STATEMENT OF SENATOR CARL LEVIN
HEARING ON
THE ROLE OF U.S. CORRESPONDENT BANKING IN
INTERNATIONAL MONEY LAUNDERING
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
MARCH 6, 2001
Through the Minority Staff's year-long investigation, its
450 page report, its close up look at 10 high risk foreign banks
and its survey of 20 major U.S. correspondent banks, and through
the Subcommittee's two days of hearings last week with experts and
correspondent banking participants, we now have 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 - 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.
And 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 we've worked so hard
to achieve.
I think it boils down to the quality of the regulatory scheme
under which a foreign bank operates. To achieve entrée 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 the
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 problems 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.
That's 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's why all of the experts we heard and several officers of
our nation’s largest banks have said 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 type of high risk 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. Two of them acknowledged that they should have done
a better job in screening and monitoring the correspondent
accounts 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 they knew the parent
entities of those banks extremely well. In fact with respect to
Federal Bank, Citibank was a major business partner 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 one of the banks, Federal Bank, had no
anti-money laundering controls. The relationship manager for
Citibank said Federal Bank lied to him. Yet Citibank claimed
"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 our witnesses whether we should ban
offshore banks not affiliated with U.S. banks and offshore banks
not subject to examination from having correspondent accounts in
the United States as well.
Another matter that merits legislative attention is the ability
of injured parties and governments to get access to 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 sue the bank in the jurisdiction where the
bank is operating or show that the respondent bank is at fault.
That's not only a tough job, that can be an impossible job.
Showing that the illegal funds are in the account is not enough.
The consequence of this situation is that crooks using foreign
bank account in the United States have greater protection for
their assets in U.S. bank accounts than U.S. citizens. 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 from a representative of one group
that has not yet spoken at these hearings, 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 they may have in mind. The prior
Administration placed a high priority on stopping money
laundering, and it made significant progress. Hopefully the
current Administration will maintain that priority and continue
the battle.
I look forward to the testimony and, again, thank the Chairman
for calling today's hearing and supporting this investigation.
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