      --First Union records disclosed eight withdrawals 
totaling over $2 million from April 26 to October 6, 1999. All 
were wire transfers from BTCB to accounts associated with IBCL 
and, in one instance, with Desert Enterprises Ltd., also 
associated with the Cook fraud.

    More than 20 of the 100 wire transfers equaled or exceeded 
$100,000. Two of the largest transactions, on 4/6/98 and 9/16/
98, together deposited more than $1 million into the IBCL 
account at BTCB. The largest withdrawal, on 5/7/99, sent 
$900,000 to an IBCL account in California.
    The transactions included in this data analysis were 
selected because of bank account or wire transfer documentation 
which, on its face, directly linked the funds to a defrauded 
investor or to an entity associated with the Cook fraud, as 
indicated in court filings and other materials provided by the 
SEC receivers' office. It is likely that additional Cook-
related transactions escaped detection due to the limited 
documentation available to the Minority Staff investigation and 
limited public information regarding how the Cook fraud 
operated. In light of the $40 million scope of the Cook fraud, 
the $4 million that passed through BTCB accounts shows BTCB was 
an active conduit for the fraud.
    IBCL Investment in BTCB High Yield Program. In addition to 
opening accounts and moving funds, the investigation obtained 
evidence indicating that BTCB actively participated in some of 
the investment activities undertaken by persons and companies 
associated with the Cook fraud. BTCB's investment role appears 
to have begun in 1998 and continued throughout 1999, despite 
the March 1999 SEC complaint naming Dennel and IBCL, among 
others, as participants in a massive investment fraud.
    The investigation first learned of BTCB's investment role 
after speaking with a person who had complained about BTCB to 
the Dominican Government. Wayne Brown, a Canadian citizen, 
voluntarily answered questions and provided documents related 
to his ongoing efforts to recover $30,000 he sent to BTCB in 
1998 for placement in a high yield investment program. Brown 
characterized his lost investment as due, in part, to the Cook 
fraud.
    Brown explained that he made the $30,000 investment because 
an old friend, Tony Rodriguez, allegedly an experienced 
investor, had recommended that he try the BTCB high yield 
program. Brown said that, on the advice of Rodriguez, he 
solicited additional investments from family members and other 
persons, pooled the funds, and provided a total of about 
$250,000 to Rodriguez for investment. He said the funds were 
wire transferred to BTCB's correspondent account at Security 
Bank in several installments, and Rodriguez was supposed to 
ensure their placement in the BTCB program. He said that it was 
his understanding that, in order to gain access to the BTCB 
investment program, Rodriguez had worked with Peter Shifman, an 
accountant with ties to both Cook and IBCL. He said that it was 
his understanding that Shifman, who was familiar with Dominica 
and BTCB, was able to get Rodriguez' investors into the BTCB 
program. He said the investment program never produced any 
returns, and he and his associates have been unable to recover 
any of their funds.
    Documents obtained by the investigation establish that 
Rodriguez was associated with at least three entities that, 
according to the SEC receiver, were involved in the Cook fraud: 
Global Investment Network Ltd., Coopman Ltd., and Wealth & 
Freedom Network, LLC. The documents establish that, in 1998, 
BTCB not only maintained accounts for Global Investment Network 
Ltd., Coopman Ltd. and IBCL, but also dealt directly with 
Rodriguez and Shifman, and eventually placed IBCL funds into 
BTCB's own high yield investment program.
    In a memorandum dated 7/20/98, on IBCL letterhead, for 
example, Shifman reported the following to ``All Investors,'' 
including Brown:

      I have just returned from Roseau, Dominica. . . . [A]ll 
pooled funds are now invested. I have received a letter from 
Dr. Charles Brazie, Vice President of Managed Accounts of 
British Trade and Commerce Bank indicating that our funds have 
been allocated for participation. . . . Please note that the 
Company mentioned on the letter head (Global Investment Funds 
S.A.) is the Investment Company of British Trade and Commerce 
Bank. . . . Dr. Brazie has indicated that the first 
disbursement will now be sometime next week.

    This document indicates that BTCB was directly involved in 
handling investments for IBCL and IBCL's investors.
    A later memorandum from Shifman to ``All Investors,'' dated 
4/1/99, suggests that the BTCB investment program was not going 
well and investment returns were not being paid as promised.

      All of you are aware that . . . disbursements have not 
been issued since the beginning of December, 1998 . . . due to 
the lack of performance by the Bank that IBCL is contracted 
with. . . . I am able to offer these options to each individual 
investor. . . . Continue our current contract and wait until 
the end of April to see if that contact performs. Request the 
return of your investment. . . . Terminate the current contract 
and issue a new contract with the following terms: 1. The 
investment contract will be for twelve (12) months. 2. A 
Certificate of Deposit will be purchased through the Bank and 
its Florida-based Securities Firm for the total amount of the 
investment. 3. A guaranteed rate of return of two percent (2%) 
per month, paid monthly will be paid to investors.

    This memorandum is dated less than 1 month after the SEC 
complaint alleging IBCL involvement with investment fraud.
    Brown indicated that, despite the Shifman promise of a 2% 
monthly return, he requested the return of his $30,000.\342\ 
Brown indicated that, in response, he received conflicting 
stories about whether his $30,000 was actually with Global 
Investment Network Ltd. under the control of Rodriguez, or with 
IBCL under the control of Shifman. On 10/8/99, Brown received a 
fax on IBCL letterhead stating that, while the records 
indicated his $30,000 had been ``transferred directly to the 
IBCL account'' at BTCB:
---------------------------------------------------------------------------
    \342\ See document signed by Brown, dated 4/6/00, requesting return 
of his $30,000 investment.

      [h]owever, the funds were placed in that account under 
contract with Global Investments Network Ltd., leaving them 
outside of our control. In order to place them into the 
Certificate of Deposit Program, and realize further profits 
from the BTCB, we would have to enter a new [agreement] issued 
to you from this office. I am expecting a call from Betts [at 
BTCB] sometime in the next hour or so, and he and I will 
address your situation, as well as others, and figure out the 
---------------------------------------------------------------------------
best and most efficient means of handling your investment.

    A few days later, Brown received a letter from BTCB dated 
10/11/99, signed by Betts and addressed, ``To all depositors in 
Global Investment Network Ltd. [a]nd certain depositors in 
International Business Consultants Ltd.'' After observing that 
the Global Investment Network account had been largely 
depleted, the letter indicated a solution had been found to 
help individual investors. The letter announced that BTCB had 
``come to an arrangement with Tony Rodriguez with respect to 
handling your deposits with Global and IBCL.'' The letter 
continued:

      As I have explained to many of you on the telephone the 
remaining balance in Global will only return 17% of your 
original principal. However, of the approximately $300,000 of 
your deposits that went into Global, $252,615 was transferred 
into IBCL and is presently invested in their managed account 
with the Bank. . . . The bottom line is that if you agree to 
let your funds be placed under the management of IBCL and Peter 
Shifman then the Bank can assure you that your funds are safe 
and in an account that is intact and will stay that way until 
the investment program is over.

    Despite BTCB's strong encouragement to leave all funds with 
IBCL in the BTCB investment program, Brown continued to ask for 
the return of his funds, without success.
    The investigation obtained a second BTCB letter dated 10/
11/99, which was also signed by Betts. This letter was 
addressed to Tony Rodriguez at Global Investment Network Ltd. 
It discussed a ``proposed settlement'' in which BTCB would 
``take over the management'' of Global Investment Network funds 
``in conjunction with Peter Shifman,'' provided that Rodriguez 
made up a funding shortfall by transferring additional funds 
from his Coopman Ltd. account at BTCB to the IBCL account. This 
letter provides still more evidence of BTCB's deep involvement 
in the investment activities of these entities at a time when, 
in 1999, each was under investigation in the ongoing SEC fraud 
proceedings.
    Brown said that, after many attempts to recover his funds 
from the BTCB high yield investment program, he requested the 
assistance of Dominica's banking regulators. On August 1, 2000, 
he received a letter from Dominica's banking supervisor stating 
that records produced by BTCB indicated that his $30,000 had 
been transferred by Rodriguez out of BTCB to one of Rodriguez's 
``other accounts in the United States.'' The banking supervisor 
wrote: ``It now appears that you have to pressure Rodriguez for 
the return of the funds. It was a mistake not to have invested 
directly with [BTCB].''
    Brown indicated that he felt as if he were in a shell game 
where his funds were being moved from account to account, 
always beyond his reach, from Global Investment Network to IBCL 
to BTCB to another bank in the United States. He noted that, at 
each step, the persons involved had simply blamed someone else 
for not producing promised returns and not returning his funds.
    When Minority Staff investigators contacted the SEC 
receiver and his staff to obtain their perspective on BTCB, the 
receiver's staff expressed surprise at the number, dollar 
amount and timing of BTCB transactions tied to persons and 
entities associated with the Cook fraud. The staff provided a 
copy of a letter sent by the SEC receiver to BTCB on May 8, 
2000, asking the bank to freeze all funds in the IBCL account. 
The staff said it was their understanding that BTCB had, in 
fact, frozen the IBCL account, but few funds were captured. 
They indicated they had been unaware that $4 million in suspect 
funds had passed through BTCB; unaware of the Dennel, Global 
Investment Network and Coopman accounts at BTCB; and unaware 
that IBCL investor funds had been lodged with BTCB.
    The Cook fraud provides another illustration of how 
criminals use offshore banks and their U.S. accounts to launder 
funds and facilitate financial fraud. The impact on the United 
States includes, again, hundreds of defrauded investors, SEC 
proceedings prosecutions in New Jersey and South Carolina, 
extradition proceedings in the United Kingdom, civil 
litigation, and the ongoing depletion of law enforcement and 
court resources.

  (4) Gold Chance Fraud

    In April 2000, two brothers filed a civil suit in Canada 
alleging, in essence, that their company, Gold Chance 
International Ltd. (``Gold Chance''), was the victim of a loan 
fraud involving $3 million.\343\ They alleged that Gold Chance 
had been fraudulently induced to deposit $3 million as supposed 
loan collateral into an attorney trust account in Canada, 
waited months for a loan that never materialized, and then 
learned that the company's funds had been secretly transferred 
to an offshore account at BTCB.
---------------------------------------------------------------------------
    \343\ Gold Chance International Ltd. v. Daigle & Hancock (Ontario 
Superior Court of Justice, Case No. 00-CV-188866)(hereinafter ``Gold 
Chance'').
---------------------------------------------------------------------------
    In response to plaintiffs' efforts to recover the funds, an 
Ontario court granted immediate emergency relief, including 
freezing assets under a Mareva injunction, appointing a 
receiver for the law firm's trust account, and ordering BTCB 
and others to cooperate with discovery. Although the civil 
proceedings have yet to reach a conclusion, a preliminary court 
decision, pleadings in the civil case, and other information 
show that the $3 million was deposited into BTCB's U.S. 
correspondent account at First Union National Bank on December 
15, 1999, and within a week, the funds were divided up and 
wired to multiple bank accounts around the world. In an order 
dated June 12, 2000, the court expressed skepticism regarding 
BTCB's claim that the $3 million was still safely on deposit 
with the bank, invested at the request of a client into a 1-
year BTCB high yield program maturing in December 2000.
    Nature of Gold Chance Fraud. On April 16, 2000, Canadian 
citizens Brent and Greg Binions filed a civil suit in the 
Ontario Superior Court of Justice, on behalf of Gold Chance and 
two other companies they own, seeking recovery of the $3 
million from two individuals, Sayse Chatterpaul and Paul 
Zhernakov, several companies controlled by these individuals, 
and the law firm and banks involved in moving the funds out of 
Canada, including BTCB.
    The plaintiffs' statement of claim, related pleadings and 
an opinion issued by the court in June 2000, indicate the 
following facts.\344\ In the fall of 1999, Gold Chance was 
introduced to and entered into negotiations with Chatterpaul to 
obtain a loan to develop certain automobile fuel technology. In 
December 1999, Gold Chance executed a borrowing agreement with 
Chatterpaul's alleged company, Triglobe International Funding 
Inc. The agreement provided that Triglobe would issue a loan to 
Gold Chance, on the condition that Gold Chance first posted 25% 
of the loan amount in cash collateral to be kept in a fiduciary 
account under the control of legal counsel. On December 3, 
1999, having borrowed the required sum from Toronto Dominion 
Bank, Gold Chance delivered a $3 million bank draft to Daigle & 
Hancock, a Canadian law firm, for deposit into the firm's 
fiduciary account at the Bank of Montreal.
---------------------------------------------------------------------------
    \344\ See Gold Chance statement of claim (4/16/00), amended 
statement of claim (5/17/00), and ``Reasons for Decision'' by Judge 
Campbell (6/12/00).
---------------------------------------------------------------------------
    The promised loan was not, however, issued to Gold Chance. 
After 2 months, on February 17, 2000, Chatterpaul and Gold 
Chance replaced the original agreement with a second borrowing 
agreement which, among other changes, replaced Triglobe with a 
company called Free Trade Bureau S.A. (``Free Trade''). The 
agreement provided that Free Trade would issue a $12 million 
loan to Gold Chance, collateralized by the $3 million in the 
fiduciary account. Chatterpaul signed the contract on behalf of 
Free Trade. When no loan materialized, on March 13, 2000, Gold 
Chance demanded return of the $3 million.
    The pleadings allege plaintiffs learned in March 2000 that, 
without their consent, the $3 million had been transferred in 
December 1999, to a BTCB account for Free Trade. The pleadings 
allege that the $3 million was quickly depleted through 
multiple wire transfers initiated by BTCB to bank accounts 
around the world. The pleadings also state that plaintiffs 
learned Free Trade was owned, not by Chatterpaul, but by 
Zhernakov, an individual with whom they had had no prior 
dealings. The pleadings accuse the defendants of a variety of 
fraudulent acts, contractual and fiduciary breaches, wrongful 
conversion and other misconduct, and demand compensatory and 
punitive damages.
    Free Trade and BTCB. BTCB admits that it has not only 
handled accounts and funds for persons and entities associated 
with the Gold Chance fraud, but also retains possession of the 
disputed $3 million, which it claimed was placed in a 1-year 
BTCB investment program.
    In its September 2000 submission to the Subcommittee, BTCB 
acknowledged its involvement in the Gold Chance dispute, 
without using specific client names. BTCB provided the 
following description of the civil litigation:

      A longstanding Canadian client had an existing account 
with BTCB, and his background fully checked out. He 
subsequently placed an additional $3 million into this BTCB 
account . . . [and] committed these funds under a year long 
investment contract with BTCB to place the funds; which the 
bank in turn committed for a year. The first sign of trouble 
BTCB had was when a company completely unknown to us surfaced, 
and alleged that the $3 million was actually its money given to 
the lawyer in Trust.

      Unfortunately, it turned out later that the Canadian 
lawyer had obtained the $3 million from a client company under 
the false pretense, that the $3 million would be used as 
collateral for a loan from BTCB of $12 million, a situation 
completely unknown to us and contradicted by all paperwork 
between BTCB and this Canadian client and lawyer regarding the 
placement of $3 million with us in December 1999. . . .

      BTCB has the $3 million invested under the signed 
contract, and will return the funds when the contracted 1-year 
period expires in December 2000.''

    BTCB also stated that it had ``filed an affidavit [with the 
Canadian court] explaining our lack of knowledge and 
documenting the Canadian client and lawyer's signed documents 
submitted to our bank; thus requesting a complete dismissal 
from the action.'' Although BTCB did not provide a copy of the 
affidavit or the attached documents, the investigation obtained 
them from the publicly available pleadings in the Canadian 
lawsuit. The affidavit was signed by BTCB president Requena and 
filed on September 7, 2000, less than 2 weeks before BTCB made 
its submission to the Subcommittee.
    In explaining BTCB's role to the court, the Requena 
affidavit attempted to draw a stark contrast between Zhernakov 
and Chatterpaul, stating that while BTCB had done business with 
Zhernakov for 2 years, BTCB ``does not have any knowledge or 
information . . . and has never had any business or other 
relationship or affiliation with'' Chatterpaul or any of his 
companies.\345\ With respect to Zhernakov, the Requena 
affidavit stated that Free Trade had been ``incorporated on 2 
January 1998 . . . for the Defendant, Paul Zhernakov pursuant 
to his instructions [and] . . . has been a customer of BTCB 
since January 1998.'' \346\ Exhibit L to the affidavit provides 
copies of BTCB's standard agreements for its high yield 
investment program, signed by Zhernakov on behalf of his 
company Free Trade, establishing that the company became a 
participant in the program in January 1998.
---------------------------------------------------------------------------
    \345\ Requena affidavit at 6.
    \346\ Id.
---------------------------------------------------------------------------
    U.S. bank records substantiate Zhernakov's status as a BTCB 
client, including records showing the Zhernakov name in BTCB 
account transactions as early as April 1998. U.S. bank records 
also show one transaction involving Chatterpaul--a wire 
transfer dated June 21, 1999, originated by Sayse Chatterpaul, 
sending $680,000 from the Canada Trustee Mortgage Company in 
Ontario to the BTCB account at Security Bank for further credit 
to Free Trade. This deposit, for more than half a million 
dollars, should have attracted BTCB's notice. At a minimum, it 
provides evidence of a connection between Chatterpaul and Free 
Trade and contradicts BTCB's claim to the court that it had 
never had any business dealings with Chatterpaul.
    Plaintiffs' pleadings raise questions about Zhernakov's 
background, business dealings, and source of funds.\347\ 
Plaintiffs' information appears to be based primarily on a 
sworn deposition provided by Zhernakov on June 5, 2000, in 
connection with the lawsuit. Citing pages in a Zhernakov 
transcript, plaintiffs allege that Zhernakov was born in Russia 
in 1954, and is currently a citizen of Grenada. They allege he 
was employed by the Russian Navy for 17 years, then worked for 
an airline and had a business consulting firm, but currently 
``does not work or have a business.'' \348\ They state that 
Zhernakov testified at his deposition that he arranged loans 
through BTCB for commissions, spoke regularly with Betts during 
1999, and worked on occasion with Chatterpaul. Plaintiffs state 
that Zhernakov testified that both he and Chatterpaul were 
``authorized'' to act on behalf of Free Trade.\349\ This 
information raises questions about what due diligence research 
BTCB did prior to accepting Zhernakov as a client and what 
information BTCB had about the source of his funds. It also 
casts doubt on BTCB's assertion to the court that it had no 
prior dealings with or information about Chatterpaul since, 
according to Zhernakov, Chatterpaul had signing authority for 
Free Trade, a BTCB-established Dominican corporation.
---------------------------------------------------------------------------
    \347\ See Gold Chance, ``Factum of the Plaintiffs'' (6/8/00).
    \348\ Id. at 7.
    \341\ Id. at 8-9.
---------------------------------------------------------------------------
    With respect to the Gold Chance funds, U.S. bank records 
show the deposit of the $3 million into BTCB's account at First 
Union on 12/15/99. The wire transfer documentation states that 
the funds originated from Daigle & Hancock at the Bank of 
Montreal and the intended beneficiary was Free Trade Bureau 
S.A. at BTCB. On the day the funds were deposited, BTCB's 
account balance at First Union was only $14,308. Over the next 
2 weeks, only three other small deposits, totaling about 
$25,000, came into the BTCB account. That means that, for the 
month of December 1999, the $3 million in Gold Chance funds 
were the primary source of funds in the BTCB account.
    The wire transfers that depleted the $3 million deposit do 
not, on their face, substantiate BTCB's claim that it placed 
the $3 million into a year-long investment program. Instead, 
the bank records show that the $3 million deposit on 12/15/99 
was followed by a flurry of outgoing wire transfers in widely 
varying amounts to multiple bank accounts around the world. 
Most of the payments using the Gold Chance funds appear to have 
been made to BTCB creditors or clients, with about $355,000 
transferred to other BTCB correspondent accounts. Altogether, 
in the span of 1 week ending December 23, 1999, about $2.3 
million left the BTCB account.\350\ By December 29, 1999, only 
about $734,000 remained in the BTCB account, of which all but 
$40,000 was attributable to the Gold Chance funds. On 12/30/99, 
BTCB deposited another $275,000, taken from its Security Bank 
correspondent account, and on 1/3/00, it transferred $1 million 
from the BTCB account to a Bank of America branch in Idaho for 
``Orphan Advocates LLC.'' \351\ After the $1 million transfer, 
the BTCB account at First Union held only about $11,000. No 
significant activity took place in the account afterward, and 
in February 2000, First Union closed the BTCB account.
---------------------------------------------------------------------------
    \350\ The wire transfers included the following:

      --$93,000 on 12/16/99 to Bank of Nevis International for 
Universal Marketing Consultants;
      --$15,339.95 on 12/16/99 to First National Bank of Antlers, 
Oklahoma for Republic Products Corp., a company controlled by BTCB's 
major stockholder John Long;
      --$240,000 on 12/17/99 to Barclays Bank in the Bahamas for BSI 
Corporation;
      --$50,000 on 12/20/99 and $50,000 on 12/23/99 to National 
Commercial Bank in Dominica for BTCB's correspondent account;
      --$200,000 and $55,000 in two separate wire transfers on 12/21/
99, both to Pacific National Bank in Miami for BTCB's correspondent 
account;
      --$205,000 on 12/21/99 to Mashreq Bank in Dubai for Graham 
Farrell;
      --$612,000 on 12/21/99 to Banque Cantonale de Geneve for Laurent 
Finance;
      --$200,000 on 12/23/99 to HSBC Bank in Hong Kong for Wanvijit 
Chauatong;
      --$140,000 on 12/23/99 to ANZ Grindlay Bank in India for Asset 
Management India;
      --$40,000 on 12/23/99 to a Union Planters Bank account for the 
credit of BTCB's president Rodolfo Requena; and
      --$14,625 on 12/23/99 to the Bank of Montreal for Zhernakov, one 
of the defendants in the civil lawsuit.
    \351\ Orphan Advocates LLC is an Idaho corporation and another BTCB 
client. The Ontario court reviewing the Gold Chance case has authorized 
the plaintiffs to inquire about whether this Idaho corporation is 
somehow associated with Betts or his wife, Mavis Betts, who still 
resides in Idaho. See Gold Chance, court orders dated 5/15/00 and 6/2/
00. The court has also authorized inquiries into the corporation's 
relationship with entities called Orphan Advocates Trust, Orphan 
Advocates Foundation, China Fund for the Handicapped, and a company 
which has changed its name four times in 4 years, from Children's Aid 
of Idaho, Inc. in 1994, to Children's Adoption Service International, 
Inc. in 1995, to Children's Adoption Services Inc. in 1996, to CASI 
Foundation for Children, Inc. in 1998.
      Plaintiffs have alleged that the $1 million payment to Orphan 
Advocates LLC on January 3rd was actually paid into an account held by 
Orphans Advocates Trust which, in turn, transferred the funds on the 
same day to the China Fund for the Handicapped. See Gold Chance, 
``Factum of the Plaintiffs'' (6/8/00) at 6. China Fund for the 
Handicapped appears to be another investor in BTCB's high yield 
program. Documentation at First Union shows that, on 6/21/99, the Fund 
transferred $3 million from its bank account at Chiyu Banking Corp. in 
Hong Kong to BTCB's account at First Union. Ted Johnson, a member of 
the Board of CASI Foundation for Children, Inc., told a Minority 
Subcommittee investigator on November 3, 2000, that it was his 
understanding that the China Fund for the Handicapped had invested a 
significant amount in BTCB's high yield investment program. Johnson 
said that the Fund was ``not satisfied with the timing or amount'' of 
the returns on their BTCB investment, although he understood the Fund 
had not filed any legal action. He also said that the China Fund for 
the Handicapped with BTCB investments was associated with the China 
Fund for the Handicapped that is a quasi-governmental organization in 
China, headed by Deng Xiaoping's son, Deng Pufang. He also stated that 
the China Fund for the Handicapped is associated with Orphan Advocates 
LLC.
      Wire transfer documentation indicates additional links between 
BTCB, the China Fund for the Handicapped, and Orphan Advocates LLC. The 
wire transfers include the following:

      --7/8/99 transfer of $1 million from BTCB account at First Union 
to a bank in Milwaukee, Wisconsin, called Marshall & Isley Bank, for 
further credit to an attorney trust account, belonging to John P. 
Savage;
      --8/11/99 transfer of $2,500 from BTCB account at BIV to the 
same Milwaukee bank and the same attorney trust account, with the 
following notation: ``Ref: Orphans Advocates Ltd.''; and
      --11/30/99 transfer of $150,000 from BTCB account at First Union 
to the Bank of Communication in Beijing for the ``Corporation Project 
of the Rehabilitation of Disable Children,'' which allegedly is a 
member of the same Federation for the Disabled, in China, as is the 
China Fund for the Handicapped.
---------------------------------------------------------------------------
    The Ontario court appeared to have reached the conclusion 
in June 2000, that Gold Chance's $3 million was no longer at 
BTCB. After reviewing bank and wire transfer documentation 
showing disbursement of the Gold Chance funds and recounting 
BTCB's failure to return the $3 million to Zhernakov upon his 
request, the Ontario court wrote, ``The prepared statement of 
Betts that the funds are in BTCB is not to be believed, against 
either the tracing evidence or Betts' failure to deliver the 
funds.'' \352\
---------------------------------------------------------------------------
    \352\ See Gold Chance ``Reasons for Decision'' (6/12/00) at 9.
---------------------------------------------------------------------------
    Despite this statement by the court in June, BTCB 
nevertheless claimed, in the Requena affidavit submitted to the 
court in September, that the $3 million was ``invested on 15 
December 1999.'' \353\ The affidavit contended that the First 
Union account was a ``general account used for business and 
investment purposes by BTCB[,] [t]he money from Free Trade was 
not trust money as far as BTCB was aware and so it was co-
mingled with the general funds in this account.'' The affidavit 
maintained that the $3 million was credited to the Free Trade 
account and ``deposited by the Defendant Free Trade . . . into 
a managed investment account for a locked-in period of 1 
year.'' \354\ BTCB further claimed that any dispute over the $3 
million investment must be resolved by arbitration in London, 
as provided in the investment agreement.
---------------------------------------------------------------------------
    \353\ See Gold Chance, Requena affidavit (9/7/00) at 14.
    \354\ Id. at 2.
---------------------------------------------------------------------------
    Free Trade Investment in BTCB High Yield Program. The 
evidence suggests that BTCB's high yield investment program may 
be contributing to the Gold Chance fraud. First, the documents 
provided by BTCB to the court, attached as Exhibit L to the 
Requena affidavit, establish that Free Trade enrolled in BTCB's 
investment program in January 1998--2 full years before the 
Gold Chance deposit. Although BTCB maintains that the $3 
million was intended for and immediately placed into its 
investment program pursuant to Free Trade's managed account 
agreement, the documentation provided by the bank does not 
support that assertion. To the contrary, Exhibits M through U 
discuss opening a ``new account'' with the money, under dual 
signatory authority that differed from Free Trade's managed 
account agreement. Not one of these documents mentions the word 
``investment'' in connection with the $3 million; not one 
references the BTCB investment program. The first document to 
claim that the $3 million was placed into a BTCB investment 
program is a BTCB letter dated April 12, 2000, a month after 
Gold Chance demanded return of its funds. The unavoidable 
implication is that BTCB may itself be defrauding Gold Chance--
delaying return of the $3 million by falsely claiming the 
money's enrollment in the BTCB investment program.
    Additional concerns arise from BTCB's admission in the 
Requena, affidavit at page 19 that, although transactions 
involving the $3 million required two signatures--from 
Zhernakov and Daigle--the bank had already advanced $240,000 to 
Zhernakov on his signature alone. BTCB has admitted that 
releasing the $240,000 violated the account instructions. 
Whether this violation was deliberate or inadvertent, it 
demonstrates a lack of proper account controls. And it raises, 
again, the spectre of BTCB misconduct--paying funds upon 
request to Zhernakov, while refusing to pay funds to the 
plaintiffs with the excuse that the entire $3 million is 
``locked'' into a year-long investment.
    BTCB later posted with the Ontario court a $3 million 
letter of credit with a maturity date of December 15, 2000. 
However, when that date arrived, BTCB failed to pay the 
required amount to the court. Gold Chance is still seeking 
recovery of its funds.
    The Gold Chance fraud provides a third illustration of a 
financial fraud carried out in part through an offshore bank 
with a U.S. account. While the major impact in this instance is 
in Canada, where the defrauded investors reside and the key 
civil suit has been filed, there is also a collateral impact on 
the United States in which BTCB's U.S. correspondent bank is 
being asked to produce documents and explain what happened to 
the. $3 million sent to BTCB's U.S. account.

  (5) $10 Million CD Interpleader

    In August 1999, PaineWebber's clearing firm, Correspondent 
Services Corporation (CSC), filed an interpleader complaint in 
Federal court in New York to resolve a dispute over the 
ownership of a $10 million certificate of deposit (``CD'') 
issued by BTCB.\355\ The parties asserting conflicting claims 
to it included J. Virgil Waggoner, a wealthy U.S. citizen from 
Texas; Donal Kelleher, an Irish citizen living in England who 
served, for a time, as an investment advisor to Waggoner; 
J.V.W. Investment Ltd., a Dominican corporation established by 
BTCB for Waggoner and administered for a time by Kelleher; and 
First Equity Corporation of Florida, the securities firm that, 
in 1998, was owned by BTCB. In August 2000, the U.S. district 
court issued a decision \356\ which resolved the CD ownership 
issue in favor of Waggoner, but also identifies troubling 
information about BTCB's investment activities and operations.
---------------------------------------------------------------------------
    \355\ Correspondent Services Corp. v. J.V.W. Investment Ltd. (U.S. 
District Court for the Southern District of New York Civil Case No. 99-
CIV-8934 (RWS)), complaint (8/16/99).
    \356\ Correspondent Services Corp. v. J.V.W. Investment Ltd., 2000 
U.S. Dist. LEXIS 11881 (U.S. District Court for the Southern District 
of New York 2000)(hereinafter ``CSC v. JVW'').
---------------------------------------------------------------------------
    BTCB's Issuance of the $10 Million Bearer CD. The August 
2000 court decision, documents associated with the interpleader 
action, discussions with bank officials, and other information 
produced the following facts: Waggoner is a retired chief 
executive officer of a large chemical company in Texas, and the 
current chief executive and owner of a U.S. company called 
J.V.W. Investments, Ltd.\357\ In November 1997, Waggoner 
entered into an arrangement with Kelleher under which Kelleher 
agreed to locate a high-yield investment program for a $10 
million investment by Waggoner, in exchange for receiving a 
percentage of any profits on such investment.\358\ In mid-1998, 
Kelleher told Waggoner about the BTCB high yield program, and 
Waggoner agreed to invest in it.
---------------------------------------------------------------------------
    \357\ See SEC filing by Sterling Chemicals Holdings, Inc., Schedule 
14A (12/27/97), proxy statement at 5.
    \358\ CSC v. JVW at 4.
---------------------------------------------------------------------------
    On June 12, 1998, BTCB requested their completion of 
various forms to establish an international business 
corporation and open an account.\359\ On June 19th, BTCB 
incorporated J.V.W. Investment Ltd. as a bearer share Dominican 
corporation.\360\ The name of this company mirrored the name of 
Waggoner's existing U.S. corporation, J.V.W. Investments Ltd., 
but omitted the letter ``s'' from ``Investments.'' BTCB has 
advocated taking this approach to naming a new Dominican 
corporation ``to allow an orderly and mostly invisible 
transition'' from an existing corporation somewhere else.
---------------------------------------------------------------------------
    \359\ Id. at 11.
    \360\ Id. at 14.
---------------------------------------------------------------------------
    On June 25, 1998, J.V.W. Investment Ltd. (``JVW'') entered 
into a cooperative venture agreement with BTCB to place an 
investment in BTCB's high yield program. As explained in the 
court's decision, this agreement provided:

      (a) JVW would deposit $1.0 million into a ``Custody/
Transaction Account at BTCB''; (b) BTCB would issue a 
certificate of deposit (``CD'') in JVW's name; (c) the CD would 
have a term of 1 year and bear interest at 6% per annum; and 
(d) BTCB would place the $10 million into investments to 
provide a ``significant yield'' on a best efforts basis over 
the course of a year.\361\
---------------------------------------------------------------------------
    \361\ Id. at 19.

    On 6/28/98, $10 million belonging to Waggoner was 
transferred into a Citibank correspondent account in New York. 
This correspondent account belonged to Suisse Security Bank and 
Trust (``SSBT''), a small offshore bank licensed in the 
Bahamas. Although Citibank was unaware of it, beginning in 1997 
or 1998, SSBT had begun providing correspondent services to 
BTCB and allowing BTCB to use the SSBT account at Citibank.
    The court notes a factual dispute over whether the $10 
million paid into the correspondent account was supposed to be 
deposited into the BTCB account at SSBT, or into a freestanding 
account at SSBT. The court decision states:

      According to Waggoner's pleadings, BTCB instructed 
Kelleher to place the $10 million into a BTCB sub-account in 
the name of JVW at SSBT. . . . BTCB would then place the $10 
million into the Investment Program and issue the CD to JVW. 
Kelleher, however, transferred Waggoner's $10 million into a 
freestanding account at SSBT, not the designated BTCB sub-
account. . . . SSBT [then] refused to transfer the $10 million 
from the freestanding account to the BTCB sub-account. As a 
result, Waggoner did not gain entry into the Investment 
Program. SSBT, when asked why it refused to effect the 
transfer, first stated that it was concerned that the $10 
million might have an illegal origin. When a formal inquiry 
showed that to be wholly without basis, SSBT stated that it had 
placed the $10 million into ACM mutual funds . . . at 
Kelleher's direction. . . . Kelleher claims, by contrast, that 
he instructed SSBT to place the $10 million in the BTCB sub-
account.\362\
---------------------------------------------------------------------------
    \362\ Id. at 22-24.

    The court notes that Kelleher claimed the $10 million CD 
issued in JVW's name was replaced by BTCB with another $10 
million CD ``with the identical certificate number, but issued 
in bearer form.'' \363\ This bearer CD, dated 6/28/98, is the 
CD that was placed into Correspondent Services Corporation 
custody, to be held until the CD's 1-year maturity date.
---------------------------------------------------------------------------
    \363\ Id. at 24.
---------------------------------------------------------------------------
    After vigorous complaints about the bank to Bahamian bank 
regulators, SSBT agreed to release the funds deposited by 
Waggoner. SSBT chose to do so by transferring the ACM mutual 
funds it had purchased with the $10 million. SSBT transferred 
the mutual funds to CSC, for further credit to BTCB, to benefit 
JVW.\364\ When liquidated, the mutual funds produced about $7.7 
million.\365\ The court found that, by investing the $10 
million in ACM mutual funds, SSBT was responsible for a 
shortfall of about $2.2 million from the $10 million originally 
deposited.\366\ The court noted that Waggoner considered taking 
legal action against SSBT to recover the $2.2 million, but did 
not do so.\367\ When a Minority Staff investigator asked why no 
legal action had been taken against SSBT, Waggoner and JVWs 
legal counsel, Kenneth Caruso, declined to discuss his clients' 
legal strategy. Bahamian bank regulators provided a September 
15, 2000 letter stating that an external audit of SSBT had 
``ruled out any possibility of irregularity on the part of 
[SSBT].'' However, neither the government nor SSBT would 
produce a copy of the audit report.
---------------------------------------------------------------------------
    \364\ See 9/21/98 letter from Betts to Tucker Anthony; and undated 
letter from Kelleher to Tucker Anthony. Tucker Anthony held the ACM 
mutual funds for SSBT.
    \365\ Id.
    \366\ Id.
    \367\ Id. at 24, 27.
---------------------------------------------------------------------------
    In any event, once his funds were lodged with BTCB, 
Waggoner took action to eliminate Kelleher's role in overseeing 
the BTCB investment. On November 10, 1998, Waggoner sent a 
letter to Kelleher terminating his services for allegedly 
breaching their agreement to locate a high yield investment 
program.\368\ On the same date, Waggoner transferred all JVW 
shares to Wagonwheel Trust, a new Dominican trust formed for 
him by BTCB and controlled by BTCB as the appointed trustee. 
The next day, November 11th, Wagonwheel Trust removed Kelleher 
from his position as sole director of JVW, and replaced him 
with a BTCB subsidiary, International Corporate Services, Ltd. 
After that date, BTCB refused to provide Kelleher with any 
information about JVW's investments in the BTCB high yield 
program or to pay him any portion of alleged profits.\369\
---------------------------------------------------------------------------
    \368\ Id. at 26.
    \369\ Id. at 27.
---------------------------------------------------------------------------
    In June 1999, the $10 million CD matured, and Kelleher 
claimed a portion of the funds, leading to the interpleader 
action. On August 16, 2000, the U.S. district court held that 
Kelleher had no ownership interest in the CD, but refused to 
dismiss, on summary judgment, his claim for damages against 
Waggoner for failing to act in good faith in their joint 
business dealings.\370\ The civil proceedings are ongoing.
---------------------------------------------------------------------------
    \370\ Id. at 64.
---------------------------------------------------------------------------
    JVW and BTCB. The interpleader action over the $10 million 
CD opens a window on BTCB's dealings with one of its clients 
and, in so doing, raises three sets of concerns about the 
bank's internal controls and investment activities. First, the 
proceedings expose operational deficiencies and aggressive 
tactics at BTCB. Second, they disclose troubling information 
about BTCB's dealings with SSBT, a small Bahamian bank with a 
poor reputation and limited assets. Third, they illustrate 
problems with BTCB's high yield investment program, including 
possibly fraudulent promises to pay extravagant returns and 
possibly fraudulent misuse of investor funds.
    The civil litigation discloses, first, operational and 
internal control deficiencies at BTCB. The court found a number 
of inconsistencies and ambiguities in the documentation used to 
establish the beneficial owner of the $10 million CD and JVW, 
requiring pages of legal analysis to recite and resolve. The 
CD, for example, was issued by BTCB in bearer form, despite a 
provision in the cooperative venture agreement calling for the 
CD to name JVW so that its ownership would be clear. With 
respect to JVW, the court noted that the ``IBC order form'' 
containing instructions for forming JVW, including naming the 
company's beneficial owner, was signed on June 22, 1998--3 days 
after the company had been incorporated on June 19th.\371\ 
JVW's incorporation documents were signed by BTCB's subsidiary, 
ICS, again without indicating the corporation's beneficial 
owner.\372\ A letter sending ``account opening forms'' for a 
JVW bank account at BTCB is dated June 23, 1998--5 days after 
the $10 million had been sent to SSBT and an account opened.
---------------------------------------------------------------------------
    \371\ Id. at 11-12.
    \372\ Id. at 14-15.
---------------------------------------------------------------------------
    The civil litigation also exposes BTCB's willingness to 
engage in aggressive tactics when intervening in a dispute over 
client funds, even when the dispute is due, at least in part, 
to BTCB's own missteps. To resolve the dispute between Waggoner 
and Kelleher over the $10 million CD, BTCB established and 
became the trustee of a new Dominican trust, Wagonwheel Trust, 
in November 1999, set up to benefit Waggoner. BTCB caused the 
trust to take possession of JVW's bearer shares, and remove 
Kelleher as JVW's sole director. In taking these actions, BTCB 
did not act as a neutral or passive financial institution. To 
the contrary, it took an active stance in favor of Waggoner and 
used the bank's fiduciary powers and subsidiary to help 
Waggoner wrest control of JVW away from Kelleher. BTCB also 
took possession of Waggoner's funds for placement in its high 
yield program, and refused Kelleher's requests for information 
about the investment or its alleged returns.
    Second, the civil litigation exposes troubling information 
about BTCB's dealings with SSBT. The documentation in the civil 
proceeding makes it clear that BTCB actively assisted JVW in 
opening an account and transferring funds to SSBT. For example, 
a fax dated June 29, 1998, from Betts to Kelleher, provided 
BTCB's account number at SSBT, approved a JVW letter to SSBT, 
and offered to forward the $10 million CD to SSBT on JVW's 
behalf. SSBT then refused for 3 months to release the $10 
million. In an 8/27/98 letter to SSBT, Kelleher stated that an 
audited balance sheet obtained from public records in the 
Bahamas showed that SSBT was ``extremely small with very little 
cash or assets and . . . is indeed far smaller than the size of 
[JVW's $10 million] deposit.'' The letter expressed ``doubt'' 
about SSBT's ``stability and liquidity.'' Bahamian Government 
officials told the investigation that SSBT had a long history 
of regulatory problems requiring oversight. Yet BTCB chose to 
do business with SSBT, despite its lack of assets and poor 
regulatory history. In addition, neither BTCB nor SSBT ever 
informed Citibank that BTCB was using SSBT's Citibank account 
to transact business. Citibank told the investigation that it 
had been completely unaware it was providing services to BTCB.
    Even more troubling is information released in the course 
of the civil litigation regarding BTCB's high yield investment 
program. Several of the documents indicate that Waggoner and 
Kelleher had been told by BTCB that the $10 million investment 
would produce $50 million or more in profits in less than 6 
months. A 9/15/98 letter from Brazie, for example, suggested 
that the funds released by SSBT be invested into ``ongoing 
HYIPs'' or high yield investment programs at Global Investment 
Fund S.A. Brazie explained that Global Investment Fund S.A. was 
``wholly owned by ICS/BTCB and serve[d] as a `pooling' and 
`masking' entity for funds from other IBC clients.'' 
Handwritten notes by Kelleher on the letter, following a 
telephone conversation with Brazie, stated: ``Return min 25%/
wk.'' One week later, a 9/23/98 letter from Waggoner to 
Kelleher stated, ``I want this project expedited and the 
delays/excuses ended. As my trustee, you must hurry to get my 
$50 million in profits to me this year.'' A letter to BTCB from 
Kelleher, dated 4/13/99, stated, ``The sum over due and payable 
[to his company alone] . . . by [BTCB] is we repeat: USD--
58,660,200.'' [Emphasis in original text.] Dominican Government 
officials and U.S. bankers interviewed during the investigation 
uniformly expressed disbelief that such returns were possible.
    U.S. bank records also raise questions about what BTCB 
actually did with the funds once they were in the bank's 
possession. Waggoner's $10 million is the largest single 
investment in BTCB's high yield program uncovered by the 
investigation. The court pleadings indicate that the ACM mutual 
funds purchased with the $10 million were apparently 
transferred by SSBT in several stages in September and October 
1998, to CSC for liquidation.\373\
---------------------------------------------------------------------------
    \373\ See 9/21/98 letter from Betts to Tucker Anthony; and undated 
letter from Kelleher to Tucker Anthony. Tucker Anthony held the ACM 
mutual funds for SSBT.
---------------------------------------------------------------------------
    On 10/26/98, at BTCB's request, CSC transferred $6.5 
million to BTCB's account at Security Bank. The origination, 
timing and size of this transfer suggests that the $6.5 million 
came from the JVW funds; the investigation found no other 
transaction that could account for the source of funds used in 
this wire transfer. The next day, on 10/27/98, BTCB transferred 
the $6.5 million to an attorney trust account at First Union 
National Bank belonging to Robert Garner. Garner is an attorney 
who has worked for both BTCB and First Equity Corporation of 
Florida. Within a week of receiving the funds, Garner 
transferred the $6.5 million, on 11/3/98, to an attorney trust 
account at Union Bank of Switzerland (``UBS'') in Zurich 
belonging to Robert McKellar.
    The $6.5 million was not the first time that U.S. bank 
records showed funds moving among accounts belonging to 
McKellar, Garner and BTCB. Less than 2 weeks earlier, on 10/19/
98, BTCB, had wire transferred $3.5 million from its account at 
Security Bank to ``McKellar's Solicitors Unit.'' The source of 
this $3.5 million is unclear, as is its relationship, if any, 
to the JVW proceedings. The fact that the $3.5 million and $6.5 
million sent to McKellar in October 1998 together add up to the 
$10 million at issue in the JVW proceedings may be just 
coincidence.
    Two 1998 BTCB financial statements further document the 
movement of these funds. A BTCB financial statement as of 6/30/
98, which BTCB submitted to First Union when applying for a 
correspondent account, states in Note 3 that the bank had $10 
million in deposits at SSBT. There is no mention of deposits at 
UBS. BTCB's audited financial statement 6 months later, as of 
12/31/98, which was submitted to the Dominican Government, 
states in Note 4 that the bank had ``10M in Union Bank of 
Switzerland.'' The December 1998 financial statement made no 
reference to deposits at SSBT. The logical inference, then, is 
that BTCB moved $10 million from SSBT to UBS during the latter 
half of 1998. The timing, dollar amount and banks involved all 
suggest that the BTCB funds in Switzerland came, in whole or in 
part, from the JVW funds.
    Once the funds were placed in a Swiss bank account, little 
is known about them, and it is unclear whether the funds were 
ever placed in an investment. What is clear is that, 6 months 
later, on 4/26/99, U.S. bank records show McKellar wire 
transferring $6 million from the UBS account in Zurich to 
Garner's account at First Union. On the same day, Garner 
transferred the $6 million to BTCB's account at First Union. On 
the day before, 4/25/99, BTCB's First Union account balance was 
only about $77,000. The $6 million was a huge addition to an 
account that otherwise had few funds. From 4/26/99 to the end 
of May, only six other deposits were made into the BTCB account 
totaling about $217,000. The bank records establish, then, that 
the majority of funds in the BTCB account at First Union, from 
April 26 until May 31, 1999, was attributable to the $6 million 
deposit.
    The bank records also show that the $6 million deposit on 
4/26/99 was followed by a flurry of outgoing wire transfers, 43 
in April and 58 in May, in widely varying amounts to bank 
accounts around the world. In the span of 1 month ending May 
31, 1999, BTCB transferred about $5.7 million out of its First 
Union account. The three largest sets of wire transfers were 
the following:

      --$1 million on 4/26/99 to BTCB's account at 
Correspondent Services Corporation;

      --$1 million on 4/26/99 to BTCB's account at Security 
Bank; and

      --1.4 million in four wire transfers on 4/26/99 and 5/7/
99 to four accounts, each of which referenced International 
Business Consultants Ltd., a participant in the Cook fraud 
described earlier.

    U.S. bank records show another, possibly related set of 
transactions 6 months later. On 10/15/99, $999,976 was 
transferred from an unidentified account at UBS in Zurich to 
Garner's account at First Union. Given earlier wire transfers, 
it is possible that these funds came from the UBS account 
belonging to McKellar. Four days later, on 10/19/99, Garner 
transferred the $1 million to BTCB's account at First Union. 
When the deposit was made, BTCB's account balance was only 
about $27,600. BTCB then disbursed the $1 million in the same 
way it had disbursed the $6 million, using multiple wire 
transfers to multiple bank accounts.
    BTCB's treatment of the JVW funds, once lodged with the 
bank, raise unavoidable questions about whether the bank was 
misusing investor funds. First, there is no clear evidence that 
the JVW funds were ever invested, especially if the $6.5 
million sent to Switzerland was, in fact, taken from the JVW 
investment. Second, the $6.5 million transferred from CSC to 
BTCB, was quickly transferred out of the bank through two 
attorney trust accounts in the United States and Switzerland. 
The reasons BTCB used two attorney trust accounts to move the 
$6.5 million to Switzerland are unclear; possibly it was 
devised to conceal the movement of the funds or impede tracing 
them.
    Third, when the $6 million came back from the Swiss 
account, through Garner's account, to BTCB in April 1999, the 
funds arrived at a time when BTCB's primary U.S. correspondent 
account was almost empty. The quick disbursement of the $6 
million in varying amounts to various bank accounts suggests 
that JVW investment funds were being used, in whole or in part, 
to pay BTCB's creditors and clients and to replenish BTCB's 
coffers. The $1 million transfer from Switzerland in October 
1999, seems to have followed the same pattern. When a Minority 
Staff investigator asked legal counsel for Waggoner and JVW 
about how the JVW funds were invested and whether Waggoner had 
any concerns about the status of the funds, he declined to 
respond, other than to indicate that his clients did not wish 
to discuss their financial affairs.

  (6) Other Suspect Transactions At BTCB: KPJ Trust, Michael Gendreau, 
        Scott Brett, Global/Vector Medical Technologies

    In reviewing U.S. bank records and other information 
associated with BTCB, the investigation came across additional 
evidence of possible misconduct and ongoing civil and criminal 
investigations involving funds at BTCB. This evidence included 
the following:

      --KPJ Trust. U.S. bank records show that, on 9/21/98, 
Tiong Tung Ming of Malaysia transferred $1 million to BTCB's 
account at Security Bank. Tiong has since complained to 
Dominican, U.K. and U.S. Government officials, the Eastern 
Caribbean Central Bank, and Security Bank about his continuing 
inability to recover his funds. Tiong invested these funds with 
a BTCB client, K.P.J. Trust S.A. (``KPJ Trust''), through 
Michael Dibble and Rosemarie Roeters-Van Lennep, based upon a 
9/15/98 joint venture agreement promising ``[t]rading profits . 
. . [of] ONE HUNDRED FIFTY PERCENT (150%) during the duration 
of the program (40 weeks), which will be distributed on a 
monthly basis.'' [Emphasis in original text.]

      A 9/17/98 letter on BTCB letterhead, signed by Betts, 
acknowledged receipt of the funds ``from Ming Tung Tion [sic] 
in favor of KPJ S.A.'' However, after Tiong complained to 
Security Bank and others, Betts sent a 2/25/99, letter denying 
any knowledge of Tiong. After additional correspondence, Betts 
sent a 3/15/99 letter stating that Tiong's funds had been 
placed, through KPJ Trust, into a BTCB ``Managed Accounts 
Contract'' for 1 year, and could not be returned to him until 
9/21/99. When Tiong continued to demand his funds and the KPJ 
Trust later joined in those demands, a 5/11/99 letter from 
Brazie stated that Tiong's funds could be released earlier if 
``we receive additional funds from other entities and those are 
committed to Global Investment Fund S.A. to replace your 
funds.'' BTCB did not, however, release any funds, even at the 
end of the 1-year period on 9/21/99.

      Documents supplied by Tiong recite repeated broken 
promises by BTCB to return the funds. Yet, at the same time, 
U.S. bank records show that BTCB made $315,000 in payments to 
several persons associated with the KPJ Trust:

      --9/22/98 wire transfer of $200,000 from BTCB's account 
at Security Bank to United Bank in Rustenburg, South Africa, 
for ``W.H. Keyser . . . Ref. K.P.J. Trust S.A.,'' returned on 
9/29/98 because United Bank could not locate the account;

      --1/15/99 wire transfer of $5,000 from BTCB's account at 
Security Bank to the Royal Bank of Scotland in London, for Ms. 
Van Lennep and KPJ Trust SA, using the account of Stuart Moss, 
a London resident who regularly works with BTCB;

      --8/5/99 wire transfer of $25,000 from BTCB's account at 
Security Bank to Wells Fargo Bank in Denver, Colorado, for Ms. 
Van Lennep, ``Ref. K.P.J. Trust S.A.'';

      --11/1/99 wire transfer of $110,000 from BTCBs account 
at First Union to Wells Fargo Bank in San Francisco, 
California, for Ms. Van Lennep; and

      --11/26/99 wire transfer of $175,000 from BTCB's account 
at First Union to Wells Fargo Bank in California for Ms. Van 
Lennep.

      The KPJ Trust allegations have clear parallels to other 
BTCB matters examined by the investigation, including the 
references to BTCB's high yield investment program and Global 
Investment Fund subsidiary; BTCB's insistence that the 
investor's funds were unavailable for 1 year; and BTCB's 
nonpayment of the funds to the investor, despite making 
payments to the BTCB client who arranged for the funds to be 
deposited at the bank in the first place.

      --Brett Investors. Investors in Texas, California and 
Canada have made complaints that funds invested with Scott 
Brett and, on his instructions, wired to BTCB, have not been 
returned. Brett is a part owner of BTCB through Bailett 
International Ltd., according to documents supplied by BTCB to 
U.S. banks, and other information linking Brett to John Long, 
BTCB's majority owner. Despite the limited information 
available about this matter, the investigation located U.S. 
bank records showing over $763,000 in wire transfers involving 
investors who have complained of being defrauded or persons or 
entities associated with Brett, including the following:

      --2/10/98 wire transfer of $25,000 from unknown 
originator to BTCB's account at BIV for ``Aurora Investments'';

      --2/25/98 wire transfer of $2,010 from unknown 
originator to BTCB's account at BIV for ``Aurora Investments'';

      --3/11/98 wire transfer of $29,994 from A. Kotelr to 
BTCB's account at BIV for ``Bailett I'';

      --4/22/98 wire transfer of $15,000 from unknown 
originator to BTCB's account at BIV for ``Aurora Investments'';

      --10/22/98 wire transfer of $10,500 from Arthur W. 
Hogan, an investor claiming to have been defrauded by Brett, to 
BTCB's account at Security Bank;

      --10/27/98 wire transfer of $110,500 from Denver and 
Arlene Hopkins in Louisiana to BTCB's account at Security Bank 
``per Scott Brett'';

      --12/9/98 wire transfer of $250,000 from ``Newcastle 
Enterprises Scott Brett'' to BTCB's account at Security Bank 
for ``Aurora Investments'';

      --1/14/99 wire transfer of $100,000 from BTCB's account 
at Security Bank to Washington Trust Bank in Spokane, 
Washington, for ``Bailett International . . . Ref: Aurora 
Investments S.A.''; and

      --4/28/99 wire transfer of $220,000 from BTCB's account 
at First Union to Canadian Imperial Bank of Commerce in 
Kelowna, British Columbia, for ``Bearisto & Co. Trust'' for 
``Aurora Investments S.A.''

      Civil and criminal investigations may be underway into 
these complaints.

      --Gendreau Investment. Plaintiffs' filings in the Gold 
Chance case provide information about a BTCB client in 
Minnesota, Michael Gendreau, who allegedly invested $390,000 
with BTCB in 1998, and has been ``unable to get his money 
back.''\374\ The U.S. Treasury Department and the FBI in 
Seattle have allegedly been informed and may be investigating 
his claims against BTCB.
---------------------------------------------------------------------------
    \374\ Gold Chance, ``Affidavit of Brent Binions'' (4/20/00) at 2.

      --Global/Vector Medical Technology Accounts. U.S. bank 
records show BTCB's involvement with a company headed by an 
individual suspected of past securities fraud. The company is 
Global Medical Technologies, Inc., a Florida corporation which, 
on January 29, 1999, changed its name to Vector Medical 
Technologies, Inc. (``Vector''). Vector's chairman and chief 
executive is Dr. Michael H. Salit, a Florida resident who 
apparently received a medical degree in Israel, but has not 
been licensed to practice medicine in any U.S. State including 
Florida. Salit was the subject of a 1996 SEC enforcement action 
for securities fraud \375\ which resulted in a March 2000 final 
judgment that required him, without admitting or denying SEC 
allegations, to pay $600,000 to the government and accept a 
court order permanently enjoining him from engaging in 
securities fraud. The court excused Salit from paying all but 
$25,000 of the required sum in light of a financial statement 
showing him to be without assets. The court warned, however, 
that the full $600,000 would become due if the SEC ``obtain[ed] 
information indicating that Defendants' representations to the 
[SEC] concerning their assets, income, liabilities, or net 
worth were fraudulent, misleading, inaccurate or incomplete.'' 
\376\
---------------------------------------------------------------------------
    \375\ SEC v. The Appletree Companies Inc. f/k/a Modami Services, 
Inc., Michael H. Salit, David B. Lobel, Paul B. Kravitz, and W. Scott 
Long III (U.S. District Court for the Southern District of Florida 
Civil Case No. 96-8675-Civ-Seitz).
    \376\ Id., ``Final Judgment of Permanent Injunction and Other 
Relief as to Defendants Salit and Lobel'' (3/3/00) at 5.

      Salit is a signatory on at least seven Vector accounts 
at First Union, and U.S. bank records show a number of 
transactions between BTCB and Vector.\377\ The bank records 
indicate that Vector's initial account was opened at First 
Union on 9/30/98, well after the SEC enforcement action was 
underway. The bank records indicate that, during 1999 and 2000, 
hundreds of investors across the United States paid over $16 
million into Vector's CAP account to purchase Vector shares. 
The bank records show that BTCB paid $500,000 into Vector's 
initial account soon after it opened, and subsequently received 
$1 million in payments from Vector over a 12-month period, 
several installments of which were pass-through payments 
involving BTC Financial.
---------------------------------------------------------------------------
    \377\ Vector has at least seven accounts at First Union, numbered 
209-000-294-6659 (opened 9/30/98 until 11/1/99, and referred to as the 
``initial account''); 998-324-6063 (opened 1/5/99 to present, and 
referred to as the ``CAP account''); 200-000-276-0469 (opened 8/30/99 
to present); 200-000-276-0375 (opened 9/8/99 to present); 200-000-748-
1837 (opened 5/12/00 to present); 24021271 (brokerage account); and 
4063000997 (money manager account, possibly opened in 8/00). Vector may 
have additional accounts in First Union's private bank.

---------------------------------------------------------------------------
      The key transactions include the following:

      --12/14/98 wire transfer of $300,000 with the notation 
``[promissory] note & investment,'' and a 3/15/99 wire transfer 
of $200,000, from BTCB's account at Security Bank into Vector's 
initial account at First Union, which provided virtually all of 
the funds in the Vector account;

      --1/6/99 wire transfer of $145,000 from Vector's initial 
account to its newly-opened CAP account, utilizing the funds 
provided by BTCB;

      --8/26/99 check for $300,000 written by Vector on its 
CAP account for BTCB, which BTCB deposited on 9/2/99 into its 
Security Bank account, presumably in repayment of the funds 
provided by BTCB in December;

      --10/4/99 check for $200,000 written by Vector on its 
CAP account for BTCB, which BTCB deposited on 10/5/99 into its 
First Union account, presumably in repayment of the funds 
provided by BTCB in March;

      --11/12/99 check for $100,000 written by Vector on its 
CAP account for BTC Financial Services which deposited the 
check on the same day, waited for it to clear, and then wrote a 
$100,000 check to BTCB, signed by Betts and dated 11/18/99, 
which BTCB deposited into its First Union account on 11/19/99;

      --12/14/99 check for $100,000 written by Vector on its 
CAP account for BTC Financial Services which deposited the 
check on the same day, and immediately wrote a $100,000 check 
to BTCB, signed by Requena. and dated 12/14/99, which BTCB 
deposited into its Security Bank account on 12/15/99;

      --1/10/00 check for $100,000 written by Vector on its 
CAP account for BTC Financial Services which deposited the 
check on 1/11/00, and immediately wrote a $100,000 check to 
BTCB, signed by David Cooper and dated 1/11/99, which BTCB 
deposited into its Security Bank account on 1/12/00;

      --2/2/00 check for $100,000 written by Vector on its CAP 
account for BTCB, which BTCB deposited into an unknown account 
on 2/9/00; and

      --2/29/00 check for $100,000 written by Vector on its 
CAP account for BTCB, with the notation ``Final Payment,'' 
which BTCB deposited into its Security Bank account on 3/1/00.

      A 1999 Vector financial statement indicates, in Note 8, 
that the $500,000 provided by BTCB was a loan and, on October 
4, 1999, apparently in connection with repaying the $500,000 
principal, Vector agreed to pay BTCB a second $500,000 ``as 
payment in full of principal and interest as well as for the 
surrender and release by BTCB of all its right, title and 
interest in Vector, including its stock ownership. BTCB had the 
right to approximately 1,400,000 unissued shares of the 
Company's common stock.''

      BTCB either failed to conduct sufficient due diligence 
to discover Salit's recent involvement with securities fraud 
allegations or decided to do business with Salit despite his 
past. BTCB not only lent Vector significant funds--one of the 
few business loans issued by this bank--but then allegedly 
acquired rights to 1.4 million in unissued Vector shares. BTCB 
then supposedly surrendered these rights in exchange for a 
portion of the $16 million the company was raising from new 
investors. SEC and criminal investigations may now be underway 
to determine whether Vector Medical Technology venture has any 
indications of securities fraud.

  (7) Taves Fraud and the Benford Account

    In April 2000, U.S. citizens Kenneth H. Taves and his wife 
Teresa Callei Taves were found liable by a U.S. district court 
for defrauding hundreds of thousands of credit card holders by 
billing their credit cards for unauthorized charges totaling 
more than $49 million. About $7.5 million in fraud proceeds was 
traced to a European Bank account opened in the name of a 
Vanuatu corporation, Benford Ltd. Benford Ltd. had been 
established by European Trust and its bank account opened by 
European Bank, without any due diligence research into the 
company's beneficial owner or source of funds. Even after 
learning that the $7.5 million came from the Taves fraud 
victims, European Bank fought for more than 1 year to prevent 
U.S. seizure of the $7.5 million from its correspondent account 
at Citibank.
    Taves Fraud. The Taves fraud first became public in January 
1999, when the U.S. Federal Trade Commission (FTC) filed a 
civil complaint in California charging the Taves and associated 
companies and individuals with unfair and deceptive business 
practices arising from fraudulent credit card billing.\378\ In 
response, the court issued a temporary restraining order 
freezing the Taves' assets, requiring the defendants to provide 
an accounting of their activities and assets, and appointing an 
FTC receiver to locate and return fraudulently obtained 
monies.\379\
---------------------------------------------------------------------------
    \378\ See FTC v. J.K. Publications, Inc. (U.S. District Court for 
the Central District of California Civil Case Number CV 99-0044 ABC 
(AJWx)), complaint (1/5/99) and amended complaint (1/20/99).
    \379\ See FTC v. J.K. Publications, Inc., temporary restraining 
order (1/6/99).
---------------------------------------------------------------------------
    In May 1999, the court held Taves in criminal contempt for 
hiding assets from the FTC, including a $2 million house in 
Malibu transferred to a corporation and $6.2 million deposited 
into a bank account at Euro Bank in the Cayman Islands.\380\ 
Euro Bank is a longstanding, Cayman licensed bank that has no 
affiliation with European Bank or the Bayer family. The U.S. 
district court ordered Taves imprisoned until he turned over 
the $2 million from the house transfer to the FTC receiver. 
Imprisoned on May 4, 1999, Taves was still in custody when he 
was indicted in February 2000, in both the United States and 
Cayman Islands.\381\
---------------------------------------------------------------------------
    \380\ See FTC v. J.K. Publications, Inc., order holding Taves in 
contempt for not disclosing Malibu realty (5/4/99); order requiring Mr. 
and Mrs. Taves to produce documentation related to Euro Bank account 
(5/5/99); and order granting summary judgment (4/7/00) at 3.
    \381\ See United States v. Taves (U.S. District Court for the 
Central District of California Criminal Case No. 00-CR-187-ALL), 
indictment (2/29/00); money laundering charges filed in the Cayman 
Islands (2/9/00). A trial is scheduled on the U.S. charges in January 
2001.
---------------------------------------------------------------------------
    In April 2000, the U.S. court issued findings of fact and 
conclusions of law holding the Taves and other defendants 
liable for fraudulent credit card billing.\382\ The court ruled 
that ``the uncontroverted evidence overwhelmingly 
demonstrate[d] that the defendants participated in a billing 
scheme by submitting unauthorized [credit card] charges for 
processing.'' \383\ The court determined that, in November 
1997, the Taves' companies paid a fee to Charter Pacific Bank 
in California to gain access to a credit card database 
containing over 3 million credit card numbers.\384\ The Taves 
then opened merchant bank accounts--accounts used to accept 
credit card payments--at Charter Pacific Bank and Heartland 
Bank and began billing small amounts, often $19.95, to 
thousands of credit card numbers in the database.\385\ Although 
the defendants apparently alleged that the $19.95 was a monthly 
fee that the credit card holders paid to access adult-content 
Internet web sites operated by Taves-related companies, the 
court found that the defendants had ``stole[n]'' the credit 
card numbers from the database and ``charged card numbers 
without the cardholders' authorization.'' \386\ The court found 
that, in 1998 alone, over $49.6 million was deposited into the 
Taves' merchant accounts \387\ from unauthorized charges billed 
to over 783,000 credit card numbers in the Charter Pacific 
database.\388\ The funds were then used for various purposes, 
including paying Mr. and Mrs. Taves a ``salary'' of $1.8 
million each.\389\ The court found that $25.3 million of the 
$49.6 million had been transferred to offshore bank accounts at 
Euro Bank.\390\
---------------------------------------------------------------------------
    \382\ See FTC v. J.K. Publications, Inc., order granting summary 
judgment (4/7/00).
    \383\ Id., at 51.
    \384\ Id. at 17, 21, 51.
    \385\ Id. at 12, 16-17, 20, 51.
    \386\ Id. at 53. See also id. at 6, 16-18, 34-35, 51-52.
    \387\ Id. at 25.
    \388\ Id. at 33-34.
    \389\ Id. at 13.
    \390\ Id. at 36-37.
---------------------------------------------------------------------------
    In February 2000, the Cayman Government charged three 
senior Euro Bank officials with money laundering, citing the 
$25.3 million transferred to the bank from the Taves fraud. 
These charges, brought against Ivan Richard Wykeham Burges, 
Brian Leslie Peter Culma, and Judith Mary Donegan, are the 
first money laundering prosecutions brought against Cayman bank 
officials in the country's history. Criminal charges were also 
brought against six other individuals, including Taves for 
money laundering.\391\
---------------------------------------------------------------------------
    \391\ Documents attached to public court filings in the FTC case in 
the United States, includes, for example, documents showing Taves' 
paying Donegan, one of the Euro Bank employees, $4,000 per month for 
her efforts on his behalf and authorizing her to use his Cayman beach 
house ``for the purposes of spending a few leisurely hours there from 
time to time.'' Another document shows Taves' transferring one of his 
companies to her ``free of charge'' in February 1999, apparently in a 
continuing effort to hide assets from the FTC and evade the January 
1999 court order imposing an asset freeze.
---------------------------------------------------------------------------
    In May 1999, due to money laundering concerns arising not 
only from the Taves fraud but other matters as well, the Cayman 
Government closed Euro Bank.\392\ In June 1999, Euro Bank's 
shareholders placed the bank in voluntary liquidation, and the 
bank began winding up its affairs. On July 26, 1999, Euro 
Bank's liquidators agreed to provide the FTC with ``information 
and documents in the Bank's possession'' relating to the Taves 
fraud in exchange for releasing the Bank from damage claims 
related to the bank's actions in that matter.\393\ After the 
agreement was approved by the Cayman Grand Court, the FTC 
receiver reviewed Euro Bank information and found the $7.5 
million transfer from Taves-related accounts at Euro Bank to 
the Benford account at European Bank in Vanuatu.
---------------------------------------------------------------------------
    \392\ FTC v. J.K. Publications, Inc., ``Report of Receiver's 
Activities Dated August 4, 1999,'' (8/6/99) at 1; interviews of Cayman 
Government officials in April 2000.
    \393\ See ``Deed of Compromise, Release, Accord and Satisfaction'' 
(7/26/99) at 2.
---------------------------------------------------------------------------
    Establishing Benford Ltd. The Benford account was opened in 
February 1999, at the request of Euro Bank employee Ivan 
Burges, later charged with money laundering on behalf of Taves. 
The account was opened by Susan Phelps, who is both a European 
Bank director and employee, and a European Trust officer.\394\ 
On 2/3/99, Burges sent a fax to European Bank inquiring about 
establishing a Vanuatu corporation and opening a corporate bank 
account for an unnamed client. Phelps faxed Burges the 
requested information. On 2/8/99, Burges requested 
incorporation and account opening forms and, the next day, 
faxed an ``urgent'' request to establish a Vanuatu corporation 
called Benford Ltd., still without naming the client on whose 
behalf he was acting. Phelps supplied him with the requested 
forms as well as wire transfer instructions for sending funds 
to European Bank's correspondent account at Citibank in New 
York.
---------------------------------------------------------------------------
    \394\ This information is based upon affidavits filed by Phelps in 
various court proceedings, as well as account documentation and other 
information. See, for example, Evans v. European Bank (Civil Case No. 
85 of 1999 before the Supreme Court of Vanuatu), Phelps affidavit (11/
22/99); Evans v. Citibank (Case No. 4999 of 1999 before the Supreme 
Court of New South Wales, Sydney Registry, Equity Division), Phelps 
affidavit (12/17/99).
---------------------------------------------------------------------------
    On 2/17/99, Burges faxed an application to incorporate 
Benford Ltd. providing minimal information about the person who 
would be the corporation's beneficial owner. Burges provided 
nothing more than her name, Vanessa Phyllis Ann Clyde, a London 
address, a copy of her passport photograph, and a one-word 
description of her occupation as ``business.'' On the same day 
Burges wire transferred $100,000 from Euro Bank to Citibank in 
New York, for European Bank. Without asking any questions or 
obtaining any additional information, 24 hours later on 2/18/
99, European Trust Incorporated Benford Ltd. Phelps faxed a 
copy of the incorporation papers to Burges on 2/19/99, and 
asked where to send the originals. He instructed her to send 
them to Clyde in London.
    The documents created by European Trust to establish 
Benford Ltd. never identify the company's beneficial owner by 
name nor refer to Clyde.\395\ Instead they reference a series 
of shell corporations which Bayer said in his interview are 
controlled by ``the Bayer group'' of companies.\396\ Only one 
European Trust document--not part of the company's official 
incorporation papers--actually named Clyde. Entitled ``Nominee 
Declaration'' and bearing the same date, 2/18/99, as the 
official incorporation papers, it declared that European 
Trust's nominee company, Meldrew Ltd,. was holding Benford's 
shares as a nominee for Clyde.\397\ Bayer explained that this 
nominee declaration was typically the key document European 
Trust used to establish the beneficial ownership of a Vanuatu 
company it formed. He said that typically European Trust would 
maintain a copy in its files, but would not supply a copy to 
European Bank.
---------------------------------------------------------------------------
    \395\ The State Department's INCSR 2000 report states that one of 
the key deficiencies in Vanuatu's anti-money laundering laws is its 
corporate secrecy laws which ``shield the identity and assets of 
beneficial owners of business entities. . . . The anonymity and secrecy 
provisions available through ownership of Vanuatuan [corporations], 
along with the ease and low cost of incorporation, make them ideal 
mechanisms for tax evasion and money laundering schemes.'' INCSR (March 
2000) Money Laundering and Financial Crimes Country Reports, Vanuatu.
    \396\ For example, the ``constitution'' used to establish Benford 
Ltd. names only one ``incorporator,'' Atlas Corp. Ltd., a Bayer group 
company. The constitution is signed on 2/17/99, by Phelps, on behalf of 
Atlas Corp. Ltd. A Benford corporate resolution, signed by Phelps on 2/
18/99 on behalf of Atlas Corp. Ltd., appoints Benford's sole director, 
Diract Ltd., and its sole corporate officer, Lotim Ltd., which are two 
more Bayer group companies. A ``share certificate'' purporting to issue 
100 Benford shares to a company called Meldrew Ltd., is signed by 
Phelps on behalf of Diract Ltd. and by another European Bank employee, 
David Outhred, who signed the certificate on behalf of Lotim Ltd. Bayer 
said during his interview that Meldrew Ltd. is owned by European Trust. 
Together, Benford Ltd.'s official incorporation documents, corporate 
resolutions and share certificate never mention Clyde, the company's 
true owner.
    \397\ The document states that Meldrew Ltd. ``hereby admits that 
the above mentioned shares are your absolute property and that they 
only stand registered in our name at your request as your nominee in 
Trust for you absolutely and that we have no beneficial interest 
therein whatsoever.'' [Emphasis in original text omitted.] It is signed 
by Phelps and Outhred on behalf of still two more European Trust 
companies, Zenith Inc. and Orion Inc., which are apparently Meldrew's 
officers.
---------------------------------------------------------------------------
    Opening the Benford Account. After incorporating Benford 
Ltd. through European Trust, Phelps put on her European Bank 
hat and opened a bank account for corporation. Phelps admitted 
in court pleadings that, throughout the bank account opening 
process, she never spoke with either Burges or Clyde.\398\ The 
documentation also makes it clear that European Bank opened the 
Benford account without conducting any due diligence research 
into Clyde, the source of her wealth, or the origin of the 
initial deposit of $100,000.
---------------------------------------------------------------------------
    \398\ See Evans v. European Bank (Civil Case No. 85 of 1999 before 
the Supreme Court of Vanuatu), Phelps affidavit (11/22/99), paragraph 
(3), ``I did not speak to Mr. Burges during the course of the 
correspondence . . . and verily believe nobody else from [European Bank 
or European Trust] spoke to Burges.'' CG 6439-43.
---------------------------------------------------------------------------
    The European Bank forms used to open the Benford bank 
account provide even less due diligence information than the 
European Trust forms used to establish the corporation. The 
account opening questionnaire, as well as a Benford corporate 
resolution and mandate to open the bank account, are all signed 
by Phelps. None mentions Clyde.\399\ None provides additional 
due diligence information about Benford Ltd. Bayer indicated 
that these forms were filled out in the usual way for bank 
accounts opened for companies formed by its affiliate, European 
Trust.
---------------------------------------------------------------------------
    \399\ One European Bank form, entitled ``Declaration of the 
Beneficial Owner's Identity,'' appeared to require disclosure of a bank 
account's beneficial owner but was completed without doing so. The copy 
of this form provided by European Bank to the Subcommittee was signed 
by Phelps, dated 2/25/99, and identified ``the beneficial owner of the 
assets deposited with the bank'' as ``Benford Limited.'' Bayer 
indicated this was a common way for European Trust to complete the form 
for companies they managed. He explained that the purpose of the form 
was not to reveal a company's true owner, but to establish that the 
accountholder is also the owner of the deposits placed into the 
account.
      The Minority staff investigation later discovered a second 
version of this form, also signed by Phelps on 2/25/99, which was 
attached to an affidavit filed by Bayer in a Vanuatu court proceeding. 
See In re European Bank (Company Case No. 8 of 1999 before the Supreme 
Court of Vanuatu), Bayer affidavit (7/28/99), Exhibit L. The form 
stated that the ``beneficial owner of the assets deposited with the 
bank'' in the Benford account was ``Vanessa P A Clyde.'' During his 
interview, Bayer was unable to explain why there were two versions of 
this document or why he had failed to supply the investigation with the 
same version he filed in court.
---------------------------------------------------------------------------
    One of the European Bank forms, entitled a ``Statutory 
Declaration of Account Holder In Relation to the Operation of 
the Account,'' was apparently intended, in part, to protect the 
bank against money laundering. European Bank provided a copy of 
this completed form for the Benford account. It stated that the 
``beneficial owner'' of the Benford account was ``Benford 
Limited,'' again without making any reference to Clyde, and 
essentially declared that the funds deposited into the Benford 
account were not derived from criminal activities.\400\ But the 
declaration was not signed by Clyde or Burges. The form was 
instead signed by Phelps, on 2/25/99, prior to her making any 
inquiry into the origin of the Benford funds or conducting any 
substantive due diligence. Her signature was witnessed by 
Bayer, who also signed the form without having any knowledge of 
the account funds or Clyde. When asked how this document 
protected European Bank from money laundering, when it was 
signed by its own employee and not based on any factual 
knowledge, Bayer said that the Benford form had been completed 
in a routine manner similar to other accounts at the bank.
---------------------------------------------------------------------------
    \400\ The document states: ``The deposits to be credited to the 
above mentioned account holder are not derived from, nor proceeds of, 
any forms of unlawful activity whatsoever nor were these assets 
(including the funds to be deposited) obtained in any manner contrary 
to the laws of the country whence they came or any other relevant 
country.''
---------------------------------------------------------------------------
    Bayer explained that, although Clyde's name never appeared 
on a bank document connected with the Benford account, European 
Bank had access to her identity through European Trust. 
Although Vanuatu law generally prohibits trust companies from 
disclosing a Vanuatu corporation's ownership, he explained that 
this prohibition could be waived by the company owner to open a 
bank account. Bayer said that European Bank could have simply 
asked European Trust at any time for the identity of the 
corporate beneficial owner. He noted that, in the case of 
Benford Ltd., that step was unnecessary since Phelps worked for 
both the bank and the trust company and had the knowledge on 
hand for both entities.
    Increasing Deposits and Increasing Concerns About the 
Benford Account. The Benford bank account application and 
related documents were dated 2/24/99 and 2/25/99. The Benford 
account was apparently opened on 2/26/00, when $97,900 out of 
the $100,000 transferred from Euro Bank on 2/17/99, was 
credited by European Bank to the newly opened Benford account, 
and the other $2,100 was kept by European Trust to pay for 
Benford's incorporation expenses.
    About 2 weeks after the Benford bank account was opened, on 
March 17, 1999, Burges telephoned European Bank and spoke with 
Phelps for the first time. He included in the telephone 
conversation a woman whom he alleged to be his client Clyde, 
who spoke with an American accent, despite her British 
passport. According to Phelps' sworn affidavit, this was the 
first of several telephone conversations she had in March and 
April discussing how Clyde wished to invest her funds.\401\
---------------------------------------------------------------------------
    \401\ Clyde indicated on several occasions her preference for 
keeping the funds in U.S. dollars in a secure but liquid investment. 
For example, on 2/23/99, Clyde sent Phelps a fax asking whether the 
bank could ``place Benford client funds in a market account . . . 
[i.e.,] a New York brokerage fund and keep privacy.'' European Bank 
ultimately placed the funds in U.S. dollar, interest-bearing accounts 
at its correspondent banks.
---------------------------------------------------------------------------
    During these 2 months, Burges also wired more than $7 
million to the Benford account.\402\ All of the funds came from 
Taves-related accounts at Euro Bank. All were made after the 1/
6/99 court order freezing Taves' assets. All were wire 
transferred to European Bank's U.S. dollar correspondent 
account at Citibank in New York.
---------------------------------------------------------------------------
    \402\ Citibank records show that the $7 million was deposited in 
three wire transfers: $2.8 million on 3/17/99; $750,000 on 4/9/99; and 
$3.88 million on 4/9/99.
---------------------------------------------------------------------------
    Bayer indicated in a letter to the Subcommittee that these 
funds were unexpected \403\ and prompted additional due 
diligence efforts. After the March deposit of $2.8 million, 
according to Bayer, European Bank contacted Euro Bank to ask 
about the nature of the funds, and Euro Bank promised to ``get 
back to us with the answers.'' \404\ Phelps then asked European 
Bank's senior vice president, Douglas Peters, if he could find 
out more about Euro Bank.
---------------------------------------------------------------------------
    \403\ Letter dated 5/22/00 from Bayer to Senator Levin at 8.
    \404\ Id.
---------------------------------------------------------------------------
    On 3/29/99, Peters sent a fax to persons he knew in the 
Cayman Islands asking about Euro Bank. One of the persons 
responded by fax the same day stating that she would like to 
speak to him by telephone. Peters' handwritten notes of the 
telephone conversation on 3/30/99 state the following about 
Euro Bank:

      Small locally incorporated bank, with a local banking 
license, 20/30 people on the staff, corporate activities too, 
not a good reputation locally, has its door open to business 
when other doors are closed to it, very much lower end of the 
local banking business, dubious, 3 months ago there were rumors 
that they might fail, not well respected, advise caution when 
dealing with them. Barclays would not accept a reference from 
them and would certainly not do business with them.

    According to Bayer, Peters communicated this information to 
both Phelps and to Bayer himself.
    Despite this negative portrayal of Euro Bank--the sole 
reference for the Benford account--European Bank left open the 
account, accepted additional funds, and chose not to try to 
verify any information about Clyde or her assets. Bayer 
explained the bank's actions by saying that Euro Bank had 
referred other clients with no negative consequences, the 
client was not asking to withdraw the funds, and Clyde had 
reassured Phelps by explaining that Clyde was retired and 
diversifying her holdings as part of an estate planning 
process. When asked how that information fit with Clyde's 
passport information indicating she was 61, and her 
incorporation application describing her as still in business, 
Bayer said that the bank had been satisfied with her 
explanation and did not feel any concern at the time. He 
acknowledged that the bank did not undertake any effort to 
independently verify Clyde's background or assets, or to obtain 
additional references for her.
    By April 1999, the Benford deposits totaled about $7.5 
million. Bayer said in his interview that Benford Ltd. had 
become a ``huge client'' for the bank, and agreed that its $7.5 
million represented about 15% of the bank's total deposit base 
of $50 to $60 million at the time.
    In May 1999, two incidents suddenly cast new suspicion on 
the Benford funds. The first was on 5/25/99, when Phelps 
received a telephone call about the account from a Clyde with 
an English accent, instead of an American accent. Phelps 
reported the call and a fax received the next day to Bayer who 
said during his interview that it was the first time European 
Bank appeared to have two different persons claiming to be the 
beneficial owner of an account at the bank. On 5/29/99, a 
Friday, European Bank received another fax, a letter dated 5/
27/99, from a firm representing Euro Bank.\405\ It stated that 
Euro Bank had been placed into receivership and the $7.5 
million previously transferred to the Benford account appeared 
to be associated with the Taves fraud. Bayer indicated that, in 
response to these two events, the bank immediately froze the 
Benford account internally and, on Monday, 5/31/99, filed a 
report with the Vanuatu police.\406\
---------------------------------------------------------------------------
    \405\ See letter dated 5/27/99 from Maples and Calder to European 
Bank.
    \406\ See also Evans v. Citibank (Case No. 4999 of 1999 before the 
Supreme Court of New South Wales, Sydney Registry, Equity Division), 
affidavit of Susan Phelps (12/17/99), CG 6519-22.
---------------------------------------------------------------------------
    Bayer indicated, and bank documentation substantiates that, 
prior to May 1999, European Bank had followed its usual 
practice of directing the Benford funds into a series of 
``placements'' at its correspondent banks, in order to maximize 
the interest earned on the funds. After freezing the funds, 
Bayer indicated that European Bank transferred them internally 
into a new, non-interest bearing account from which client 
withdrawals were prohibited.\407\ However, even after moving 
the Benford deposits into a non-interest bearing account within 
the bank, European Bank continued to place the $7.5 million 
with the correspondent bank paying the highest interest rate on 
the funds.\408\ A series of placements by European Bank with 
its correspondents for $7.5 million plus interest appear to 
have been paid for with the Benford funds.\409\ In his 
interview, Bayer said that while he was ``not denying'' that 
these placements included the Benford deposits, he maintained 
that they also included non-Benford funds, such as European 
Bank's own interest earnings from the deposits and possibly 
$20,000 to $40,000 belonging to one or two other clients. 
Despite a request, Bayer did not identify these other clients 
or provide documentation showing how or when other client funds 
may have been combined with the frozen $7.5 million in Benford 
funds and included in these placements.
---------------------------------------------------------------------------
    \407\ Id. Phelps affidavit at paragraph (7).
    \408\ Documentation and interviews indicate the following U.S. 
dollar placements involving the $7.5 million:
      --30 day placement from 7/20/99 until 8/20/99 at Westpac Bank;
      --30 day placement from 8/20/99 until 9/20/99 at Citibank;
      --30 day placement from 9/20/99 until 10/20/99 at ANZ Bank;
      --placement from 10/20/99 until November 2000 at Citibank, after 
which the funds were seized and taken into custody by the United 
States.
    \409\ A review of European Bank's U.S. dollar correspondent account 
records at Citibank and ANZ Bank show no other deposit, transaction or 
placement, in 1998 or 1999, which could have given rise to these $7.5 
million placements, other than the Benford deposits.
---------------------------------------------------------------------------
    In June 1999, after freezing the Benford funds internally, 
European Bank attempted to find out more about their origin. 
Bayer indicated and documentation suggests that inquiries 
directed to Euro Bank and Burges were unanswered. Phelps had 
already attempted, without success, to verify Clyde's London 
address and telephone number.\410\ She also asked Clyde to send 
a notarized copy of her passport photograph, which Clyde did 
and which matched the one the bank had on file for the Benford 
account. On 6/15/99, Phelps asked Clyde in a telephone 
conversation about the origin of the funds. She wrote this 
summary of the conversation:
---------------------------------------------------------------------------
    \410\ See Phelps email dated 5/26/99, CG 6497.

      L[Clyde] said I should have got this info from Burges. I 
said the funds had just arrived without supporting 
documentation. . . . English was asked to open the a/c. Doesn't 
know when. . . . Doesn't know how much. Wasn't responsible. for 
putting funds in. Not her personal funds. Extremely 
uncomfortable. . . . If somebody had taken funds she doesn't 
want to be tarred.\411\
---------------------------------------------------------------------------
    \411\ See Phelps affidavit and notes, CG 6509-11.

    Vanuatu and Australia Court Proceedings. Within months of 
the $7.5 million being deposited, European Bank had notice and 
evidence of their suspect origin. Yet when legal proceedings 
ensued in Vanuatu and then Australia, European Bank steadfastly 
opposed releasing the funds or remitting them to the FTC 
receiver representing the Taves fraud victims.
    The litigation began in the summer of 1999. On July 2, 
1999, someone claiming to be Clyde attempted to withdraw 
$700,000 from the Benford account. Because the account was 
frozen, European Bank refused the request but, according to 
Bayer, also realized that it had no statutory basis or court 
order supporting its refusal. On 7/28/99, European Bank filed a 
lawsuit in Vanuatu court asking for a court order freezing the 
Benford account, which the court issued on the same day.\412\ 
On 8/25/99, the FTC receiver filed a civil suit in the Vanuatu 
court seeking information about the account and restraining 
Benford Ltd. from transferring any funds.\413\ The court 
consolidated the two cases and granted the FTC receiver access 
to the information in the first suit.
---------------------------------------------------------------------------
    \412\ In re European Bank (Company Case No. 8 of 1999 before the 
Supreme Court of Vanuatu).
    \413\ Evans v. European Bank (Civil Case No. 85 of 1999 before the 
Supreme Court of Vanuatu).
---------------------------------------------------------------------------
    On 9/22/99, Clyde filed a pleading in the Vanuatu case 
stating that, ``subject to the Order of this Honorable Court,'' 
she would like to remit all of the Benford funds to the FTC 
receiver.\414\ Her sworn affidavit stated:
---------------------------------------------------------------------------
    \414\ Evans v. European Bank, Clyde affidavit (9/22/99).

      I knew nothing of the founding of Benford Limited, nor 
of the opening of an account with European Bank Limited, until 
I received, unsolicited, a copy of the Benford's Articles of 
Incorporation and a summary of charges from European Bank. . . 
. In late January of 1999, I was living in . . . Malibu, 
California . . . [and] an old and close friend of my family, 
Gretchen Buck . . . told me that . . . I would earn a helpers 
fee of at least $10,000 if I would assist her in opening an 
offshore account for ``a friend.'' I was assured that the 
purposes of the account were totally aboveboard and the 
``friend'' was of unimpeachable integrity with a few legitimate 
business problems but a person who craved anonymity. I agreed 
to assist, and at Buck's request, signed 40 pieces of blank 
paper. I have not seen these papers since. . . . I became 
suspicious thereafter when Buck was not forthcoming . . . [and] 
---------------------------------------------------------------------------
would say . . . ``Its best you don't know.''

    Gretchen Buck is an associate of Taves, a former Euro Bank 
accountholder, and one of the individuals indicted in the 
Cayman Islands for money laundering. She apparently directed 
the transfer of more than $3 million to the Benford 
account.\415\
---------------------------------------------------------------------------
    \415\ See FTC v. J.K. Publications, ``Report of Receiver's 
Activities dated August 4, 1999,'' at 5-6.
---------------------------------------------------------------------------
    Attached to Clyde's pleading were documents indicating that 
she intended to transfer control over Benford Ltd. from 
European Trust's nominee companies to the FTC receiver's legal 
counsel in Vanuatu, so that the $7.5 million could be paid to 
the FTC. European Trust's nominee companies, however, opposed 
this change in control over Benford Ltd. and opposed remitting 
the $7.5 million to the FTC receiver.\416\
---------------------------------------------------------------------------
    \416\ See Evans v. Citibank (Case No. 4999 of 1999 before the 
Supreme Court of New South Wales, Sydney Registry, Equity Division), 
affidavit of Douglas Edmund Raftesath, Australian counsel for the FTC 
receiver (12/17/99) at 3.
---------------------------------------------------------------------------
    More litigation in Vanuatu followed, including a criminal 
investigation of Benford Ltd. by the Vanuatu police for money 
laundering.\417\ On 11/30/99, the Vanuatu police charged 
Benford Ltd. with possession of property ``suspected of being 
proceeds of crime.'' \418\
---------------------------------------------------------------------------
    \417\ On 9/23/99, the Vanuatu police asked the court to impose a 
freeze under criminal law on the $7.5 million, pending an investigation 
of Benford Ltd. for money laundering. Despite requests by Benford Ltd. 
and the FTC receiver to attend the hearing on this request, the court 
heard from the police on an ex parte basis, issued the requested order, 
declined to allow release of the $7.5 million to the FTC receiver, and 
ordered additional proceedings. On 10/29/99 and 11/22/99, Phelps filed 
two affidavits in the case providing additional information and stating 
that, despite the bank's role in establishing the corporation, opening 
its bank account and managing the $7.5 million, European Bank did not 
know the true identity of Benford Ltd.'s beneficial owner.
    \418\ Information filed before the Supreme Court of Vanuatu 
(Criminal Case No. 754 of 1999). On 12/2/99, pursuant to the request of 
the police, the Vanuatu court issued still another order freezing the 
Benford funds. On 12/3/99, Clyde filed a new civil suit in Vanuatu 
court requesting an order declaring her the sole beneficial owner of 
Benford Ltd. and requiring Meldrew Ltd., the European Trust nominee 
company, to transfer all Benford shares to the Vanuatu counsel working 
with the FTC receiver. In re Benford Ltd. (Company Case No. 14 of 1999 
before the Supreme Court of Vanuatu). The intent of her lawsuit was, 
again, to facilitate the transfer of the $7.5 million to the FTC 
receiver.
---------------------------------------------------------------------------
    Legal proceedings began in Australia after the FTC located 
a document notifying Benford Ltd. that its funds had been 
transferred to ``Citibank Limited, [Offshore Bank Unit] 
Sydney.'' \419\ On 11/30/99, the FTC receiver sent a letter to 
Citibank offices in Sydney, Australia (``Citibank Sydney''), 
alerting it to the Taves fraud and its relation to the Benford 
funds deposited by European Bank.\420\ On 12/10/99, the FTC 
receiver filed suit in Australia to freeze the $7.5 million on 
deposit with Citibank.\421\
---------------------------------------------------------------------------
    \419\ See ``Interest Bearing Deposit Confirmation,'' dated 10/12/
99, issued by European Bank to Benford Ltd., CG 4625.
    \420\ The letter placed Citibank ``on notice that [the FTC 
receiver] assert[s] priority claims over any funds originating from 
this fraud, including the funds on deposit with you.'' According to 
Citibank, this letter was the first notice they had of any problem with 
the $7.5 million deposit made by European Bank. See Evans v. Citibank 
(Case No. 4999 of 1999 before the Supreme Court of New South Wales, 
Sydney Registry, Equity Division), affidavit of Christopher Schofield 
Moore (12/16/99).
    \421\ Evans v. Citibank summons (12/10/99). The pleadings stated, 
in part, that while the FTC receiver had obtained freeze orders for the 
funds in Vanuatu, the funds ``had already been transferred before the 
orders could be carried out . . . [and] there is a real risk that any 
moneys held by Citibank . . . may be transferred out of Citibank's 
accounts.'' Affidavit of Douglas Edmund Raftesath, Australian counsel 
for the FTC receiver (12/10/99) at 3.
---------------------------------------------------------------------------
    Unknown to the FTC receiver at the time of its filing, 
European Bank had, in fact, taken steps that same day to 
transfer the funds from Citibank to one of its correspondent 
banks in Vanuatu.\422\ Before any transfer took place, however, 
the Australian court issued an order freezing the funds.
---------------------------------------------------------------------------
    \422\ In a 12/10/99 fax to Citibank Sydney, CG 4810, Bayer informed 
Moore for the first time about the suspicious activity surrounding the 
Benford account beginning 6 months earlier, in May 1999, the ongoing 
money laundering investigation by the Vanuatu police, and the Vanuatu 
court orders freezing the funds. Bayer wrote:
      ``We of course will not be distributing the [Benford] funds to 
anyone without the direction of the Vanuatu Supreme Court. 
Unfortunately for your bank, it has not been the high bidder for this 
deposit upon rollover and I confirm our request that you follow our 
instruction to transfer the funds to Westpac Banking Corporation for 
the credit of their Port Vila branch, for the further credit of 
ourselves (copy enclosed). I assure you that the decision to move the 
funds has been purely a commercial one and not one driven by any hidden 
agenda. We will continue to favor Citibank whenever possible in support 
of our relationship with your bank which we value greatly.''
---------------------------------------------------------------------------
    Additional pleadings followed in Australia from the Vanuatu 
Government, European Bank and FTC receiver, all seeking control 
of the $7.5 million. At first, European Bank alleged that the 
frozen $7.5 million was unrelated to the Benford funds and 
Taves fraud,\423\ and the FTC receiver's Australian legal 
counsel agreed to drop the suit. That was on a Friday. 
According to Moore, European Bank asked Citibank to transfer 
the funds to Westpac Banking Corp. in Vanuatu on the following 
Monday. However, on Sunday, the Australian federal police filed 
an emergency request to freeze the funds pending further 
investigation, and the Australian court reinstated the freeze.
---------------------------------------------------------------------------
    \423\ European Bank contended that the freeze order was 
inappropriate because the funds on deposit with Citibank ``are not 
funds belonging to Benford but are funds belonging to European Bank.'' 
Evans v. Citibank, affidavit of Susan Phelps (12/17/99) at paragraph 
(14).
---------------------------------------------------------------------------
    On 12/15/99, European Bank sent a fax to Citibank 
complaining that the FTC receiver was trying ``every trick in 
the book'' to ``force the monies to be sent to the USA.'' \424\ 
Bayer concluded the fax with these observations:
---------------------------------------------------------------------------
    \424\ 12/15/99 fax from European Bank to Citibank Sydney, CG 4686-
87. He stated further, ``The monies have never `fled the jurisdiction.' 
They have always been on deposit in US$ with European Bank and nowhere 
else. European Bank . . . placed the funds in various banks to get the 
best return.''

      Locally [European Bank] has been perceived as being the 
bank that uncovered the suspicious transactions and took all 
the right steps to assist the authorities. Now in Australia we 
are being cast as money launderers and probable accomplices. I 
---------------------------------------------------------------------------
fear the Australian authorities would like to believe that.

    In December 1999, a local Vanuatu newspaper gave this 
summary of the Benford matter:

      The Vanuatu Government could find themselves with a 
US$7.5 million (v982 million) windfall cash gift if the Public 
Prosecutors office are successful in convicting . . . Benford 
Ltd. of laundering money here from the illicit proceeds of one 
of the biggest credit card frauds in history. . . . [The FTC 
receiver] has been travelling the world tracking down the 
missing money. He advised, ``There are a couple of countries in 
the Caribbean, . . . Channel islands, . . . Europe and Vanuatu 
where stolen money was sent. . . . [U]nfortunately, Vanuatu is 
the only country that is trying not to return the funds to the 
rightful owners. . . .'' [M]embers of the Finance Centre 
believe that if the government do confiscate it, a clear 
message will be sent to the outside world not to launder the 
proceeds of crime through Vanuatu's Finance Centre. This case 
is however a sensitive one. Vanuatu may have a fight on its 
hands if it tries to confiscate the funds owing to ordinary 
people around the world that the court in California USA has 
ordered to be returned.\425\
---------------------------------------------------------------------------
    \425\ ``Vanuatu Goes After $US7.5m of Laundered Money,'' Trading 
Post Vanuatu (12/4/99).

    The Vanuatu and Australian litigation continued throughout 
2000.
    U.S. Court Proceedings. Almost 1 year later, on November 
29, 2000, at the request of the FTC, the U.S. Department of 
Justice filed legal proceedings to seize the Benford funds from 
Citibank in New York. It was able to file the pleadings in the 
United States, because Citibank Sydney had always kept the 
Benford funds in U.S. dollars in a U.S. account at Citibank in 
New York. When presented with the seizure warrant, issued by a 
U.S. magistrate, Citibank New York, delivered the funds to the 
United States. On December 21, 2000, the United States filed a 
civil forfeiture action seeking to eliminate any other claim to 
the Benford funds.\426\ The complaint alleged that the funds 
were the proceeds of the Taves credit card fraud, and the FTC 
receiver had ``tried to obtain the funds from European Bank 
through a Vanuatuan court proceeding, but failed to obtain 
relief in Vanuatu.''
---------------------------------------------------------------------------
    \426\ United States v. $8,110,073.30 in U.S. Currency, Representing 
$7,593,532.48 Deposited by European Bank at Citibank NA (Sydney Branch) 
on or about October 20, 1999, Plus Accrued Interest Since the Date of 
Deposit (U.S. District Court for the Central District of California 
Civil Case No. CV-00-13328 (CBM)), complaint (12/21/00).
---------------------------------------------------------------------------
    During more than a year of litigation in three countries, 
Clyde has supported sending the Benford funds to the FTC, but 
European Bank has vigorously opposed it. When asked why, Bayer 
gave three reasons during his interview: (1) the ownership of 
the funds remained unclear, since Clyde had admitted that they 
were not her funds and she did not know their origin; (2) the 
allegation that the funds came from the Taves fraud should be 
established in Vanuatu court and, if true, the Vanuatu Attorney 
General could reimburse the fraud victims, rather than pay the 
monies to the FTC receiver who might exhaust the entire sum 
through fees and expenses; \427\ and (3) European Bank had to 
defend itself from the risk of inconsistent court decisions 
which might order it to pay the $7.5 million twice, once to the 
Vanuatu Government in connection with the Benford money 
laundering prosecution and once to the FTC receiver seeking 
funds for the Taves fraud victims. At times, Bayer also argued 
that the $7.5 million deposit at Citibank represented European 
Bank's own funds, unrelated to the Benford matter, although at 
other times he acknowledged the Benford deposits made up the 
bulk of the Citibank placement.
---------------------------------------------------------------------------
    \427\ However, the State Department's INCSR 2000 report warns: 
``Case law in Vanuatu has shown that proving the criminal origins of 
proceeds, especially of offenses committed abroad, is extremely 
difficult. Linking criminal proceeds seized in Vanuatu with the offense 
committed abroad through a complex series of financial transactions 
conducted by related corporations operating in several offshore 
jurisdictions is all but impossible.'' INCSR Report 2000 at 751.
---------------------------------------------------------------------------
    The $7.5 million, now swelled with interest earnings to 
$8.1 million, remains in the custody of the United States, 
while the litigation in Vanuatu, Australia and the United 
States continues.

  (8) IPC Fraud

    In February 1999, the same month it opened the Benford 
account, European Bank opened another ill-fated account under a 
credit card merchant agreement with a Florida corporation 
called Internet Processing Corporation (``IPC''). As in the 
Benford matter, European Bank opened the account without a due 
diligence review of the prospective client. IPC used 
unauthorized credit card charges to obtain $2 million in 
payments from European Bank and then absconded with the funds. 
By the time it learned of the fraud, European Bank was unable 
to locate IPC, the company's owner, or the missing $2 million. 
It ultimately suffered a $1.3 million loss which threatened the 
solvency of the bank.
    IPC Merchant Account. According to Bayer, the IPC account 
was one of about a half a dozen new accounts that European Bank 
opened in 1999 in an effort to expand the bank's check clearing 
business into credit card clearing. Bayer said that the bank 
had not then understood the financial exposure involved in 
credit card clearing, and its negative experience with IPC and 
two other companies has since led to its getting out of that 
line of business for at least the short term.
    Bayer explained that the credit card clearing business 
essentially involved European Bank's earning fees for providing 
advance payments at a discounted rate to merchants seeking the 
quick processing of credit card charges. He said that, in 1999, 
European Bank worked with a Netherlands credit-card processing 
company called TNT International Mail (``TNT'') to make advance 
credit card payments. Essentially, a company with a European 
Bank merchant account would send its credit card slips to 
European Bank; European Bank would forward the data to TNT; TNT 
would advance the total amount of credit card charges, 
discounted at a certain rate, to European Bank; and European 
Bank would, in turn, advance certain payments to the merchant 
by depositing the funds into the company's merchant account. 
European Bank would then wait for the credit card charges to 
clear, earning its profits from the payments ultimately made by 
the cardholders.
    Bayer explained that European Bank had undertaken a variety 
of steps to protect the bank from the credit risk associated 
with advancing credit card payments to merchants, including: 
(1) requiring its merchants to make a large security deposit; 
(2) charging its merchants a 6% discount rate instead of the 
usual 2.5% to 3.5%; (3) retaining 10% of incoming payments from 
TNT until the merchant's credit card charges cleared; and (4) 
performing random reviews of credit card orders to detect fraud 
or misconduct. According to Bayer, what the bank had not taken 
into account was the possibility of a massive credit card fraud 
by a merchant who would abscond with the payments made by 
European Bank for unauthorized credit card charges that would 
never clear.
    Bayer said that the IPC account was first referred to 
European Bank by a company called Media World which worked with 
telemarketers and, among other services, earned a fee for 
bringing them together with banks willing to provide merchant 
accounts.\428\ Bayer said that Media World was owned by Michael 
Okun, a U.S. citizen living in Florida who had referred two 
other merchants to European Bank as well. Bayer said that he 
thought Media World had investigated IPC and was recommending 
the company, but later learned that Media World had simply 
referred IPC, without any prior investigation into the 
company's reputation or reliability.
---------------------------------------------------------------------------
    \428\ For example, Bayer said that, for every $100 in credit card 
charges posted by a merchant referred by Media World, European Bank 
would have kept $6 and, from that $6, paid Media World perhaps $1 for 
referring the merchant.
---------------------------------------------------------------------------
    The documentation indicates that Media World first 
contacted European Bank about the IPC account around 2/15/99, 
when Okun sent an email to Kely Ihrig alerting her to expect 
account opening documentation from IPC. Ihrig had recently been 
hired by European Bank as its operations manager. The next day, 
IPC letters and materials arrived by fax, with 49 pages of 
account opening information.
    Ihrig actually opened the IPC account 1 week later on 2/23/
99. As with the Benford account, the IPC account was opened 
based upon written materials and correspondence, without any 
telephone conversation or direct client contact. Further, 
despite the credit risk involved, the documentation indicates 
that the bank performed virtually no due diligence prior to 
opening the IPC merchant account.
    The IPC account opening questionnaire, dated 2/12/99, was 
signed by Mosaddeo Hossain. It indicated that IPC had been 
incorporated just 10 days earlier, on 2/2/99. Questions asking 
about IPC's assets and liabilities were left blank. The company 
address in Florida, which European Bank did not attempt to 
verify, was actually the address of a ``Kwik Serve Food Store'' 
in a questionable area of town. IPC's business activities were 
described as ``Outbound Telemarketing of Tours & Time Shares,'' 
which Bayer said referred to selling vacation and travel 
packages on the Internet. Bayer said that while European Bank 
generally considered telemarketers a credit risk, it had been 
reassured by IPC's providing numerous pages of information 
about the travel packages it was marketing. Bayer indicated 
that, later, the bank was unable to find any evidence that IPC 
had actually marketed any products on the Internet, although it 
may have made some telephone sales.
    The questionnaire listed two references for IPC. The first 
was Mike Okun of Media World. According to Bayer, Okun later 
indicated that he was unaware that IPC had listed him as a 
reference, and knew little about either the company or Hossain. 
The second reference was ``Bank Atlantic Hillsboro Office,'' 
which turned out to be BankAtlantic, a Federal savings bank in 
Florida. The questionnaire states that IPC had ``banked with 
them for 1 years/months,'' without indicating whether the 
correct time period was 1 year or 1 month. As part of the 
account opening process, European Bank asked IPC for a written 
reference letter from BankAtlantic. In response, BankAtlantic 
provided a very brief letter, dated 2/19/99, addressed to 
``whom it may concern,'' stating that IPC ``has maintained an 
account with BankAtlantic, and has handled [the] account as 
agreed.'' Bayer said during his interview that this letter had 
caused European Bank to assume IPC had a mature association 
with BankAtlantic. However, the bank learned later that the 
Florida bank account had been opened on 2/5/99, 2 weeks prior 
to the date of the reference letter; it held only $1,500 at the 
time of the letter; and it represented the first time Hossain 
had done business with BankAtlantic.
    No inquiry was made by European Bank and no information was 
provided by IPC about any aspect of the company's finances, 
such as its initial capitalization or account balances. Nor was 
any information provided about the company's ownership.\429\ 
The file did include copies of IPC's incorporation papers, but 
the documents contained primarily boiler plate language and 
virtually no due diligence information other than listing 
Hossain as the company's sole incorporator, sole director, sole 
officer and sole registered agent.
---------------------------------------------------------------------------
    \429\ A form entitled, ``Verification of the Beneficial Owner's 
Identity,'' listed IPC as the beneficial owner of the assets deposited 
with European Bank, but did not provide the ``identity'' of IPC's 
owner. Bayer said this was not a mistake, because the beneficial 
ownership form was not intended to identify a company's true owner, but 
merely to verify that the entity opening the account was the true owner 
of any funds deposited into its account. When asked whether the bank 
had noticed the lack of information about IPC's ownership, Bayer 
indicated that had not been noticed at the time, but the bank had later 
determined that Hossain was the sole company shareholder.
---------------------------------------------------------------------------
    Hossain was, in fact, the only individual named in any of 
the IPC account opening documentation. Despite his key role, 
the account opening questionnaire provided minimal information 
about him--nothing more than his name, a Florida address, his 
Bangladeshi nationality, and his passport photograph--
essentially the same skeletal information provided in the 
Benford account opening documentation.\430\ Hossain did list 
himself on the questionnaire as IPC's accountant, but Bayer 
indicated that the bank did not know whether Hossain was 
actually a member of the accounting profession. He admitted 
that the bank had not obtained any information about Hossain's 
business background, past employment or finances.\431\
---------------------------------------------------------------------------
    \430\ In this instance, the Bangladeshi passport was marked as 
having expired 7 years earlier, in 1992, a fact that Bayer said was not 
noticed at the time.
    \431\ When asked whether European Bank had any concern about the 
geographic logic of a Bangladeshi doing business in the United States 
and using a bank in Vanuatu, Bayer indicated that had not been a 
concern. He said that the United States was a nation of immigrants, and 
Hossain had listed a U.S. telephone number, a U.S. address, and a U.S. 
bank account, so the bank reasonably believed he was a U.S. resident. 
Bayer said they had assumed IPC was using a Vanuatu bank because the 
company was so new that it had been unable to convince a U.S. bank to 
open a merchant account and so began looking abroad. He acknowledged 
that the bank had subsequently been unable to locate Hossain's personal 
residence, either in the United States or elsewhere, and that the 
company address provided also proved false.
---------------------------------------------------------------------------
    European Bank opened the IPC bank account within 1 week of 
being contacted for the first time by the company. Despite 
opening a merchant account involving credit risk and services 
beyond that of a run-of-the-mill corporate bank account, 
European Bank conducted virtually no due diligence 
investigation of IPC or Hossain. It did not inquire into the 
company's ownership, double check its references, ascertain its 
capital or bank account balances, or verify its physical 
address. With respect to Hossain, it did not inquire into his 
business or employment background, obtain any personal or 
professional references, check his credit history, or verify 
any personal or professional information about him. The only 
facts that the bank had were that IPC was a brand new company 
with a new Florida bank account, and Hossain was willing to pay 
unusually high charges to open a merchant account at a Vanuatu 
bank.
    When asked whether he thought the bank's due diligence 
effort was adequate, Bayer said that, at the time, European 
Bank had not understood its exposure and had thought it was 
dealing with a U.S. corporation that had sufficient bona fides 
to open a U.S. bank account. He indicated that the bank later 
learned to its detriment that its due diligence efforts had 
been insufficient to protect it from loss.
    IPC Fraud. European Bank approved opening the IPC merchant 
account in February, but the account did not become operational 
until late March 1999, after European Bank had obtained a 
merchant identification number for IPC from several credit card 
companies. During the 1-month waiting period, emails from Okun 
and Hossain inquired into the status of the account. Hossain 
indicated that he had already sold numerous travel packages and 
had credit card charges piling up that needed processing.
    The Bayer interview and other documentation indicate that 
as soon as its merchant account became operational, IPC filed 
numerous credit card charges which, in less than 3 months, 
totaled about $13 million. Bayer indicated in his interview 
that the vast majority of these charges, about 85%, would later 
be disputed by cardholders who refused to pay the billed 
amounts. He said there were also indications, never proven, 
that IPC may have illegally obtained the credit card numbers 
from a database and simply fabricated the unauthorized charges.
    In April 1999, the first month the IPC account was 
operational, European Bank processed about $3.5 million in 
charges and paid IPC over $2 million. The documentation shows 
that European Bank sent the $2 million in four payments through 
its U.S. dollar account at Citibank to the IPC account at 
BankAtlantic. The payments were:

      --$705,775.41 wire transferred by European Bank on 4/1/99;
      --$333,641.68 wire transferred by European Bank on 4/9/99;
      --$358,333.59 wire transferred by European Bank on 4/15/99; 
and
      --$728,098.90 wire transferred by European Bank on 4/22/99.

    On 4/21/99, European Bank received an email from TNT, its 
credit card processing company, describing a phone call 
reporting ``a possible fraud of cardholders of your merchant: 
Internet Processing Corp.'' European Bank attempted to find out 
more, but was unable to obtain any new information for several 
days. On 4/23/99, it asked Citibank to recall its latest 
payment to IPC of $728,000, and Citibank sent a 4/23/99 telex 
to BankAtlantic asking it to return the funds. Although 
BankAtlantic apparently acknowledged on 4/26 receiving the 
Citibank telex, BankAtlantic failed to return the $728,000. 
Instead, on the same day, 4/26/99, at IPC's request, it wire 
transferred all but about $11,000 from the IPC account to a 
small bank in Jordan.
    The documentation indicates that the 4/26 transfer was just 
the latest in a series of transfers by IPC within days of 
receiving a payment from European Bank. In each instance, IPC 
transferred the funds across international lines to a bank in 
either Israel or Jordan.\432\
---------------------------------------------------------------------------
    \432\ Bank documentation indicates the following four transfers:

      --Following European Bank's payment of about $705,000 on 4/1/99, 
IPC transferred $700,000 on 4/5/99 to Bank Leumi in Tel Aviv, Israel, 
and an unspecified accountholder withdrew the funds on 4/9/99.
      --Following European Bank's payment of about $333,000 on 4/9/99, 
IPC transferred $330,000 on 4/12/99 to Union Bank for Savings and 
Investment in Amman, Jordan, and Paul Al Marjai, the accountholder, 
withdrew the funds on 4/15/99.
      --Following European Bank's payment of about $358,000 on 4/15/
99, IPC transferred $342,000 on 4/21/99 to the same Union Bank in 
Jordan, and Marjai withdrew the funds on 4/26/99.
      --Following European Bank's payment of about $728,000 on 4/26/
99, IPC transferred $734,000 on 4/22/99 to Union Bank in Jordan, and 
Marjai withdrew the funds on 4/29/99.
---------------------------------------------------------------------------
    When asked to describe BankAtlantic's response to the 
possible IPC fraud, Bayer characterized it as ``abysmal.'' He 
noted that BankAtlantic never returned the $728,000; failed to 
promptly alert the banks in Israel and Jordan to the possible 
IPC fraud; and failed to provide effective assistance in 
locating Hossain, IPC or the missing $2 million. The Minority 
Staff investigation contacted BankAtlantic directly about the 
IPC account. BankAtlantic neither confirmed nor denied that it 
had opened the IPC account based upon an expired Florida 
drivers license, expired passport, and an unverified company 
address. BankAtlantic indicated that it did not normally issue 
a bank letter of reference for a 2-week old account with 
minimal funds, and speculated that the BankAtlantic letter 
provided to European Bank might have been a forgery. When asked 
whether the bank had any concerns in April 1999 when IPC began 
moving large sums from Vanuatu to banks in the Middle East, 
BankAtlantic indicated that the events had taken place so 
quickly, within the space of a month, that it had no 
documentation indicating concerns prior to being contacted by 
European Bank. Despite a request, BankAtlantic did not provide 
an explanation of why it transferred the $728,000 payment to a 
Jordan bank on 4/26/99, instead of returning the funds to 
European Bank as requested.
    European Bank alerted U.S. law enforcement, including the 
Secret Service, to the IPC fraud. On 5/7/99, European Bank 
faxed urgent messages to Bank Leumi in Israel and Union Bank in 
Jordan about the IPC fraud, but neither bank returned any funds 
or provided investigative leads. Bank Leumi stated in a 6/10/99 
fax that ``under Israeli law, banks owe a strict duty of 
confidentiality to their customers, which prevents us from 
providing any additional information other than by compulsion 
of law.'' European Bank asked Media World for assistance in 
locating IPC and Hossain; Okun agreed and stated in an email 
that, ``to avoid this absolute mess in the future, my 
investigating team will investigate any and all people we bring 
to you.''\433\ European Bank was unable to find any trace of 
IPC, Hossain or the missing $2 million.
---------------------------------------------------------------------------
    \433\ Email dated 7/13/99 from Okun of Media World to Ihrig at 
European Bank.
---------------------------------------------------------------------------
    European Bank calculated that, after taking into account 
IPC's security deposit, the bank's discount rate and holdbacks, 
it actually lost about $1.3 million from the IPC fraud. On 5/
17/99, Citibank sent a letter asking about the fraud: 
``Citibank feels it would like to have an understanding of what 
. . . happened, and what will be done to avoid a repeat, given 
that we have placed very considerable weight on European Bank's 
management.'' In an internal Citibank memorandum dated 5/18/99, 
the relationship manager for the European Bank account, 
Christopher Moore, indicated that the loss appeared to be a 
substantial one, given European Bank's thin capitalization. He 
wrote:

      The real risk for us in the future is that some 
transactions that cause loss finish up in accounts with us . . 
. and they don't have the resources to cover us. . . . [W]e 
have to decide if this event is terminal for us.

    In the end he recommended requiring European Bank to keep 
$1 million on deposit at Citibank until the IPC matter was 
fully resolved. European Bank eventually sent Citibank a more 
detailed explanation of the IPC fraud.\434\ The memorandum by 
bank president Robert Bohn stated in part:
---------------------------------------------------------------------------
    \434\ See 7/1/99 memorandum from European Bank to Moore at 
Citibank, CG 3966-67.

      The fraud occurred in the business of credit card 
clearing for a U.S. merchant that had been recommended . . . by 
an existing client and which very quickly turned out to be bad. 
Our normal due diligence . . . on that merchant, including a 
trade reference and a reference from his USA bank, as well as a 
---------------------------------------------------------------------------
financial assessment, revealed no obvious warning signals.

    When asked about this memorandum, Bayer explained that the 
``existing client'' and ``trade reference'' both referred to 
Okun at Media World, and the ``financial assessment'' was the 
bank's determination that, because IPC was so new, the bank 
would use its most cautious merchant account terms, requiring a 
6% discount rate and 10% holdbacks on incoming credit card 
payments. Bayer said that, even with those precautions, the 
loss had been a ``very serious matter'' for the bank, had 
required him to deposit $1 million to cover the lost funds, and 
could have resulted in a bank failure, if the exposure had been 
greater. He said, however, that European Bank appears to have 
weathered the damage to its solvency.

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