- Because of their central role in drug trafficking and organized
crime, money laundering activities have been the subject of eight
prior investigations of the Permanent Subcommittee on
Investigations. Despite increasing international attention and
stronger anti-money laundering controls, some current estimates are
that $500 billion to $1 trillion in criminal proceeds are laundered
through banks worldwide each year, with about half of that amount
moved through United States banks.
- This report summarizes the Minority Subcommittee staff
investigation to date into U.S. private banks and their
vulnerability to money laundering. The investigation has found that
the products, services and culture of the private banking industry
present opportunities for money launderers, and that without sound
controls and active enforcement, private banking services have been
and will continue to be used by those intent on laundering money.
Subcommittee Investigation
- To date in this investigation, the Subcommittee staff has
conducted almost one hundred interviews and reviewed tens of
thousands of pages of documents. The interviews have included
meetings with almost 50 private bank personnel, including private
bankers, their supervisors, compliance personnel, auditors, senior
bank management and board members. The staff has interviewed and
obtained information from more than two dozen government agencies
and organizations, including the United States Departments of State,
Treasury and Justice, the Federal Reserve, Securities and Exchange
Commission, International Monetary Fund, World Bank, and law
enforcement personnel in Mexico, France and other countries. The
Subcommittee staff has also spoken with private bank clients, and
with banking and anti-money laundering experts in academic,
regulatory and law enforcement circles.
- The documents reviewed by the Subcommittee staff include a wide
range of materials, from reports on the private banking industry, to
reports on money laundering trends, to SEC filings, legal pleadings,
private bank audits, bank examination materials, and numerous
documents related to specific private bank accounts and
transactions. The Subcommittee has issued subpoenas to over half a
dozen financial institutions and entities.
- The information gathered by the Subcommittee's investigation falls
into three categories: (1) the anti-money laundering obligations of
all banks, including private banks; (2) the elements of private
banking that make it vulnerable to money laundering; and (3) four
case histories at the Citibank private bank illustrating a range of
issues related to money laundering.
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 banks to
have anti-money laundering programs. This law states the following.
"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 Treasury Department to
require financial institutions and other businesses to file reports
on currency transactions and suspicious activities, again as part of
U.S. efforts to combat money laundering.
- The second key law is the Money Laundering Control Act of 1986,
which was enacted partly in response to hearings held by this
Subcommittee in 1985. This law was the first in the world to make
money laundering a 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. Most are crimes under U.S. law; only a few
foreign crimes, such as drug trafficking, kidnapping, and foreign
bank fraud, are currently listed as predicate offenses for a money
laundering prosecution in the United States.
- 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.
Private Banking Industry
- Private banks are banks, or operational units within banks, which
specialize in providing financial services to wealthy individuals.
Often portrayed as a specialty of the Swiss whose private banks are
the largest in the world, the private banking industry actually has
a long history in many countries, including the United States. For
example, private banks have long been in operation at Bank of
America, Bank of New York, Bankers Trust, Chase Manhattan, Citibank,
J.P. Morgan and many other U.S. financial institutions. Today, the
largest U.S. private bank handles as many as 100,000 clients; and a
single U.S. private bank may have assets exceeding $100 billion. The
worldwide total for assets currently under management by private
banks has been estimated at $15.5 trillion.
- Today, private banks are a growth area at many U.S. financial
institutions. Banks report increasing clientele, assets under
management, and revenues. A report prepared by the General
Accounting Office for the Subcommittee states:
"Domestic and foreign banks operating in the
United States have been increasing their private banking activities
and their reliance on income from private banking. The target market
for private banking -- individuals with high net worth -- is also
growing and becoming more sophisticated with regard to their product
preferences and risk appetites."
- One key reason for the growth in private banking in the United
States is an increasing number of individuals with great personal
wealth, providing an expanding client base for private bank
operations. Another key reason is profits. Federal Reserve officials
told the Subcommittee staff that private banking has become a
"profit driver" for many banks, offering returns twice as
high as many other banking areas. Private banks interviewed by the
Subcommittee staff have confirmed rates of return in excess of 20
percent.
- In general, private banking seeks to provide financial and related
services to wealthy individuals, primarily by acting as a financial
advisor, estate planner, credit source, and investment manager. As
one senior bank official put it during a Subcommittee interview, the
very wealthy have "peculiar" financial needs, and private
banks are intended to address those needs. Consumer banking, in
contrast, provides financial services to individuals regardless of
wealth. Corporate banking provides financial services to businesses.
- To open an account in a private bank, prospective clients usually
must deposit a substantial sum, often $1 million or more. In return
for this deposit, the private bank assigns a "private
banker" or "relationship manager" to act as a liaison
between the client and the bank, and to facilitate the client's use
of a wide range of financial services and products. These products
and services often span the globe, enabling a client to make use of
a variety of corporate, investment and trust vehicles, estate and
tax planning, and other financial services. In essence, private
banks seek to provide global wealth management for the wealthy.
Private banks typically charge fees based upon the amount of client
"assets under management," and the particular products and
services used by the client. These fees can exceed $1 million per
client each year.
- While many of the products and services offered by a private bank
are also available through retail banking operations, there are at
least two key differences. First, private banks offer an inside
advocate the private banker whose mission is to help his or her
clients make easy use of the bank's products and services. For
example, many retail banks provide wire transfer services, but a
private banker will routinely arrange complex wire transfers for a
client who simply calls in by phone to request them. Retail banks
may offer offshore services, but a private banker is an expert in
facilitating the creation of offshore trusts and corporations,
opening accounts for them, and arranging transactions on their
behalf. Retail banks will allow clients to open multiple accounts,
but a private banker will not only create these accounts for a
client, but also keep track of the assets in each account and
arrange transactions among them.
- A second key difference is that a private bank provides its
clients with a team of specialists under the coordinated direction
of the private banker. These specialists include investment
managers, trust officers, estate planners, and other financial
experts, all prepared to act in concert. The private banker
orchestrates their services with a degree of coordination that is
often difficult or impossible to achieve in retail banking.
Why Private Banking is Vulnerable to Money Laundering
- For some time now, evidence has been accumulating that private
banks are vulnerable to money laundering. The 1994 conviction of a
private banker from American Express was an early wake-up call. The
1995 Salinas scandal raised a second set of troubling questions. The
1998 Casablanca undercover money laundering operation resulted in
the indictment of several private bankers in Mexico.
- Bank regulators have shown a growing concern. Three years ago, the
Federal Reserve Bank of New York reviewed private banking activities
at 40 U.S. and foreign financial institutions operating in the New
York area. In 1997, it conducted followup reviews at four financial
institutions which it had identified had deficiencies needing
correction, and issued a publication entitled, "Sound Risk
Management Practices Governing Private Banking Activities" to
provide private banks "with guidance regarding the basic
controls necessary to minimize reputational and legal risk and to
deter illicit activities, such as money laundering."
- In 1998, the Federal Reserve reviewed an additional six financial
institutions, as well as conducting a third review of the Citibank
private bank. The General Accounting Office reports that this 1998
study found that "internal controls and oversight practices
over private banking activities were generally strong at banks with
high-end domestic clients," but "seriously weak at banks
with higher risk Latin American and Caribbean clients." Also in
1998 two new examination manuals were issued, a Federal Reserve
manual designed solely to evaluate private banks' controls, and a
revised bank examination manual on money laundering used by all U.S.
bank regulators which includes a section identifying private banking
as an area meriting special attention. The 1998 International
Narcotics Control Strategy Report, issued by the State Department,
observes that "[p]rivate banking facilities continue to be
vulnerable to money laundering."
- Five Factors Creating Money Laundering Vulnerabilities
- Five factors in private banking increase its vulnerability to
money laundering: the role of private bankers as client advocates, a
powerful clientele which discourages tough questions, a corporate
culture of secrecy, a corporate culture of lax controls, and the
competitive nature of the industry.
- Private Bankers As Client Advocates. Private bankers are
the linchpin of the private bank system. They are trained to service
their clients' needs and to set up accounts and move money around
the world using sophisticated financial systems and secrecy tools.
Private banks encourage their bankers to develop personal
relationships with their clients, visiting the clients' homes,
attending weddings and graduations, and arranging their financial
affairs. The result is that private bankers may feel loyalty to
their clients for both professional and personal reasons, leading
them to miss or minimize warning signs. In addition, private bankers
may use their expertise in bank systems to evade what they may
perceive as unnecessary "red tape" hampering the services
their clients want, thereby evading controls designed to detect or
prevent money laundering.
- Powerful Clients. Private bank clients are, by definition,
wealthy. Many also exert political or economic influence which may
make banks anxious to satisfy their requests and reluctant to ask
hard questions. If a client is a government official with influence
over the bank's in-country operations, the bank has added reason to
avoid offense. As we will see in the case histories that follow,
government officials and other powerful clients can minimize bank
inquiries simply by virtue of their stature. For example, when asked
why he never questioned a client about certain funds, one private
banker told the Subcommittee staff that, because the client was a
head of state, he felt constrained by "issues of etiquette and
protocol."
- Moreover, verifying information about a foreign client's assets,
business dealings, and community standing can be difficult for U.S.
banks. The Federal Reserve found in its private banking review that
foreign clients were particularly difficult for private bankers to
assess due to a lack of independent databases of information, such
as credit reports. One senior bank official told the Subcommittee
staff that a key problem is developing tools to detect when clients
may be misrepresenting their personal assets or business dealings,
or supplying inaccurate documenta- tion. While private banks
routinely claim that their private bankers gain intimate knowledge
of their clients, the case histories demonstrate that too often
isn't true. For example, in one case, a private banker was unaware
for more than three years that he was handling the accounts of the
sons of an African head of state.
- Culture of Secrecy. A culture of secrecy pervades the
private banking industry. Numbered accounts at Swiss banks are but
one example. There are other layers of secrecy that private banks
and clients routinely use to mask accounts and transactions. For
example, private banks routinely create shell companies and trusts
to shield the identity of the beneficial owner of a bank account.
Private banks also open accounts under code names and will, when
asked, refer to clients by code names or encode account
transactions.
- For example, in the case of Raul Salinas, Citibank's private bank
created a trust that was known only by a number and a shell company
called Trocca, Ltd. to serve as the owner of record for accounts
benefitting Mr. Salinas and his family. The private bank hid Mr.
Salinas' ownership of Trocca by omitting his name from the Trocca
incorporation papers and naming still other shell companies as the
shareholders, directors, and officers. Citibank consistently
referred to Mr. Salinas in internal bank communications by the code
name "Confidential Client Number 2" or "CC-2."
The private bank's Swiss office opened a special name account for
him under the name of "Bonaparte." These are just some of
the steps that the private bank took to meet Mr. Salinas' requests
for extreme secrecy in the handling of his accounts.
- Secrecy Jurisdictions. In addition to shell corporations
and codes, a number of private banks also conduct business in
secrecy jurisdictions such as Switzerland and the Cayman Islands,
which impose criminal sanctions on the disclosure of bank
information related to clients and restrict U.S. bank oversight. The
secrecy laws are so tight, they even restrict internal bank
oversight. For example, if a bank's own employee uncovers a problem
in an office located in a secrecy jurisdiction, that employee is
barred from conveying any client-specific information to colleagues
in the United States, even though they are part of the same banking
operation. The bank's auditors and compliance officers operate under
the same restrictions; any audit or compliance report sent out of
the country must first be cleansed of client-specific information.
- If a bank employee in the United States wants more information
about a problem in a secrecy jurisdiction involving specific
clients, he or she has to fly to the secrecy jurisdiction to discuss
the matter in detail or review documentation. Even then, the
restrictions continue. For example, before allowing an employee to
travel to Switzerland, private banks such as J.P. Morgan and
Citibank require their employees to sign a non-disclosure statement,
reminding them that Swiss law bars disclosing client information
acquired in Switzerland to anyone, even their fellow bankers in the
United States.
- If a U.S. private bank were to tell its Swiss office that an
individual is suspected of money laundering and to close any
accounts related to that individual, Swiss law bars the Swiss office
from disclosing the existence of any such accounts. Then, if U.S.
bank personnel wanted to confirm the closure of any accounts,
someone from the private bank would have to fly to Switzerland to do
so. Upon returning, the private bank official could not, without
breaking Swiss law, communicate any specific account information to
senior bank management in the United States or to U.S. bank
regulators. The bottom line, then, is that private bank personnel
cannot have a frank discussion in the United States about what the
private bank is doing in Switzerland without breaking Swiss law.
- Secrecy Restrictions on U.S. Bank Regulators. U.S. bank
regulators operate under similar restrictions. The General
Accounting Office report to the Subcommttee provides comparative
information about the bank secrecy laws in 20 jurisdictions,
identifying those that prohibit the disclosure of client-specific
bank information to U.S. bank regulators or bar U.S. regulators from
conducting on-site examinations of U.S. bank operations. GAO
concludes:
"[T] he key barriers to U.S. regulators'
oversight of offshore banking activities are secrecy laws that
restrict access to banking information or that prohibit on- site
examinations of U.S. bank branches in offshore jurisdictions. An
important challenge that confronts efforts to combat money
laundering is the extent to which such secrecy laws will continue to
be barriers to U.S. and foreign regulators."
- Once a matter becomes the subject of a criminal investigation,
many secrecy jurisdictions provide a disclosure exception for law
enforcement inquiries. But that exception may be invoked only by law
enforcement personnel, acting in an official capacity through
designated channels; it cannot be used by bank regulators.
- Private banks not only choose to conduct business in these secrecy
jurisdictions, some also build secrecy into their U.S. operations by
restricting the client information that can be kept in the United
States. For example, one former private banker told the Subcommittee
staff that he was prohibited by his bank from keeping any records in
the United States linking shell corporations to their owners. He
said that he had 30 - 40 clients, each of which had up to fifteen
shell corporations and, to keep track, he and other colleagues in
the private bank used to create private lists of their clients'
shell companies. He said that he and his colleagues had to hide
these "cheat sheets" from bank compliance personnel who,
on occasion, conducted surprise inspections to eliminate this
information from bank files. When asked why the bank would destroy
information he needed to do his job effectively, the former private
banker simply said that it was bank policy not to keep this
information in the United States.
- During its review of the private banking industry, one of the
issues addressed by the Federal Reserve was to determine whether
U.S. private banks holding accounts in the name of shell companies
were aware of the companies' owners and had conducted sufficient due
diligence to determine whether their funds were of suspicious
origin. However, many of the private banks resisted providing
information on their shell company accounts.
- For example, in an exchange of letters in 1998, Bankers Trust
initially declined providing any information to Federal Reserve
examiners. After several discussions, the bank agreed to set up a
database linking shell companies with information about their
beneficial owners, and promised to consult this database in the
event of a U.S. regulatory inquiry or subpoena. But the catch was
that Bankers Trust located the database on the Isle of Jersey. When
the Federal Reserve asked if Bankers Trust would use the database to
provide regulators with information about the owner of a shell
company with a U.S. bank account, Bankers Trust responded that it
would have to check with Jersey courts on a case-by-case basis. The
point here is that no one forced Bankers Trust to establish its
database on the Isle of Jersey the bank could have used the state of
New Jersey. The fact that Bankers Trust instead chose a foreign
jurisdiction which routinely restricts access to information is
another example of how a culture of secrecy raises money laundering
concerns by impeding regulatory review of client accounts.
- Money laundering, of course, thrives on secrecy. Shell companies,
code names and offices in secrecy jurisdictions are one more set of
factors that make private banks attractive to money launderers.
- Culture of Lax Anti-Money Laundering Controls. In addition
to a culture of secrecy, private banking operates in a corporate
culture that is at times indifferent or resistant to anti-money
laundering controls, such as due diligence requirements and account
monitoring.
- The problem begins with the private banker who, in most private
banks, is responsible for the initial enforcement of anti-money
laundering controls. It is the private banker who is charged with
researching the background of prospective clients, and it is the
private banker who is asked in the first instance to monitor
existing accounts for suspicious activity. But it is also the job of
the private banker to open accounts and expand client deposits. John
Reed, co-chairman of Citigroup with 30 years of banking experience,
told the Subcommittee staff that, over time, private bankers tend to
become advocates for their clients and lose the detachment needed to
monitor their transactions. He also observed that private bankers
often don't have the temperament or discipline needed to ask clients
detailed questions about their funds and transactions and to record
the information provided on the proper forms.
- The fundamental problem is that private bankers are being asked to
fill contradictory roles -- to develop a personal relationship with
a client and increase their deposits with the bank, while also
monitoring their accounts for suspicious activity and questioning
specific transactions. Human nature makes these contradictory roles
difficult to perform, and anti-money laundering duties often suffer.
- Private banks have dealt with this problem by setting up systems
to ensure that private banker activities are reviewed by third
parties, such as supervisors, compliance personnel or auditors. The
Subcommittee staff investigation has found, however, that while
strong oversight procedures exist on paper, in practice private bank
oversight is often absent, weak or ignored.
- Two examples of lax oversight came to light last year, when
private bankers at two different banks were discovered to have
evaded bank controls to commit years-long, multi-million dollar
frauds. In one case, the head of the New York office of the
BankBoston private bank, Ricardo Carrasco, apparently embezzled $60
million, by setting up multiple accounts which the private bank did
not realize were related, allowing them to accumulate loans and
overdrafts for 4 years, and then absconding with the funds. Carrasco
is currently a fugitive. The second case involves a Citibank private
banker with 10 years of experience, Carlos Gomez, who pleaded guilty
in 1998 and is now serving a 4-year prison term, for defrauding the
private bank of more than $23 million. He committed his fraud by
issuing multi-million dollar loans to fictitious private bank
clients secured by funds from existing accounts whose owners were
not informed of the security arrangements. Gomez invested the loan
proceeds, kept the earnings, and repaid the loans. He successfully
evaded bank controls for a number of years, including loan limits,
overdraft limits, signature requirements, account reviews, and
audits.
- In both instances, the private bankers were able to exploit
vulnerabilities in their banks' internal controls to commit frauds.
A 40-page Federal Reserve report dated April 6, 1998, details the
lack of controls at BankBoston which, in response, replaced the head
of its private bank, removed a number of other officers, and
revamped its procedures. The Gomez fraud was followed by a
five-month compliance review and an action plan with multiple
recommendations for tighter controls. These two cases show just how
weak the internal controls were at these private banks, even in
1998.
- All of the private banks interviewed by the Subcommittee staff
described a renewed effort, following the Federal Reserve's 1996
review of the private banking industry, to improve their due
diligence documentation for clients. The key documents, variously
called "client profiles," "know-your-customer
files," or "due diligence reports," describe a
client's financial background, source of funds, and expected
transactions. The evidence shows, however, that in many instances,
the private bankers either delayed or resisted improving the
documentation. One private bank supervisor, asked why it was taking
years to upgrade the documents, explained that private bankers
viewed the documents as "time consuming" to complete and
worried that listing a client's sources of wealth raised
"confidentiality concerns." He said it was like
"pulling teeth" to get them to complete the required
forms. Another supervisor told the Subcommittee staff that the
bank's auditors did not understand how complicated and difficult it
was to obtain the level of information they wanted. A private banker
told the Subcommittee staff he viewed the effort to upgrade his
client profiles as a paperwork exercise, akin to having "a
teacher grade his homework." Another told us that no one took
the directives seriously until bonuses were threatened. Audits,
compliance reviews, repeated deadlines and bonus threats are just
some of the tools private banks have used over the past two years to
coax their private bankers to improve the due diligence information
in client files. The level of effort expended is itself proof of a
culture of lax compliance with anti-money laundering controls.
- Competition and Profitability. A final factor creating
money laundering concerns is the ongoing competition among private
banks for clients, due to the profitability of the business. A 1997
Federal Reserve report on private banking states: "As the
target market for private banking is growing, so is the level of
competition among institutions that provide private banking
services." Private banks interviewed by the Subcommittee staff
confirm that the market remains highly competitive; most also
reported plans to expand operations. The dual pressures of
competition and expansion are disincentives for private banks to
impose tough anti-money laundering controls that may discourage new
business or cause existing clients to move to other institutions.
- Private Banking Products And Services
- In addition to the general factors cited above, the actual
products and services offered by the private bank also create
opportunities for money laundering.
- Multiple Accounts. A striking feature of the private bank
accounts examined is their complexity. Private bank clients often
have many accounts in many locations. Some are personal checking,
money market or credit card accounts. Others are in the name of one
or more shell companies. Multiple investment accounts are common,
including mutual funds, stocks, bonds and time deposits. One private
banker said it was common for his clients to have multiple shell
companies, each with one or more accounts.
- In addition, no private bank currently has a database which
automatically aggregates all of the information related to a single
client. A few banks are in the process of installing systems that
will attempt to centralize client information and identify related
accounts using different names, but even these systems will be
heavily dependent upon private banker updates. In addition,
information on accounts in secrecy jurisdictions may be excluded or
not fully integrated into the database due to those jurisdictions'
secrecy laws.
- The reality right now is that private banks allow clients to have
multiple accounts in multiple locations under multiple names and do
not aggregate the information. This approach creates vulnerabilities
to money laundering by making it difficult for banks to have a
comprehensive understanding of their own client's accounts. In
addition, it complicates regulatory oversight and law enforcement,
by making it nearly impossible for an outside reviewer to be sure
that all private bank accounts belonging to an individual have been
identified.
- Secrecy Products. Most private banks offer a number of
products and services that shield a client's ownership of funds.
They include offshore trusts and shell corporations, special name
accounts, and codes used to refer to clients or fund transfers.
- All of the private banks interviewed by the Subcommittee staff
made routine use of shell corporations for their clients. These
shell corporations are often referred to as "private investment
corporations" or PICs. They are usually incorporated in
jurisdictions such as the Cayman Islands or Channel Islands which
restrict disclosure of a PIC's beneficial owner. Private banks then
open bank accounts in the name of the PIC, allowing the PIC's owner
to avoid identification as the accountholder.
- It is not unusual for private bank clients to have multiple PICs
and use these PICs to hold accounts and conduct transactions. Some
private banks will open accounts only for PICs they incorporate and
manage, while others will do so for PICs incorporated and managed by
someone else, such as the client. These so-called
"client-managed PICs" create additional money- laundering
risks, because the private banks do not control and may not even
know the activities, assets and complete ownership of the PIC
holding the account at the private bank. Some private banks go a
step further and open accounts for client-managed PICs whose
ownership is determined by whomever has physical possession of the
PIC's shares. These so-called "bearer- share PICs" pose
still greater money-laundering risks because, unless a bank
maintains physical possession of the shares, it is impossible to
know with certainty who, at any given moment, is the PIC's true
owner. While most private banks interviewed by the Subcommittee
staff did not have any accounts held by bearer-share PICs, the Chase
Manhattan private bank indicated it had accounts for about 1500
bearer-share PICs. As part of its industry-wide review, the Federal
Reserve identified bearer-share PICs as an area of concern and asked
private banks to develop a list of these accountholders, to review
the due diligence on record for them and their beneficial owners,
and to consider closing the accounts in favor of PICs with
documented ownership.
- The case histories to be examined today include many examples of
shell corporations functioning as accountholders for clients,
including Trocca, M.S. Capricorn Trading, Tendin Investments, and
Morgan Procurement. The case histories also include special name
accounts such as "Bonaparte," "OS," and "Gelsobella."
Three of the four case histories also had code names or systems for
encoding fund transfers.
- Movement of Funds. Client account transactions at private
banks routinely involve large sums of money. The size of client
transactions increases the bank's vulnerability to money laundering
by providing an attractive venue for money launderers who want to
move large sums without attracting notice. In addition, most private
banks provide products and services that facilitate the quick,
confidential and hard-to-trace movement of money across
jurisdictional lines. For example, private banks routinely
facilitate large wire transfers into, out of and among client
accounts, in multiple countries. Several private bankers told us
that many of these transfers take place with minimal or no notice
from the client and sometimes involve parties and accounts with
which the private banker is unfamiliar. It is a situation that
invites money laundering.
- Some private banks move funds for clients through concentration or
suspense accounts, which are accounts established by private banks
for administrative purposes to hold funds from various destinations
prior to depositing them into the proper accounts. Client funds
which come into a private bank may pass through a concentration
account on the way to the client's own account. The problem arises
when a private bank allows clients to move funds through the bank's
concentration account and onto another destination, without ever
passing through an account belonging to the client. When that
happens, the funds are never associated in bank records with a
particular client. The Federal Reserve has warned against this
practice, stating:
"[I]t is inadvisable from a risk management and
control perspective for institutions to allow their clients to
direct transactions through the organization's suspense accounts(s).
Such practices effectively prevent association of the clients' names
and account numbers with specific account activity, could easily
mask unusual transactions and flows, the monitoring of which is
essential to sound risk management in private banking, and could
easily be abused."
The Citibank private bank used a concentration account to move
over $80 million for Raul Salinas. Citibank has since prohibited its
private bank from using its concentration account for client
transactions, but other private banks continue to do so.
- Credit. Another common private bank service involves the
extension of credit to clients. Several private bankers told the
Subcommittee staff that private banks urge their private bankers to
convince clients to leave their deposits in the bank and use them as
collateral for large loans. This practice enables the bank to earn a
fee not only on the deposits under their management, but also on the
loan. This practice also, however, creates vulnerabilities for money
laundering, by allowing a client to deposit questionable funds and
replace them with "clean" money from a loan. In addition,
because the client loans are fully collateralized by assets on
deposit with the bank, the bank may not scrutinize the loan purpose
and repayment prospects as carefully as for a conventional loan, and
may unwittingly further a money launderer's efforts to hide illicit
proceeds behind seemingly legitimate transactions. The Federal
Reserve has warned private banks about this practice from a risk
management perspective:
"If credit is extended based on collateral, even
if the collateral is cash, repayment is not assured. For example,
collateral derived from illicit activities may be subject to
government forfeiture. Accordingly, when extending secured private
banking loans, institutions should be satisfied as to the source and
legitimacy of the client's collateral, the borrower's intended use
of the proceeds and the source of repayment."
Citibank Private Bank Case Histories
- Four case histories illustrate the vulnerability of private banks
to money laundering. The case histories are drawn from Citibank, the
largest bank in the United States with over $700 billion in assets.
Citibank operates one of the country's largest private banks. It has
over $100 billion in client assets in private bank offices in over
30 countries, which is the largest global presence of any U.S.
private bank. It is continuing to expand. Citibank's private bank is
also no stranger to controversy. From the Salinas scandal in 1995,
to the Zardari scandal in 1997, to the Carlos Gomez fraud in 1998,
if any private bank has had reason to review its anti-money
laundering controls, Citibank has. Of the 40 private banks reviewed
by the Federal Reserve during its industry wide examination of
private banking, only one -- Citibank -- was reviewed in detail by
Federal Reserve examiners three years in a row. It is a private bank
that has struggled with a wide range of anti-money laundering
issues.
- Citibank private bank has implemented policies, internal systems,
and employee training programs to combat money laundering. But its
record during the 1990s is marked by years of poor audits, three
consecutive years of regulatory criticism, and repeated difficulties
related to troubled accounts. Citibank's experience underscores the
fact that even private banks with ample resources may have
inadequate anti-money laundering controls.
- Citibank Private Bank During the 1990s
- The Citibank private bank has been in existence for many years in
various forms. During the 1990s, it has experienced steady growth,
and today has thousands of employees and hundreds of private bankers
in over 30 locations throughout the world. The Citibank private bank
has also changed leadership four times in ten years, with the newest
chief executive having taken office last month.
- During the 1990s, the private bank has operated with four
divisions: the Western Hemisphere Division which includes the United
States, Canada and Latin America; the EMEA Division which includes
Europe, the Middle East and Africa; the Japan Division; and the
Asia/Pacific Division which includes Hong Kong and Singapore. The
private bank has also operated in tandem with four affiliated trust
companies, called "Cititrust" in the Bahamas, Cayman
Islands, and the Isle of Jersey; and "Confidas" in
Switzerland. These trust companies help establish and administer
trusts and shell corporations for Citibank private bank clients.
- During the first half of the 1990s, the private bank's
headquarters were located in Switzerland, and the four divisions
operated fairly independently. After the Salinas scandal in 1995,
the headquarters moved from Switzerland to New York, and the private
bank began an effort to centralize management of its divisions under
a single set of policies.
- Anti-Money Laundering Program. During the 1990s, the
primary elements of the private bank's anti-money laundering program
have remained the same, although particular policies, procedures and
systems have been clarified or strengthened over time. The primary
elements include: (1) obtaining due diligence information on a
client prior to opening an account, recording that information on a
"client profile," and updating the client profile annually
based upon contacts during the year; (2) establishing a client
transaction profile with anticipated levels of activity, and
monitoring the account for unusual activity; and (3) reporting any
suspicious activity internally and, if appropriate, to the U.S.
government through a Suspicious Activity Report.
- The private banker with primary responsibility for a client is
charged with meeting the due diligence requirements. These
requirements include ascertaining the true identity of the client,
obtaining references, and determining the client's background and
source of funds. The private bank has also specified several
categories of "high risk accounts" requiring added due
diligence and monitoring. These categories include clients in high
risk geographic areas, such as countries identified by the U.S.
State Department as at high risk of drug trafficking; clients
engaged in high risk businesses, such as casinos or currency
exchanges; clients who are "public figures"; and clients
who become the subject of adverse rumors or media stories. In
addition, the private bank has engaged in training, and has
implemented internal audit procedures designed to test compliance
with its anti-money laundering controls.
- Audit Results. During the 1990s, the private bank was
subjected to repeated criticisms in internal audits and regulatory
reviews. Citibank's own auditors provide audit ratings on a scale of
1 to 5, with 1 being the worst score and 5 the best. In 1995 and
1996, these internal audits gave a number of private bank units in
the United States, Europe and Asia ratings of "2" and
"3," which private bank personnel told the Subcommittee
staff are failing scores. Many of the audits identified anti-money
laundering deficiencies, including noncompliance with bank anti-
money laundering policies, inadequate client information, and
inadequate monitoring of client transactions.
- For example, a 1995 audit of nine European offices found that the
office managers had "not enforced the development and
implementation of compliance programs" required by the private
bank. A 1995 audit of a U.S. unit responsible for establishing and
administering client trusts did "not perform effective
[know-your-customer] procedures before accepting account referrals
from Private Bankers. As a result, customers attempting to launder
money may not be identified." A 1995 audit of the Singapore
private bank office found major control and documentation problems,
including a lack of training and oversight and inadequate compliance
with know-your-customer policies. A 1995 audit of the Monaco private
bank office found that "80% of the Unit's client base [is
classified] 'high risk' using the Legal Affairs Office criteria for
money laundering. Although the unit has established 'Know Your
Customer' policies, there is no effective transaction profile
monitoring for high risk clients."
- A 1996 audit of private bank offices handling Latin American
clients found four "major deficiencies" which "increase[d]
the exposure to money laundering schemes and internal fraud."
The audit stated that it "seems the Unit's priority was to
focus on customer service, even when it meant that internal controls
would be compromised." A 1996 audit criticized the Bahamas and
Cayman Islands trust companies for failing to obtain "adequate
Know Your Customer (KYC) information from Private Bankers to enable
them to assess money laundering risk and suitability." The
audit report stated: "This concern is heightened by the
confidential nature of the off-shore business and exposes [the trust
companies] ... to civil penalties, criminal charges, and negative
publicity. ... [A]lmost all (92%) existing, Private Banker-linked
accounts tested were missing one or more key elements of KYC
documentation."
- The bank auditors were particularly critical of the private bank's
headquarters in Switzerland, giving it failing "2" audit
ratings in several audits. In December 1995, due to continued
deficiencies, the auditors assigned the office a rating of
"1," the only 1 audit rating given to any private bank
unit in recent years. A cover memorandum stated, "Such a rating
indicates this office is operating in a severe[ly] deficient manner,
with a lack of policy and procedure implement[ation] as well as ...
less than acceptable internal controls."
- Regulatory Reviews. The private bank's poor audit ratings
caught the attention of the Federal Reserve during its review of the
private bank in 1996. The result was that the Federal Reserve
conducted three consecutive audits of the private bank, the only one
of 40 banks which received that level of attention. In 1996, a
Federal Reserve examiner noted in an internal review document that
the private bank's Swiss headquarters had received the "worst
possible audit rating" in December 1995, and wrote that it
appeared poor audit scores were "not taken seriously"
within the private bank, although the bank was trying to change.
- In 1997, Federal Reserve examiners stated in internal documents
that the Citibank private bank lagged behind other private banks
they had reviewed. One examiner wrote that, compared to its peers in
the second district, Citibank private bank's policy "meets
standards [and] it is more detailed ... [but] practice lags behind
the pack." The examiner wrote that the private bank is
"getting started later, [its] control environment is weaker,
and [its] risk tolerance is greater." The examiner noted that,
within Citibank itself, "the private bank ... significantly
lags behind the rest of corporation in achieving acceptable audit
ratings." The examiner wrote:
"The auditors are a key asset of [the private
bank]. The problem is that for years audit has been identifying
problems and nothing ahs been done about it. In 1992 [the private
bank had] 66% favorable audits in 1997 the percentage of favorable
audits was 62%. ... It appears that there are no consequences for
bad audits as long as [the private bank] meets their financial
goals."
- With respect to anti-money laundering issues, the examiner wrote
in 1997 that, "In spite of the progress made since the prior
inspection, significant KYC deficiencies have not yet been
addressed. Management must ensure that appropriate measures are
taken to complete the client profiles, document sources of wealth,
monitor transactions and identify suspicious account activity."
- The Federal Reserve examiners also commented unfavorably in 1997,
on the private bank's Swiss headquarters. One examiner wrote:
"Historically [the private bank] was very
decentralized with the marketing heads having a lot of autonomy, and
[the] head office was located in Switzerland. Under this structure
the corporate culture of the [private bank] did not foster 'a
climate of integrity, ethical conduct and prudent risk taking' by
U.S. standards."
The examiner stated that, with respect to Switzerland,
"historical control problems remain unresolved, resulting in
unacceptable audit ratings. The internal audit ratings for the Swiss
Front Office and Swiss Investment Services have been unacceptable
since 1992 and 1994, respectively." In another 1997 document,
an examiner reported being told that Citibank's "Swiss bankers
think that the US KYC effort is an attempt to undermine Swiss
banking," and that the Swiss office "thinks they do not
need to comply with the control policies because they only deal with
the very rich and their clients are above reproach." After the
Swiss office received two additional "2" audit ratings for
certain operations in 1997, the Federal Reserve examiner attributed
the continuing "bad audits" in the Swiss office "in
part to the fact that senior management responsible for these
problems are still in charge." The examiner said that, when
asked about the continued presence of these managers, private bank
personnel responded, "'ask the Chairman why they still work
there.'"
- During the same period, 1996-1997, Citibank's primary regulator,
the Office of the Comptroller of Currency (OCC) also reviewed the
private bank and expressed many of the same concerns as the Federal
Reserve and Citibank's own auditors. The multi-million dollar fraud
committed by the private banker Carlos Gomez, which came to light in
early 1998, raised additional regulatory concerns about weak
controls and inadequate management oversight in the private bank.
February 1998, during their regular annual meeting with
Citibank board members, the Federal Reserve and OCC discussed their
concerns about the private bank. According to talking points
prepared for the meeting, the Federal Reserve indicated that the
private bank had "significant weaknesses in internal controls
that expose Citibank to excessive legal and reputational risk."
It also conveyed concern about the "length of time" the
private bank was taking to correct deficiencies and the
"relative slowness of progress [which is] out of keeping with
management's decisive reaction to other control weaknesses."
The Federal Reserve recommended that Citibank conduct a
"fundamental review" of the private bank by mid-1998, and
that the Board's Audit Committee review private bank issues on a
quarterly basis.
- Senior Bank Management Oversight. Poor audit results,
ongoing regulatory reviews, and the Salinas and Zardari scandals
elevated the private bank's problems to the attention of Citibank's
senior management. The Chairman of the Audit Committee of Citibank's
Board of Directors, Robert Shapiro, an outside director who is also
chief executive officer of Monsanto, told the Subcommittee staff
that, during his tenure as committee chairman from 1996 until 1998,
the private bank became one of a handful of issues he focused on. He
said that he was troubled not only by the repeated low audit scores,
but also by the private bank's repeated failure to meet deadlines
for corrective action. He said that he personally talked to
Citicorp's CEO John Reed about the need to take action. He said that
Mr. Reed responded by taking a personal interest in addressing the
private bank problems.
- Among other actions, in May 1997, Mr. Reed replaced the head of
the private bank. He selected Shaukat Aziz, a longtime Citibank
executive not previously associated with the private bank. He told
the Subcommittee staff that he charged Mr. Aziz with improving what
Mr. Reed called the private bank's "lousy audits." He
indicated that he also asked Mr. Aziz to review the private bank's
handling of public figures accounts, and to initiate the
"fundamental review" of the private bank requested by bank
regulators. In a November 1997 letter to the Board of Directors, Mr.
Reed wrote the following:
"I spent a day being interviewed by the
Department of Justice on the Salinas affair. As a legal issue, I
continue to think that we are on very solid ground. However, I am
more than ever convinced that we have to rethink and reposition the
Private Banking business. ... Much of our practice that used to make
good sense is now a liability. We live in a world where we have to
worry about 'how someone made his/her money' which did not used to
be an issue. Much that we had done to keep Private Banking private
becomes 'wrong' in the current environment. The business itself is
very highly attractive and there is no reason why we cannot pursue
it in a sound way but it will take an adjustment." [CS7463]
That adjustment apparently has not been a smooth one and is still
underway. In July 1998, Mr. Aziz presented a new private bank
strategy to the Citibank Audit Committee, recommending among other
measures that the bank move away from "secrecy" and
instead emphasize producing good investment returns for its clients.
He also recommended taking steps to change the private bank's
culture of lax internal controls. These controls were a sensitive
matter throughout 1998, not only because of the Carlos Gomez fraud
in January, but also because, in May 1998, ten days after Citibank
had agreed to purchase Banca Confia in Mexico, that Mexican bank was
indicted by the United States Justice Department for engaging in
money laundering.
- After receiving approval of the Audit Committee and senior bank
management of the proposed 1998 strategy, Mr. Aziz began making
personnel changes at the private bank, including firing a longtime
senior manager in Switzerland, Phillipe Holderbeke, and altering the
private bank's leadership team. On the issue of public figure
accounts, in late 1998 and early 1999, over the objection of some
longterm private bank employees, he ordered a number of longstanding
public figure accounts to be closed.
- In October 1999, after accepting an appointment as finance
minister of Pakistan, his home country, Mr. Aziz left the private
bank. He was replaced by Todd Thomson, a former Travelers Group
executive.
- Four Case Histories
- It is against this backdrop of growth, leadership and
organizational change, poor audits and increasing regulatory and
management oversight, that the four case histories involving
accounts at the Citibank private bank should be analyzed. These case
histories span the years 1992 to the present. They involve private
bank clients in Latin America, Asia, and Africa.
- Each case history involves either a head of state or a close
relative clients who fall into a category which the private bank
calls "public figures." Public figure accounts, by
longstanding policy, are subject to the private bank's highest
levels of scrutiny, including requirements for senior management
approval prior to opening an account, heightened monitoring, and
annual reviews of account developments by the private bank head. The
private bank's policy does not specify the criteria to be used in
evaluating prospective or existing public figure clients, but
instead requires each account to be handled on a case-by-case basis.
These four case histories will help convey a sense of the private
bank's practices over time and how issues of due diligence, secrecy
and anti-money laundering controls were actually handled. The case
histories convey issues related not only to Citibank's policy and
practice, but also to inherent problems in the private banking
industry -- the difficulty of evaluating clients, monitoring their
transactions, and creating a private banking culture sufficiently
sensitive to money laundering.
- (1) Raul Salinas Case History
- The Facts
- The first case history involves Raul Salinas, brother of the
former president of Mexico, Carlos Salinas. Raul Salinas was trained
as a civil engineer. For five years during the late 1980s, he was
director of planning for Conasupo, a state-run agency that regulated
certain agricultural markets, with an annual salary of up to
$190,000. From 1990 until mid-1992, Salinas was a consultant at an
government antipoverty agency, called Sedesol.
- In January 1992, Carlos Hank Rhon, a prominent Mexican businessman
and longtime client of Citibank private bank, telephoned his private
banker, Amy Elliott, and asked her to meet with him and Raul Salinas
that same day. Ms. Elliott was Citibank's most senior private banker
in New York handling Mexican clients. She handled only seven or
eight accounts personally, while supervising other private bankers
in the New York office handling Mexican clients.
- At the meeting in New York, which was attended by Ms. Elliott and
a more senior private bank manager Reynaldo Figueiredo, Mr. Hank
provided the bank with a strong personal reference for allowing Mr.
Salinas to open an account. In May 1992, Ms. Elliott flew to Mexico
and obtained Mr. Salinas' signature on account opening
documentation. She proposed accepting him as a client without
investigating his employment background, financial background or
assets, and waiving all references other than the one provided by
Mr. Hank. The head of the Western Hemisphere Division in the private
bank, Edward Montero, approved opening the account. The private
bank's country head in Mexico, Albert Misan, was not consulted, and
apparently did not learn of the account until 1993. In June 1992,
Ms. Elliott wrote in a monthly business report that Salinas accounts
had "[p]otential in the $15-$20MM range."
- Structure of the Relationship. After accepting him as a
client, the private bank opened multiple accounts for Mr. Salinas
and his family. The New York office opened 5 accounts for Mr.
Salinas and his family members. The private bank's trust company in
Switzerland, Confidas, talked to Mr. Salinas about opening
additional accounts in the name of a shell corporation. A Confidas
employee wrote in June of 1992:
"[T]he client requires a high level of
confidentiality in view of his family's political background. ...
This relationship will be operated along the lines as Amy's 'other'
relationship; ie she will only be aware of the 'Confidential
accounts' and not even be aware of the names of the underlying
companies. ... [P]lease note for the record that the client is
extremely sensitive about the use of his name and does not want it
circulated within the bank. I believe Amy's 'other' client has a
similar arrangement. In view of this client's background, I think
we'll need a detailed reference from Amy with Rukavina's sign-off
for our files."
- The detailed reference was never provided, nor was Mr. Rukavina's
sign-off obtained, but Cititrust in the Cayman Islands activated a
Cayman Islands shell corporation called Trocca Ltd. to serve as the
owner of record for private bank accounts benefitting Mr. Salinas
and his family. Cititrust used three additional shell companies,
sometimes called "nominee companies," to function as
Trocca's board of directors Madeline Investments SA, Donat
Investments SA, and Hitchcock Investments SA. Cititrust used three
more nominee companies to serve as Trocca's officers and principal
shareholders Brennan Ltd., Buchanan Ltd. and Tyler Ltd. Cititrust
controls all six of these nominee companies, and routinely uses them
to function as directors and officers of shell companies owned by
private bank clients. Approximately one year later, Cititrust also
established a trust, identified only by a number (PT-5242), to serve
as the owner of Trocca.
- The result of this elaborate structure was that the Mr. Salinas'
name did not appear anywhere on Trocca's incorporation papers.
Separate documentation establishing his ownership of Trocca was
maintained by Cititrust in the Cayman Islands, under secrecy laws
restricting its disclosure.
- The private bank did not disclose the name of the Salinas shell
company to any private bank personnel other than Cititrust and
Confidas personnel who administered the company, and Swiss bank
personnel required by Swiss law to know the beneficial owner of a
Swiss account. Even Ms. Elliott did not know the name of the shell
corporation. In addition, the private bank did not use Mr. Salinas'
name in bank communications about his accounts, but instead referred
to him as "Confidential Client Number 2" or
"CC-2." "CC-1" was the code used to refer to
Carlos Hank Rhon.
- After Trocca was established, the private bank opened investment
accounts in London and Switzerland in the name of Trocca. The
private bank personnel managing the investment accounts in London
were not told who owned Trocca. Later, in 1994, the private bank
opened a special name account in Switzerland for Mr. Salinas and his
wife under the name of "Bonaparte." During the meeting
with Mr. Salinas to establish the Bonaparte account, Confidas
personnel again noted Mr. Salinas' extreme concern about secrecy. A
memo written about the meeting included the following:
"During the meeting the client made several
remarks addressing his concern for 'confidentiality', so we offered
him comfort by reminding him of our procedures and the nature of our
business."
The private bank did not open any accounts for Mr. Salinas in
Mexico.
- Movement of Funds. After his accounts were first opened,
Mr. Salinas made an initial 1992 deposit of $2 million. The funds
were deposited through two wire transfers from an account belonging
to Mr. Hank, who told Ms. Elliott the funds had been given to him by
Mr. Salinas for a business deal which did not go forward. The funds
were divided between the Salinas accounts in New York and the Trocca
investment accounts in London and Switzerland.
- In May 1993, Ms. Elliott met with Mr. Salinas and his fianc‚,
Paulina Castanon, at Mr. Salinas' home in Mexico. She told the
Subcommittee that Mr. Salinas said he had decided to move funds out
of Mexico to his London and Swiss accounts to avoid the financial
volatility that traditionally accompanied Mexican elections, then
scheduled in 1994. She said that he also told her he did not want
anyone to know he was moving funds out of the country, because the
information might negatively impact his brother and the Salinas
administration. She said that Mr. Salinas informed her that he
wanted to use cashiers checks and asked if Citibank could
accommodate that request. Ms. Elliot informed the Subcommittee that
for greater confidentiality it was decided that Ms. Castanon would
present the checks to the Mexico City office of Citibank using her
middle names, Patricia Rios.
- Ms. Elliott told the Subcommittee that she agreed to talk to
Citibank's personnel in Mexico about these arrangements, since she
had not had other clients use cashiers checks to move funds to New
York. The type of cashiers check at issue was a check written by a
bank on its own account, so that the bank itself served as the payor
of the amount. Ms. Elliott said she checked with the private bank's
Mexico country head, Albert Misan, who worked in the Mexico City
office, about using the cashiers checks, and he approved the
arrangements. Mr. Misan later told the Subcommittee that Ms. Elliott
did not clear the arrangements with him beforehand, but he learned
of them later and allowed them to continue.
- Ms. Elliott then arranged a meeting between a service officer in
the Mexico City office and Ms. Castanon, whom Ms. Elliott introduced
as Patricia Rios. Ms. Elliott directed the service officer to accept
cashier checks from Ms. Rios, convert them from pesos into U.S.
dollars, and then wire transfer the funds to Ms. Elliott's attention
using the New York concentration account. The concentration account
is an account which the New York private bank uses for
administrative purposes, commingling funds from various sources
prior to transferring them to other accounts. This account was not
designed to be used by clients.
- Although Ms. Elliott indicated that these arrangements were
established in May 1993, six months earlier two cashier checks
totaling about $1 million had been converted from pesos to dollars
in Mexico, and sent to the New York concentration account to the
attention of Ms. Elliott. Some of the funds were forwarded to Trocca
accounts in London and Switzerland, setting the pattern for the 1993
and 1994 checks. In May and June 1993, in a period of less than 3
weeks, seven cashiers checks were presented to Citibank's Mexico
City branch, totaling $40 million. This amount far exceeded Ms.
Elliott's initial estimate of the account's potential size; however,
the account documentation contains no evidence of any inquiry to
check on the source of funds.
- By the end of June 1994, the total funds in the Salinas accounts
originating from Mexican cashiers checks had reached $67 million. In
a June 29, 1993 email, Ms. Elliott wrote to a colleague in
Switzerland: "This account is turning into an exciting
profitable one for us all[.] [M]any thanks for making me look
good." [CB022908.]
- Additional cashier checks followed throughout 1993 and 1994. In a
two week period in January 1994, for example, four cashiers checks
totaling $19 million were transferred from Mexico through the New
York concentration account to the Trocca accounts in London and
Switzerland. Altogether, between October 1992 and October 1994,
about $67 million was moved from Mexico using Mexican bank cashiers
checks and the New York concentration account. In excess of $20
million was transferred to Salinas accounts through other means, for
a grand total in excess of $87 million.
- All of the cashiers checks used in Mexico named Citibank as the
payee, rather than Mr. Salinas, Paulina Castanon or Patricia Rios.
When asked whether the private bank was aware of the origin of the
funds used to obtain these cashiers checks, Ms. Elliott indicated
that no one had made the necessary inquiries. Both Ms. Elliott and
Mr. Misan informed the Subcommittee that the private bank did not
attempt to determine if Mr. Salinas had accounts at the banks that
issued the checks or whether any accounts that existed at the banks
were large enough to support the size of the checks presented to
Citibank.
- When asked why the private bank used this method to transfer the
Salinas funds, Ms. Elliott explained that she was attempting to meet
Mr. Salinas' request for the confidential movement of his funds from
Mexico. The GAO report states that the method, in fact,
"effectively disguised the funds' source and destination, thus
breaking the funds' paper trail." This break in the paper trail
was due primarily to three factors: (1) the cashiers checks named
only banks as the payor and payee; (2) the cashiers checks were
handled by Citibank in Mexico for a non-account holder using an
alias; and (3) the funds passed through the private bank's
concentration account in New York, bypassing any specific client
account and further obscuring the true source and ultimate
destination of the funds. The GAO report states:
"Citibank ... acknowledged that the fund
transfers could have been wired to the Salinas checking account in
Citibank New York or directly to Citibank London or Citibank
Switzerland, thus retaining a paper trail. The [Citibank]
representative stated, however, that Citibank had believed that the
movement of the funds could be expedited by having them deposited
first to the Citibank concentration account. When asked, the
Citibank representative could not explain how the transfers were
thus expedited."
- In addition to moving funds from Mexico, the private bank also
performed other services for Mr. Salinas. In 1994, the private bank
issued him a loan of $3 million, secured by his deposits. The
private bank also provided bill payment services and credit cards.
In 1994, it activated a second shell company, Birchwood Heights,
Ltd. to hold real estate that Mr. Salinas had acquired in the U.S.
through another Bahamian PIC. In January 1995, the private bank
agreed to Mr. Salinas' request to transfer $5 million to an account
at Julius Baer Bank, "through another bank" to disguise
the origin of the funds. [CB023414] Citibank routed the funds first
through its own New York concentration account and then to Julius
Baer Bank's correspondent account at Chase Manhattan Bank in New
York. [CB023412-13.]
- Citibank has calculated it received over $2 million in fees
associated with the Salinas accounts, from 1992 to 1996. [CB021344]
Additional fees have accumulated since then.
- Due Diligence. In early February 1995, the Mexican press
reported that Mr. Salinas was under suspicion of being involved with
the murder of his former brother-in-law, Ruiz Massieu, a leading
Mexican politician. According to Ms. Elliott, in a meeting
previously scheduled to discuss other matters, she asked Mr. Salinas
about the allegation. He described it as politically motivated and
denied any involvement. On February 28, 1995, Mr. Salinas was
arrested and imprisoned in Mexico on suspicion of murder.
- On the day following the arrest, a number of telephone
conversations took place between private bank personnel in New York,
London and Switzerland. The telephone conversations to London were
recorded on an automatic taping system. The tape transcripts
indicate that the private bank's initial reaction to the arrest was
not to assist law enforcement, but to determine whether the Salinas
accounts should be moved to Switzerland to make discovery of the
assets and bank records more difficult. This suggestion was made by
the head of the private bank at the time, Hubertus Rukavina, and
discussed by several employees. It was not acted upon, apparently
because it was agreed that London bank records would disclose the
funds transfer to Switzerland. Private bank employees also tried to
determine whether to require immediate repayment of an outstanding
$3 million loan that had been made to Trocca, so that if the funds
in the Trocca accounts were frozen by authorities, Citibank funds
would not be at risk.
- Citibank transcripts indicate that after Mr. Salinas' arrest,
Citibank officials responsible for the account in Europe asked Ms.
Elliott to prepare a more detailed analysis of the origin of
client's funds so that they "could be more comfortable about
it." Ms. Elliot said that one step she took to comply with the
request was to review the client profile for the account in the
private bank's client database, known as the Client Account
Management System or CAMS. The private bank's due diligence policies
required private bankers to include information in the client
profile about the client's business background and source of wealth.
Ms. Elliott told the Subcommittee staff that when she reviewed the
Salinas profile, she discovered that in the three years the accounts
had been open in clear violation of bank policy she had never
completed the required information on his business background or
source of wealth. The profile was blank. She said she added the
information to the client profile on the day that she discovered the
omission, using the information that she had at hand.
- The absence of any information in the Salinas profile nearly three
years after the account had been established is striking because
during this same period, 1992 until 1995, top leadership in the
Western Hemisphere Division had sent numerous, strongly worded
memoranda urging, and ultimately ordering, its private bankers to
complete and update information on their client account profiles.
Several internal audits had specifically identified incomplete
client profiles as a problem. As the supervisor of the Mexican team
in New York, Ms. Elliott was responsible for implementing Division
policy and corrective action plans responding to audit findings.
- When Ms. Elliott filled out the client profile, she wrote that Mr.
Salinas was a civil engineer, a "member of the Mexican
political and social elite," and was "known to have owned
a construction company ... until some time late 1992 or early 1993,
and to have participated in major construction projects." Ms.
Elliott acknowledged to the Subcommittee staff that neither she nor
anyone else at the private bank had ever verified the existence of
the construction company or the projects it had handled. Ms. Elliott
said that Mr. Salinas had told her of a construction company he was
thinking of selling, and Mr. Hank had told her that the sale had
gone through and Mr. Salinas had "done very well." She
admitted, however, that she did not know the company's name, to whom
it was sold, when the sale took place, the amounts involved or the
profits realized nor had she made any effort to obtain that
information.
- On March 3, 1995, Ms. Elliott sent a memorandum to her Division
head, Mr. Montero, explaining "the basis for the acceptance of
this account, during 1992." [CB7178] The memorandum describes
her initial meeting with Mr. Salinas and Mr. Hank, and reports a
statement by Mr. Salinas that "he had several banking
relationships, including a 'sizeable account at a Swiss bank.'"
The memorandum notes that Mr. Salinas was the member of a prominent
Mexican family "known to be wealthy," had business
dealings with Mr. Hank, and was married to Paulina Castanon who was
"known to have received a large cash settlement after her
divorce." The memorandum makes no mention of a construction
company.
- In her interview with Subcommittee staff, Ms. Elliott indicated
that she listed the Salinas family wealth as a possible source of
the funds in the accounts, because Mexican families have a tradition
of bestowing some portion of the parents' wealth on their children,
and she thought that might have happened in this instance. However,
there is no evidence that she attempted to verify through Mr.
Salinas or by any other means that family funds were a source of the
funds in the Salinas accounts.
- Ms. Elliott told the Subcommittee staff that, in early 1995, her
superiors seemed satisfied with the way she had opened and managed
the Salinas accounts, but a decision was also made, due to the
arrest, to turn over management of the accounts to the private
bank's legal department.
- Closing the Account. According to Ms. Elliott, three to
four weeks after Mr. Salinas had been arrested, the issue was still
generating a great deal of publicity. Mr. Montero, Mr. Misan and the
private bank attorney for the Western Hemisphere Division, Sandra
Lopez Bird, informed Ms. Elliott they had decided to ask Ms. Salinas
to close the Salinas Citibank accounts and move the funds elsewhere.
They asked her to speak with Ms. Salinas about that matter. Although
Ms. Elliott initially resisted the decision, she eventually agreed
to speak to Ms. Salinas. However, Ms. Elliott did not discuss this
matter with Ms. Salinas until early October 1995.
- Ms. Elliott said that Ms. Salinas indicated during the October
conversation, which took place in Mexico, that she could not
transfer her funds to a certain Swiss bank, because that bank had
frozen her account and was not accepting additional funds. Ms.
Elliott said she reported this information to her superiors in New
York. On November 14, 1995, Ms. Salinas met with bank personnel in
Switzerland to begin the process of closing the Salinas accounts at
the private bank. According to a November 14, 1995 Confidas memo,
when Ms. Salinas met with Confidas staff to make plans to close the
accounts she informed Citibank personnel:
"[S]he had discussed this with Amy Elliott who
told her that because Citibank was a U.S. institution with a global
presence the Mexican government might more easily demand information
for political reasons under U.S.-Mexican treaties than with a non-
U.S. bank."
According to the memo, Ms. Salinas also denied that any funds had
been blocked by a Swiss bank; that authorities were alleging that
Mr. Salinas was involved in corruption; or that the Salinas funds
were in any other way allegedly involved in crime.
- Legal Proceedings. The next day, November 15th, Ms. Salinas
was arrested in Switzerland at Banque Pictet, where she and Raul
Salinas had approximately $84 million in accounts under the name
Juan Guillermo Gomez Gutierrez, a false identity Mr. Salinas had
used at that bank. On November 16th, Swiss police issued an order
freezing Salinas accounts at several Swiss banks, including
Citibank. Approximately $132 million was frozen, including about $27
million at the Citibank private bank offices in Switzerland. A
British court later froze the Salinas accounts in London.
- On November 17th, Citibank filed a Criminal Referral Form on Raul
Salinas and Paulina Castanon with U.S. law enforcement officials.
The form mentioned the Salinas accounts in New York which held less
than two hundred thousand dollars, but not the Trocca accounts in
London or Switzerland holding the bulk of the Salinas money then
nearly $50 million.
- On November 21st, in response to a request for information on the
Salinas accounts relayed by a Swiss colleague on behalf of
"requesting authorities" [CB009449], private bank
personnel in New York including Ms. Elliott, Mr. Misan, and Sandra
Lopez Bird reviewed the Salinas client profile and jointly redrafted
the information that Ms. Elliott had provided in March regarding Mr.
Salinas' source of wealth. The new description emphasized his
construction company, his family's wealth and cited Ms. Salinas'
divorce settlement. The document containing the edits was marked
"Attorney-Client privilege." [CB21433]
- Ms. Salinas was released from Swiss prison in December 1995. Ms.
Elliott said that Ms. Salinas telephoned her and spoke briefly about
the Salinas accounts, stating for the first time that some of the
funds had come from other individuals who had given Mr. Salinas
millions of dollars to invest on their behalf. Ms. Elliott indicated
to the Subcommittee staff that Mr. Salinas had never told her that;
it was inconsistent with her understanding of the sources of the
funds in the accounts; and it caused her concern about whether the
Salinases had been completely forthcoming about their funds.
- In October 1998, a Swiss federal court ordered civil forfeiture of
$114 million frozen in the Salinas accounts, as illegal proceeds
related to narcotics trafficking. The forfeiture order was based
upon a nonpublic report by the Swiss Attorney General, summarizing a
three-year investigation which concluded that Mr. Salinas had
received substantial funds from narcotics traffickers. In July 1999,
the highest Swiss court invalidated the seizure order on procedural
grounds, holding that the proceedings should have been brought by
local "cantonal authorities" rather than federal
authorities, like the Attorney General. The court also ordered the
Salinas funds to remain frozen, while Swiss cantonal authorities
considered further proceedings.
- In Mexico, in January 1999, after a lengthy trial, a court
convicted Mr. Salinas of murder. In July 1999, the murder conviction
was upheld on appeal. Two years earlier, in July 1997, another
Mexican court dismissed money laundering charges against Salinas, on
the grounds that no prior court ruling had determined that the $21
million in dispute had been illegally obtained. That dismissal was
upheld by an appeals court in May 1998. Mexican law enforcement
officials informed the Subcommittee staff that the Mexican
government has nearly completed its investigation into the sources
of Mr. Salinas' funds and plans to file charges of illicit
enrichment and money laundering against Mr. Salinas in the near
future.
- In the United States, the U.S. Attorney for the Southern District
of New York initiated an investigation into whether the Citibank
private bank or any of its employees should be charged with money
laundering in connection with the Salinas accounts. No indictments
have been brought, and the five-year statute of limitations may soon
bar any prosecution of these matters.
- The Issues
- The Salinas case history raises issues involving due diligence,
secrecy and the application of anti-money laundering controls to
accounts belonging to a public figure.
- Lack of Due Diligence. A private bank is obligated by law
to take steps to ensure that its clients do not involve the bank in
money laundering. To meet its anti-money laundering obligations, the
Citibank private bank has developed detailed policies and procedures
requiring its private bankers to conduct due diligence in opening
and managing client accounts. Ms. Elliott was asked to testify as an
expert government witness in a 1994 money laundering case about the
obligation of private bankers to obtain adequate information on
their clients. She testified that, "'[K]now your client,' at
least in our bank, is part of the culture. It's part of ... the way
you do things. It's part of the way you conduct yourself." She
also testified that it is an ongoing responsibility.
- In the Salinas matter, the private bank accepted Mr. Salinas as a
client without any specific review of his background and without
determining the source of the funds that would be deposited into his
accounts. Ms. Elliott admits that, in place of conducting a due
diligence review, she relied on the verbal reference provided by Mr.
Hank and her general knowledge of the reputation and wealth of the
Salinas family. She admits that she did not investigate Mr. Salinas'
employment, financial background, or assets.
- It also important to note that her superiors did not find fault
with her performance. No one asked her to find out more or to write
up what she knew until after Mr. Salinas had been arrested. The
suggestion of a Confidas employee in Switzerland to obtain a more
detailed reference and the approval of the EMEA Division head was
not acted upon. Instead, the Western Hemisphere Division head
approved opening the account on the scant information provided. Nor
did management realize that the Salinas client profile was missing
required background information for three years running, despite a
series of management initiatives to improve client profiles,
internal audits criticizing incomplete profiles, and a compliance
review which specifically identified Ms. Salinas' profile as being
incomplete.
- As Ms. Elliott acknowledged at the American Express trial, due
diligence requirements do not end when a decision is made to open an
account. They are an ongoing responsibility. The failure to perform
due diligence prior to opening the Salinas accounts was compounded
when Mr. Salinas began depositing tens of millions of dollars into
his shell company's offshore accounts, which quickly reached an
aggregate balance far above the $20 million account potential that
Citibank had projected in 1992. Just three weeks in 1993 saw $40
million in deposits, with more after that. The Subcommittee
investigation has determined that no one questioned Mr. Salinas
about the origin of these funds. Far from expressing concern or
questioning the source of the funds, Ms. Elliott wrote to her
colleagues in June 1993, that the Salinas account "is turning
into an exciting profitable one for us all[.] [M]any thanks for
making me look good." [CB022908.]
- Ms. Elliott was not alone in her inaction. There is no evidence
that other private bank personnel charged with monitoring client
accounts for suspicious transactions raised any questions about the
Salinas accounts. Our investigation has uncovered no other auditor
or compliance officer in Mexico, New York, London or Switzerland who
questioned the Salinas account activity in 1993 and 1994. The
individual in the New York office responsible for monitoring client
transactions told the Subcommittee staff that he was unaware of the
increase in the Salinas accounts at the time. Because the funds were
moved through the New York concentration account, the transactions
were not registered with any client account, effectively bypassing
the monitoring system in place.
- There is one document prepared in 1995, after the Swiss police had
frozen the Salinas funds, which suggests that one or more Citibank
employees in Mexico may have expressed concerns about the Salinas
transfers while they were going on. A draft memorandum prepared by
the financial controller in Citibank's Mexico City office, in
anticipation of a briefing of Mexican bank regulators on the Salinas
matter, states the following.
"To open an account for all of its clients,
Citibank requires a thorough Customer Profile which demonstrates the
client's personal data as well as his source of wealth. ...
Routinely the Officer [of Citibank N.Y.] would call and advise
Mexico that a transaction would be initiated. ... Mexico became
concerned about the frequency and size of the transactions. Mexico
was reassured by Citibank N.Y. that the 'Know your Customer'
guidelines were in place, had been followed, and that the volume of
the transactions were consistent with the client's profile. Given
this reassurance, it was concluded that the transactions were not of
a suspicious nature and that no issue existed."
- When questioned, neither the author of the memorandum nor others
could identify who called New York or who provided assurances about
the Salinas account. What is clear is that, at the time of the
transfers, little effort was expended to determine the source of the
millions of dollars flowing from Mexico to New York to London and
Switzerland. When questioned about his lack of intervention on this
matter, Mr. Misan, then the private bank's Mexico Country head,
stated that when he took his position his superiors, Mr. Figueiredo
and Mr. Montero, informed him that there were some Mexican client
accounts that he should not supervise. Mr. Misan told the
Subcommittee staff that, as a result, he did not supervise the
Salinas accounts.
- An added factor is that allegations of corruption involving Mr.
Salinas existed at the time. The chief executive officer of
Citicorp, John Reed, told Subcommittee staff of a conversation he
had with Mexican businessmen in 1993 or 1994 about Raul Salinas'
"inserting himself in local business deals
inappropriately" and potentially embarrassing his brother, then
president of Mexico. A 1992 press report in a Mexican publication
called El Pais, characterized Conasupo, the agency Mr. Salinas
headed, as an agency "sadly famous for its corruption,
including accusations of impropriety against Raul Salinas ... during
his period as a public official." An August 1993 article from a
California newspaper, the Sacramento Bee, reported unsubstantiated
rumors "flying in government circles and among the national
press that members of the Salinas family ... are taking advantage of
the president's office to build massive personal fortunes. ...
According to some of the stories, Salinas' siblings are involved in
a wide variety of unsavory business deals, peddling their influence,
using other people as phony fronts and generally throwing their
weight around in their commercial dealings. ... [O]ff the record,
such stories are the talk of the town."
- Private bank personnel uniformly told the Subcommittee staff that
they were unaware of such press reports and rumors until February
1995, when Ms. Elliott confronted Mr. Salinas about the murder
allegations and he was subsequently arrested. Whether or not the
private bank was aware of the allegations in this particular case,
the larger issue is what a private bank should do with such
information when it arrives. None of the private banks interviewed
by the Subcommittee staff, including Citibank, had standards
spelling out how negative media reports or indictments involving a
private bank client should be handled. The danger is the allegations
turn out to be correct, and a financial institution finds itself
having participated in transactions which in the Salinas case may
have involved large-scale money laundering.
- Secrecy. A second issue raised by the Salinas case history
involves how far a private bank should go in accommodating client
requests for secrecy. In the Salinas matter, the private bank not
only established a shell company with layers of disguised ownership,
but also permitted a third party using an alias to deposit funds
into the account, accepted multi-million dollar cashiers checks
without knowing the origin of the funds, and moved the funds out of
the country through a Citibank concentration account that hid the
origin and destination of the client's wire transfers. It is one
thing for a private bank to provide reasonable levels of
confidentiality; it is another for a private bank to provide the
means for an individual to deposit millions of dollars in Swiss
accounts in ways that even auditors would find difficult to detect.
When products and services are structured to satisfy a client's
demand for secrecy, they become much more vulnerable to money
laundering.
- The Salinas matter also highlights the tension that exists between
a bank's obligations to its clients and its obligations to combat
money laundering. After Mr. Salinas was arrested, Mr. Rukavina, the
head of the Citibank private bank at that time, suggested that the
Salinas accounts in London be transferred to Switzerland because
they would be afforded more secrecy there. Similarly, according to
Ms. Salinas, Ms. Elliott advised her that it might be wise to move
the Trocca accounts out of Citibank because it might be more
difficult for Mexican authorities to obtain account information from
a non-U.S. bank. A former Citibank private banker told the
Subcommittee staff that, after the Salinas incident, private bankers
in New York were instructed to review their client files and
"purge" information connecting the clients to offshore
PICs or trusts.
- After Mr. Salinas' arrest in February 1995, private bank officials
and attorneys restricted activities in the Trocca account, put it
under the control of the legal department, made a decision to
terminate the relationship and secured repayment of an outstanding
loan out of concern that the bank's funds would be at risk if a
government froze the assets in the accounts. Yet, it was not until
six months later after Ms. Salinas' arrest that Citibank filed a
criminal referral on the Salinas accounts. That referral made no
mention of the Trocca accounts, even though it was Trocca that held
almost all of the clients' assets and was the subject of all the
Citibank actions six months earlier.
- Anti-Money Laundering Controls and Public Figures. The
Salinas case history also raises questions about what steps a
private bank should take when the person asking the bank to move
millions of dollars to offshore accounts is a senior government
official or close relative.
- Citibank and other private banks have long taken the position that
senior government officials, politicians and other public figures
merit heightened scrutiny. Citibank's public figure policy requires
the approval of the private bank head to open an account and annual
reviews of account activity. Other private banks have established
even more specific standards for reviewing public figures. One
prohibits acceptance of a government official as a client unless the
official has "verifiable nonpolitical sources of income."
Another prohibits acceptance of any government official who wants to
"open accounts in jurisdictions outside their home
country."
- At each of the private banks interviewed by the Subcommittee
staff, when asked for an analysis of the Salinas matter, the
response was that the private bank should have begun asking tougher
questions when millions of dollars began flowing out of Mexico. The
consensus view was that corruption was a known problem in Mexico,
and Mr. Salinas' post as a government official for five years and
his relationship to his brother raised concerns that should have
been addressed.
- Citibank's current public figure policy includes close relatives
in the definition of a public figure, but in 1992, it was an open
question as to whether relatives were covered. In the Salinas
matter, some private bank documentation deemed him a public figure,
while other documentation did not. After his arrest, private bank
personnel discussed his status and determined he was not a public
figure by virtue of his relationship to Carlos Salinas. Apparently,
no one in the private bank then knew that Raul himself had held a
government post in Mexico.
- As a top official of Confidas remarked on the day that Mr. Salinas
was arrested:
- "What we need to be preparing to do is to say why we thought
it was okay to have the relationship with this customer when we knew
who the brother was. I mean, Amy Elliott can say all she wants that
the money came from, you know making roads in, in Mexico or
something like that but the big question is [going to] be why didn't
we think, or why didn't we question, or did, did, didn't we
care?"
- Pattern of Poor Account Management. Many of the actions
taken with respect to the Salinas account were the subject of
criticisms in audits of the private bank. For example, a 1996 audit
of private bank offices handling Latin American clients during 1995,
focusing primarily on the relationships managed and serviced in New
York, gave the offices an audit rating of "2" a failing
score. Acknowledging that the Latin American Account Offices were
the largest and most profitable segment of the private bank's
Western Hemisphere Division, the audit concluded that major
deficiencies "increase[d] the exposure to money laundering
schemes and internal fraud." Among the weaknesses discussed in
the audit were the following practices, all of which were employed
in the servicing of the Salinas account:
* "New clients are accepted before performing fundamental
KYC procedures." The office "continues to accept new
clients without complete identification and reference checks. As a
result, the Bank and individual employees are exposed to significant
civil penalties and criminal charges because customers attempting to
launder money may not be detected."
* Waivers [of KYC requirements] are granted too frequently."
* The Latin America office "does not effectively monitor the
transactions of all clients, especially those that may require
increased scrutiny because of political affiliations, cash-based
businesses or special name arrangements."
* "Confidentiality is behind use of the [concentration]
account. . .The use of the concentration account for this purpose is
inappropriate because of the heightened concerns over money
laundering."
- These audit findings suggest that Ms. Elliott's conduct in the
Salinas matter was far from unique. The 1996 audit concluded by
saying that "[It] seems the Unit's priority was to focus on
customer service, even when it meant internal controls would be
compromised. Recent discussions with employees in the unit indicate
this philosophy has not changed."
- (2) Asif Ali Zardari Case History
- The Facts
- The second case history involves Asif Ali Zardari, the husband of
Benazir Bhutto, former Prime Minister of Pakistan. Ms. Bhutto was
elected Prime Minister in 1988, dismissed by the President of
Pakistan in August 1990 for alleged corruption and inability to
maintain law and order, elected Prime Minister again in October
1993, and dismissed by the President again in November 1996. At
various times, Mr. Zardari served as Senator, Environment Minister
and Minister for Investment in the Bhutto government. Inbetween the
two Bhutto administrations, he was incarcerated in 1990 and 1991 on
charges of corruption; the charges were eventually dropped. During
Ms. Bhutto's second term there were increasing allegations of
corruption in her government, and a major target of those
allegations was Mr. Zardari. It has been reported that the
government of Pakistan claims that Ms. Bhutto and Mr. Zardari stole
over $1 billion from the country.
- During the period 1994 to1997, Citibank opened and maintained
three private bank accounts in Switzerland and a consumer account in
Dubai for three corporations under Mr. Zardari's control. There are
allegations that some of these accounts were used to disguise $10
million in kickbacks for a gold importing contract to Pakistan.
- Structure of Private Bank Relationship. Mr. Zardari's
relationship with Citibank began in October 1994, through the
services of Kamran Amouzegar, a private banker at Citibank private
bank in Switzerland, and Jens Schlegelmilch, a Swiss lawyer who was
the Bhutto family's attorney in Europe and close personal friend for
more than 20 years. According to Citibank, Mr. Schlegelmilch
represented to Mr. Amouzegar that he was working for the Dubai royal
family and he wanted to open some accounts at the Citibank branch
office in Dubai. Mr. Schlegelmilch had a Dubai residency permit and
a visa signed by a member of the Dubai royal family. Mr. Amouzegar
agreed to introduce Mr. Schlegelmilch to a banker in the Citibank
branch office in Dubai.
- According to Citicorp, Mr. Schlegelmilch told the Citibank Dubai
banker that he wanted to open an account in the name of M.S.
Capricorn Trading, a British Virgin Island PIC. The stated purpose
of the account was to receive money and transfer it to Switzerland.
The account was opened in early October 1994.
- According to Citibank, Mr. Schlegelmilch informed the Dubai banker
that he would serve as the representative of the account and the
signatory on the account. Under Dubai law, a bank is not required to
know an account's beneficial owner, only the signatory. Citibank
told the Subcommittee staff that Mr. Schlegelmilch did not reveal to
the Dubai banker that Mr. Zardari was the beneficial owner of the
PIC, and the account manager never asked him the identity of the
beneficial owner of the account. Instead, according to Citibank, she
assumed the beneficial owner of the account was the member of the
royal family who had signed Mr. Schlegelmilch 's visa. According to
Citibank, the account manager actually performed some due diligence
on the royal family member whom she believed to be the beneficial
owner of the account.
- Shortly after opening the account in Dubai, Mr. Schlegelmilch
signed a standard referral agreement with Citibank Switzerland
private bank guaranteeing him 20% of the first three years of client
net revenues earned by the bank from each client he referred to the
private bank .
- On February 27, 1995, Mr. Schlegelmilch, working with Mr.
Amouzegar, opened three accounts at the Citibank Switzerland private
bank. The accounts were opened in the name of M.S. Capricorn
Trading, which already had an account at Citibank's Dubai branch, as
well as Marvel and Bomer Finance, two other British Virgin Island
PICs established by Mr. Schlegelmilch, according to Citibank. Each
private bank account listed Mr. Schlegelmilch as the account contact
and signatory. Citibank informed the Subcommittee that the Swiss
Form A, a government-required beneficial owner identification form,
identified Mr. Zardari as the beneficial owner of each PIC.
- Lack of Due Diligence. The decision to allow Mr.
Schlegelmilch to open the three accounts on behalf of Mr. Zardari,
according to Citibank, involved officials at the highest levels of
the private bank. The officials were: (a) Mr. Amouzegar, the private
banker; (b) Deepak Sharma, then head of private bank operations in
Pakistan; (c) Phillipe Holderbeke, then head of private bank
operations in Switzerland (who became head of the Europe, Middle
East, Africa Division in February 1996); (d) Salim Raza, then head
of the EMEA Division of the private bank; and (e) Hubertus Rukavina,
then head of the Citibank private bank. Mr. Rukavina told the
Subcommittee staff that when he was asked about opening the Zardari
accounts, he did not make the decision to open them, but rather
directed that the matter be discussed with Mr. Sharma. According to
Mr. Rukavina, he never heard whether the accounts were ultimately
opened. Mr. Rukavina left the private bank in 1996 and left Citibank
in 1999.
- Citibank informed the Subcommittee staff that the private bank was
aware of the allegations of corruption against Mr. Zardari at the
time it opened the accounts in Switzerland. However, Citibank
reasoned that if the charges for which Mr. Zardari had been
incarcerated for two years had any merit, they would not have been
dropped. Bank officials also believed that the family wealth of Ms.
Bhutto and Mr. Zardari was large enough to support a large private
bank account, even though Citibank was not able to specify what
actions were taken to verify the amount and source of their wealth.
Citibank said that bank officials were also aware of the M.S.
Capricorn Trading account in Dubai, and they were comforted by the
fact that there had been no problems with that account. According to
Citibank, Mr. Amouzegar informed his superiors that Mr. Zardari was
the beneficial owner of the Capricorn account in Dubai when they
were considering the request to open the accounts in Switzerland.
Inexplicably, however, the Dubai account manager was apparently
still operating under the assumption that the beneficial owner of
the Dubai Capricorn account was a member of the Dubai royal family.
Subcommittee staff have been unable to determine whether Citibank
officials were unaware of or inattentive to the serious
inconsistency between Citibank Switzerland and Citibank Dubai with
respect to the Capricorn Trading account. Citibank also informed the
Subcommittee staff that bank officials had some concerns that if
they turned down the accounts, their actions may have implications
for the corporation's operations in Pakistan; however, they said
they never received any threats on that issue.
- Citibank told the Subcommittee staff the private bank decided to
allow Mr. Schlegelmilch to open the three accounts for Mr. Zardari
on the condition that the private bank would not be the primary
accounts for Mr. Zardari's assets and the accounts would function as
passive investment accounts. Citibank told the Subcommittee staff
that Mr. Holderbeke signed a memo delineating the restrictions
placed on the accounts, including a $40 million aggregate limit on
the size of the three accounts, and transaction restrictions
requiring the accounts to function as passive, stable investments,
without multiple transactions or funding pass-throughs. None of the
Citibank personnel interviewed by Subcommittee staff could identify
any other private bank account with these types of restrictions.
Other private banks interviewed by the Subcommittee staff were asked
if they had ever accepted a client on the condition that certain
restrictions be imposed on the account. The banks all said they had
not. One bank representative explained that if the bank felt that it
needed to place restrictions on the client's account, it didn't want
that type of client. The existence of the restrictions are in
themselves proof of the private bank's awareness of Mr. Zardari's
poor reputation and concerns regarding the sources of his wealth.
- Movement of Funds. Citibank told the Subcommittee staff
that, once opened, only three deposits were made into the M.S.
Capricorn Trading account in Dubai. Two deposits, totaling $10
million were made into the account almost immediately after it was
opened. Citibank records show that one $5 million deposit was made
on October 5,1994, and another was made on October 6, 1994. The
source of both deposits was A.R.Y. International Exchange, a company
owned by Abdul Razzak Yaqub, a Pakistani gold bullion trader living
in Dubai.
- According to the New York Times, in December 1994, the Bhutto
government awarded Mr. Razzak an exclusive gold import license. In
an interview with the New York Times, Mr. Razzak acknowledged that
he had used the exclusive license to import more than $500 million
worth of gold into Pakistan. Mr. Razzak denies, however, making any
payments to Mr. Zardari. Citibank could not explain the two $5
million payments. Ms. Bhutto told the Subcommittee staff that since
A.R.Y. International Exchange is a foreign exchange business, the
payments did not necessarily come from Mr. Razzak, but could have
come from a third party who was merely making use of A.R.Y.'s
exchange services. The staff invited Ms. Bhutto to provide
additional information on the M.S. Capricorn Trading accounts, but
she has not yet done so.
- On February 25, 1995, a third deposit of $8 million was made into
the Dubai M.S. Capricorn Trading account. Records show that the
payment was made through American Express, with the originator of
the account listed as "Morgan NYC." Citibank indicated it
does not know who Morgan NYC is, nor does it know the source of the
$8 million.
- All of the funds in the Dubai account of M.S. Capricorn Trading
were moved to the Swiss accounts in the Spring of 1995. On March 6,
1995, $8.1 million was transferred; and on May 5, 1995, another
$10.2 million was transferred. Both transfers involved U.S. dollars
and were routed through Citibank's New York offices. Citibank
informed the Subcommittee staff that M.S. Capricorn Trading closed
its Dubai account shortly after the last transfer was completed.
- Citibank has indicated that significant amounts of other funds
were also deposited into the Swiss accounts. As described below, the
$40 million cap was reached, and millions of additional dollars also
passed through those accounts. However, Swiss bank secrecy law has
prevented the Subcommittee from obtaining the details on the
transactions in the Zardari accounts.
- Account Monitoring. Citibank told the Subcommittee staff
that, in 1996, the Swiss office of the private bank conducted a
number of reviews of the Zardari Swiss accounts, finally deciding in
October to close them.
- The first review was allegedly in early 1996, triggered by
increasing publicity about allegations of corruption against Mr.
Zardari. Citibank told the Subcommittee staff that Messrs.
Holderbeke, Raza, Sharma and Amouzegar participated in the review,
and apparently concluded that the allegations were politically
motivated and that the accounts should remain open. The Subcommittee
staff was told that the review did not include looking at the
accounts' transaction activity.
- In March or April, 1996, Mr. Amouzegar asked that the overall
limit on the Zardari accounts be increased from $40 million to $60
million, apparently because the accounts had reached the previously
imposed limit of $40 million. Citibank told the Subcommittee staff
that Mr. Holderbeke considered the request, but declined to increase
the $40 million limit.
- In June, press reports in the United Kingdom that Mr. Zardari had
purchased real estate in London triggered still another review of
the Zardari accounts. Citibank private bank told the Subcommittee
staff that its Swiss office internally discussed the source of the
funds for the property purchase. Mr. Amouzegar and Mr. Raza then met
with Mr. Schlegelmilch, who allegedly informed them that funds had
been deposited into the Citibank accounts, transferred to another
PIC account outside of Citibank and used to purchase the property.
Mr. Schlegelmilch allegedly indicated the funds had come from the
sale of some sugar mills and were legitimate. Citibank told the
Subcommittee staff it is not sure if anyone at the private bank
attempted to validate the information about the sale of the sugar
mills. In addition, even though this account activity violated the
condition imposed by Citibank that the accounts were not to be used
as a pass through for funds, the accounts were kept open.
- Closing the Accounts. In July 1996, after Mr. Amouzegar
left the private bank to open his own company, another private
banker, Cedric Grant, took over management of the Zardari accounts.
Citibank told the Subcommittee staff that Mr. Grant began to review
the Zardari accounts about one month later to familiarize himself
with them. He also reviewed the transactions that had taken place
within the accounts.
- In September and October 1996, press accounts in Pakistan
repeatedly raised questions about corruption by Mr. Zardari and Ms.
Bhutto, as Ms. Bhutto's re-election campaign increased its
activities prior to a February election date. In September, Ms.
Bhutto's only surviving brother, Murtaza Bhutto, was assassinated,
and Ms. Bhutto's mother accused Ms. Bhutto and Mr. Zardari of
masterminding the murder, because the brother had been leading
opposition to Ms. Bhutto.
- In October, Mr. Grant completed his review of the Zardari accounts
and provided a written analysis to Messrs. Holderbeke, Sharma and
Raza, according to Citibank. Mr. Grant had found numerous violations
of the account restrictions imposed by Citibank, including multiple
transactions and funding pass-throughs. Citibank told the
Subcommittee staff that the accounts had functioned more as checking
accounts than passive investment accounts, directly contrary to the
private bank's restrictions. Apparently, well over $40 million had
flowed through the accounts, though Subcommittee staff were unable
to ascertain the actual amount because Swiss bank secrecy law
prohibits Citibank from sharing that information with the
Subcommittee. Citibank indicated that Mr. Amouzegar had either
ignored or did not pay attention to the account activity. Mr. Grant
recommended closing the accounts, and they were closed by January
1997.
- Legal Proceedings. On September 8, 1997, the Swiss
government issued orders freezing the Zardari and Bhutto accounts at
Citibank and three other banks in Switzerland at the request of the
Pakistani government. Since Citibank had closed its Zardari accounts
in January 1997, it took no action nor did it make any effort to
inform U.S. authorities of the accounts until late November 1997.
Citibank contacted the Federal Reserve and OCC about the Zardari
accounts in late November, in anticipation of a New York Times
article that eventually ran in January 1998, alleging that Mr.
Zardari had accepted bribes, and that he held Citibank accounts in
Dubai and Switzerland. On December 8 and 11, 1997, Citibank briefed
the OCC and the Federal Reserve, respectively, about the accounts
and the steps it had taken as a result of the Zardari matter. These
steps included: closing all of the accounts that had been referred
by Mr. Schlegelmilch to the private bank and terminating his
referral agreement; reviewing all of the accounts opened in the
Dubai office; and tightening up account opening procedures in Dubai,
including requiring the Dubai office to identify the beneficial
owner of all Dubai accounts. Citibank did not identify any changes
made or planned for the Swiss office, even though the majority of
the activity with respect to the Zardari accounts had taken place in
Switzerland.
- On December 5, 1997, Citibank prepared a Suspicious Activity
Report on the Zardari accounts and filed it with the Financial
Crimes Enforcement Network at the U.S. Department of Treasury. The
filing was made fourteen months after its decision to close the
Zardari accounts; thirteen months after Mr. Zardari was arrested a
second time for corruption in November 1996; and nearly two months
after the Swiss government had ordered four Swiss banks (including
Citibank Switzerland) to freeze all Zardari accounts.
- In June 1998, Switzerland indicted Mr. Schlegelmilch and two Swiss
businessmen, the former senior executive vice president of SGS and
the managing director of Cotecna, for money laundering in connection
with kickbacks paid by the Swiss companies for the award of a
government contract by Pakistan. In July 1998, Mr. Zardari was
indicted for violation of Swiss money laundering law in connection
with the same incident. Ms. Bhutto was indicted in Switzerland for
the same offense in August 1998. A trial on the charges is expected.
- In October 1998, Pakistan indicted Mr. Zardari and Ms. Bhutto for
accepting kickbacks from the two Swiss companies in exchange for the
award of a government contract. On April 15, 1999, after an 18-month
trial, Pakistan's Lahore High Court convicted Ms. Bhutto and Mr.
Zardari of accepting the kickbacks and sentenced them to 5 years in
prison, fined them $8.6 million and disqualified them from holding
public office. Ms. Bhutto, who now lives in London, denounced the
decision. Mr. Zardari remains in jail. Additional criminal charges
are pending against both in Pakistani courts.
- On December 11, 1997, Citicorp's Chairman John Reed wrote the
following to the Board of Directors:
"We have another issue with the husband of
Ex-Prime Minister Bhutto of Pakistan. I do not yet understand the
facts but I am inclined to think that we made a mistake. More reason
than ever to rework our Private Bank."
Mr. Reed told the Subcommittee staff that it was the combination
of the Salinas and Zardari accounts that made him charge Mr. Aziz,
the new private bank head, with taking a hard look at the bank's
public figure policy and public figure accounts.
- The Issues
- The Zardari case history raises issues involving due diligence,
secrecy and public figure accounts. The Zardari case history begins
with the Citibank Dubai branch's failure to identify the true
beneficial owner of the M.S. Capricorn Trading account. As a result,
the account officer in Dubai performed due diligence on an
individual who had no relationship to the account being opened. In
Switzerland, Citibank officials opened three private bank accounts
despite evidence of impropriety on the part of Mr. Zardari. In an
interview with Subcommittee staff, Citigroup Co- Chair John Reed
informed the Subcommittee staff that he had been advised by Citibank
officials in preparation for a trip to Pakistan in February 1994,
that there were troubling accusations concerning corruption
surrounding Mr. Zardari, that he should stay away from him, and that
he was not a man with whom the bank wanted to be associated. Yet one
year later, the private bank opened three accounts for Mr. Zardari
in Switzerland. Mr. Reed told the Subcommittee staff that when he
learned of the Zardari accounts he thought the account officer must
have been "an idiot."
- Citibank has been unable to confirm that bank employees verified
that Mr. Zardari had a level of wealth sufficient to support the
size of the accounts that he was opening. In addition, the Swiss
private banker took no action to validate the legitimacy of the
source of the funds that were deposited into the account. For
example, there was no effort made to verify the claims that some of
the funds derived from the sale of sugar mills.
- Citibank also performed no due diligence on the client owned and
managed PICs that were the named accountholders. Because the PICs
were client-created, the bank's failure to perform due diligence on
the PICs meant that it had no knowledge of the activities, assets or
entities involved with the corporations. One of the PICs, Bomer
Finance, has been determined to have been a repository for kickbacks
paid to Mr. Zardari, and those kickbacks tainted funds deposited at
the Geneva branch of Union Bank of Switzerland. Documentation has
not been made available to determine whether Bomer Finance also used
its Citibank account for illicit funds.
- Another due diligence lapse was the private bank's failure to
monitor the Zardari accounts to ensure that the account restrictions
imposed on them were being followed. When officials were presented
with evidence in 1996 that the restrictions were being violated,
they nevertheless allowed the accounts to continue.
- The Zardari accounts in Switzerland were opened one day before
Raul Salinas was arrested. The account was repeatedly reviewed in
1996, after the Salinas scandal became public. Yet there is no
evidence that anyone in the private bank had been sensitized to the
problems associated with handling an account of a person suspected
of corruption.
- The Zardari example also demonstrates the practical consequences
of secrecy in private banking. Citibank claims that its
decisionmaking in the Zardari matter cannot be fully explained or
documented, since all Citibank officials are subject to Swiss
secrecy laws prohibiting discussion of client-specific information.
In light of the fact that U.S. banks are supposed to oversee their
foreign branches and enforce U.S. law, including anti-money
laundering requirements, this inability to produce documentation
related to a troubling case again highlights the problems with U.S.
banks choosing to operate in secrecy jurisdictions.
- Pattern of Poor Account Management. The Zardari case
history took place during a series of critical internal and federal
audits between 1992 and 1997 of the Swiss office which, during most
of that time, served as the headquarters of the private bank. The
shortcomings identified in the audits included policies, procedures,
and problems that affected the management of the Zardari accounts.
They included:
* failure of the "corporate culture" in the Swiss
office to foster " 'a climate of integrity, ethical conduct and
prudent risk taking' by U.S. standards";
* inadequate due diligence;
* "less than acceptable internal controls";
* lack of oversight and control of third party referral agents
such as Schlegelmilch; and
* inadequate monitoring of accounts;
all of which resulted in "unacceptable" internal audit
ratings. In December 1995, the Swiss office received the lowest
audit score received by any office in the private bank during the
1990s. These audit scores indicate the office's poor handling of the
Zardari accounts was part of an ongoing pattern of poor account
management.
- (3) El Hadj Omar Bongo Case History
- The Facts
- The third case history involves El Hadj Omar Bongo, the elected
president of Gabon since 1967. President Bongo has been a client of
the Citibank private bank since 1970, although his accounts are now
in the process of being closed.
- Gabon is located on the west coast of Africa. It is a country
about the size of Colorado, with a population of over 1 million. It
is the third largest oil producing state in Africa. Gabon declared
its independence from France in 1960, but continues strong ties with
that country and has adopted French as its official language. El
Hadj Omar Bongo (then Albert Bernard Bongo) was first elected Vice
President in 1967. He assumed the office of Presidency later that
year, when the President died in office from illness. He has been
elected President of Gabon five times, in elections held in 1975,
1979, 1986, 1993 and 1998.
- Structure of the Private Bank Relationship. President Bongo
became a Citibank client in 1970. Over the years, he and his family
developed an extensive relationship with the Citibank private bank.
They have had multiple consumer and private bank accounts at
Citibank offices in Bahrain, Gabon, the Isle of Jersey, London,
Luxembourg, New York, Paris and Switzerland. These accounts have
included checking, money market, time deposit, and investment
accounts. Most of the private bank accounts managed out of New York
have been held in the name of Tendin Investments, Ltd., a Bahamian
shell corporation which Cititrust assigned to President Bongo in
1985. Certain private bank accounts managed in Paris have been held
in the name of a second shell corporation, Leontine, Ltd. In
addition, in 1995, the New York office opened a special name bank
account under the name "OS" a word which is simply the
title of the account and not a corporation or other legal entity.
- President Bongo's relationship with the private bank in the United
States began in 1985, when he transferred about $52 million from his
accounts at Citibank Bahrain to newly opened accounts in New York
for Tendin Investments. The total funds in the Tendin accounts have
since fluctuated over time from about $28 million to about $72
million, including withdrawals of about $67 million. President
Bongo's OS account has fluctuated over time from about $5 million
down to $1 million, and the Leontine accounts in Paris have had at
least $7.5 million. Additional accounts are in Switzerland; however,
the private bank has not provided any information about the account
totals due to Swiss secrecy laws. Altogether, the records reviewed
by the Subcommittee staff indicate that funds moving through the
Bongo private bank accounts since 1985 have exceeded $130 million.
- In addition to accounts with substantial deposits, President Bongo
has had an extensive credit relationship with the private bank. From
1989 until 1996, he obtained multiple loans from the private bank,
collateralized by his deposits. Documents indicate that many of
these loans were issued under a complex arrangement, in which the
private bank allowed President Bongo's accounts at Citibank Gabon to
incur multi-million dollar overdrafts, which were immediately
covered by transfers from Bongo accounts in Paris, which were in
turn covered by transfers from offshore accounts belonging to Tendin.
This three-step process may have been designed to avoid direct
transfers from the Tendin offshore accounts into the President's
accounts in Gabon, and minimize the chance that Gabon bank personnel
would learn the name of President Bongo's PIC.
- The private bank loans peaked in 1994 at about $50 million.
According to the credit approval documentation, the loan proceeds
were used for "local liquidity needs." Account
documentation in 1996 states that the loans were "used to
finance last reelection campaign," referring to President
Bongo's successful re-election to office in December 1993, but the
private banker who wrote that description has since said his remarks
were based on speculation rather than facts, and that he did not
have specific information on how the loan proceeds were used. In
1995, President Bongo began repaying the loans, completing repayment
in 1996 with a final transfer of $31 million. In 1997 and 1998,
credit reports indicated an outstanding loan balance of just $1
million.
- In addition to providing President Bongo with multi-million dollar
loans, the private bank in New York performed other services for him
and his family. These services included, for example, converting a
1995 wire transfer for $1.6 million into cash which the Bongo family
used during a visit to New York in connection with a celebration of
the United Nations' 50th anniversary. On another occasion, the
private bank cashed a $69,000 check for the President's daughter and
wired the funds to her in Gabon to enable her to avoid a three-week
delay that would have resulted if she had presented the check to
Citibank in Gabon. On still another occasion, the private bank
allowed a cash withdrawal of $100,000 to a third party whom the
private bank was told would be bringing the funds to the President's
son.
- The documentation indicates that, in return for these and other
services, the Bongo account generated substantial fees for the
private bank. One document indicates that client net revenue
exceeded $1 million per year. [X4318] A client profile prepared in
London describes the Bongo accounts as an "[e]xtremely
profitable relationship for the [private bank] and other centres."
[X6303]
- The Relationship Managers. Since 1985, the New York office
has been the primary private bank unit handling the Bongo accounts.
Since 1992, the primary account manager has been Alain Ober, the
only private banker in New York specializing in clients from Africa.
Mr. Ober manages about 100 clients altogether; the Bongo accounts
are his largest relationship. His predecessor on the Bongo accounts
was William Owen.
- Mr. Ober's immediate supervisor until 1995 was Salvatore Mollica,
and then Muwaffak Bibi. Mr. Ober told the Subcommittee staff that he
also reviewed the account at least once per year in person with the
Western Hemisphere Division head in New York, Edward Montero. Mr.
Montero, however, told the Subcommittee staff that he was unfamiliar
with the account.
- Another key Citibank employee handling the Bongo accounts is
Christopher Rogers, a longtime private bank employee specializing in
Africa. Mr. Rogers was employed in Paris until last year and now
works for Citibank in South Africa.
- Secrecy. The documentation indicates that President Bongo
requested and his private bankers provided secrecy in its handling
of his accounts. For example, the account documentation states in a
section entitled, "Operational Considerations/ Cautions":
"Secrecy is v[e]ry important." [X2454] In 1995, President
Bongo requested and the private bank proposed a code to describe his
account transactions, based upon the phrases "NEW YORK
USA" and "Fort Knox Securities" [X2374], although it
is unclear whether this code was used. An internal email dated
August 30, 1990, from a Citibank private bank official in Africa
states that he does "not have any problems with the large
deposits held in New York by J1 [referring to President Bongo],
providing information concerning them is kept completely
confidential." [770]
- Secrecy was provided in part through the private bank's standard
practice of establishing client accounts in another name, here the
shell corporations, Tendin and Leontine, and the special name
account, OS. Loans were also issued with precautions to ensure
secrecy. In 1986, for example, a document recommending a loan to
President Bongo states, "This is a highly confidential
transaction given the identity of the borrower. It is therefore
recommended that this package not be circulated as usual by the
Credit Department, but directly reviewed by" certain senior
private bank personnel. The document goes on:
"The only risk really associated with this credit
is the so-called 'political' one, i.e. the supposedly negative
consequences which may result from a public knowledge of the credit
transactions. ... A stigma is more likely to be attached to the
large deposits the client has with us overseas if this were to be
known. A credit relationship does not have the same impact. ... [T]he
U.S. press would give political disturbances very limited
coverage." [851]
Loans issued from 1989 through 1994 also incorporated secrecy
protections by using a Citibank Gabon overdraft facility to make the
loans and routing repayment through two offshore accounts.
- Due Diligence and Account Monitoring. These and other
arrangements kept knowledge of the Bongo accounts within a small
circle in the private bank, until a 1996 inquiry by the Federal
Reserve Bank of New York in connection with its review of the
private banking industry in the United States.
- One goal of the Federal Reserve's industry review was to determine
how private banks monitor client accounts for suspicious activity.
In the case of Citibank, the private bank gave the examiners a
"Sensitivity Hot Sheet" listing more than 80 accounts
which the staff had flagged for additional analysis. The examiners
selected 10 accounts from the list for further review, including a
Tendin Investments account.
- The Sensitivity Hot Sheet stated that the Tendin account had been
added to the list in March 1996 due to "Large amounts of Wire
Transfers In and Out of account." On October 21, 1996, a
private bank compliance officer had sent a memorandum to the private
banker, Mr. Ober, asking about the "unusual wire transfer
activity." An 8-page document forming the basis for the inquiry
showed that, in less than 6 months, from March until August 1996,
about $49 million had been deposited into and $51 million withdrawn
from two Tendin accounts in New York. On December 4, 1996, Mr. Ober
provided a handwritten response explaining that the wire transfers
occurred in connection with a $31 million loan payoff which then
triggered a liquidation of "various portfolios" and a
complete restructuring of the "client's overall
portfolio."
- The Federal Reserve examiners noted that five weeks had elapsed
between the compliance inquiry and Mr. Ober's response, observing,
"It does not appear that responding to these requests is a
priority for the private bankers." The examiners also took a
closer look at Tendin's beneficial owner, President Bongo,
evaluating the bank's due diligence efforts, specific account
transactions, and loans.
- The client profile at the time, dated August 12, 1996, provided
the following explanation of President Bongo's business background
and source of wealth:
"Head of State for over 25 Years ... Source of
Wealth/business Background: Self-made as a result of position.
Country is oil producer." [x2448; converted from all capitals
in original text]
In separate interviews with the Subcommittee staff, the private
banker, his immediate supervisor, and a Division head acknowledged
that this description was wholly inadequate, and could not explain
why this profile had not been improved by 1996, given the private
bank's heightened awareness of due diligence requirements after the
Salinas scandal.
- The Federal Reserve examiners were also dissatisfied. When the
examiners requested more information about the source of the
original $52 million deposit, Mr. Ober sent the following email
dated December 10, 1996, to his colleague, Mr. Rogers:
"[T]he Federal Examiners are auditing the Tendin
Account. ... [T]here is one major issue which remains unresolved
.... You may remember that this account was opened in 1985 at [the
private bank in New York] with $52MM coming from a time deposit at
Citibank Bahrain which was opened by Citibank Libreville on behalf
of our client. ... Bill indicated that the $52MM were accumulated
over several years at the Branch at the time you were there. Neither
Bill nor myself ever asked our client where this money came from. My
guess, as well as Bill's is that ... the French Government/French
oil companies (Elf) made "donations" to him (very much
like we give to PACs in the US!). ... [D]o you remember specifically
were [the monies] came from ...?" [X2283]
Mr. Ober told the Subcommittee staff that he could not recall Mr.
Rogers' response. Citibank later found a copy of the email Mr.
Rogers sent in response on December 11, 1996. It stated in part:
"Gabon resembles a Gulf Emirate in that Oil ...
accounts for 95 pct of revenues for a population of less than 1
million. It is clear therefore that Tendin Investments draws most of
its wealth from oil, but we have no way of being more
specific."
- The Federal Reserve examiners concluded that they "were not
satisfied with the explanation of the source of wealth/funds and the
use of loan proceeds." They also noted a comment by the private
bank's legal counsel who said that, in the summer of 1996,
"Citibank had consider[ed] ending the relationship ... but they
were concerned for the safety of the country officer in [Gabon], so
the account remains open."
- OCC Inquiry. In February 1997, the Federal Reserve alerted
Citibank's primary regulator, the Office of the Comptroller of the
Currency (OCC), to its concerns about the Bongo accounts. The OCC
followed with a 4-month, in-depth review. The OCC examiner told the
Subcommittee staff that, after collecting account documentation, he
prepared a list of specific transactions and issues he wanted to
discuss and scheduled a meeting at Citibank for April 10, 1997.
- By then, the client profile for the Bongo accounts had been
revised. The new profile contained the following description of
President Bongo's business background and source of wealth:
"Self-made[.] President of African oil producing
country for 30 years. Wealth created as a result of position and
connection to French oil companies (Elf) since country is major oil
[supplier] to France. Wealth invested in real estate locally and in
financial instruments overseas. It is believed that subject through
affiliated [entities] retains ownership in many oil related ventures
in the country which over the past 30 years resulted in significant
accumulation of wealth estimated at $200MM." [x4328; converted
from all capitals in original text]
The OCC examiner told the Subcommittee staff that a preliminary
review of the accounts indicated that the private bank had virtually
no supporting documentation for this description of President
Bongo's financial background. He said, for example, that the private
bank had no documentation of the President's oil interests and no
information on either the oil companies involved or the nature of
the President's dealings in the industry. He told the Subcommittee
staff that, prior to the April 10th meeting, he had informed the
private bank that a key concern was for them to provide appropriate
documentation for the source of the funds in the accounts.
- Two documents indicate the private bank's efforts to respond to
the OCC. The first is a 3-page email dated April 9, 1997, the day
before the OCC meeting. [X4315] It is an email from Mr. Rogers to
Mr. Ober and four other persons in the private bank entitled, "Tendin
cash flow." The email describes "a lengthy meeting"
that Mr. Rogers had "with a senior Gabonese civil servant, a
consultant to the President." In it, Mr. Rogers states, "I
was pretty direct in my probing and the answers I received, although
not comprehensive, give a better picture of Gabonese public finances
as they relate to the Presidency."
- The email then addresses two topics, "Official State
Budget" and "Oil Receipts." With respect to the Gabon
budget, the email states:
"Every year, an overall allocation, loosely
referred to as 'security' or 'political' funds, is voted into the
budget across the operating and investment categories. Although not
spelled out for obvious reasons, these funds are understood to be
used at the discretion of the Presidency."
It then lists four budget categories in the 1995 Gabon budget,
totaling $111 million or 8.5% of the overall budget for the year.
The second part of the email discusses Gabon's 1995 oil receipts. It
refers to Elf Gabon, which is a subsidiary of the largest oil
company in France, Elf Aquitaine. The email states that Elf Gabon is
"the largest company in Gabon" and "is 58% owned by
Elf parent, 25% by the Republic of Gabon ... and 17% by private
investors, ... which almost certainly [includes] President Bongo.
... I will try and obtain more information on the President's equity
holding in the company."
- The second document is dated April 11, 1997, the day after the OCC
meeting on the Bongo accounts. [X6694] It is a one-page memorandum
to the file by Mr. Ober referencing the Tendin accounts. It states
the following:
"Christopher L. Rogers, our African marketing
head based in Paris, recently had a meeting with a very high ranking
government official of our client's country. ... The main purpose of
the meeting was to determine the amount of funds put at our client's
disposal in the national budget of his country."
The memorandum states that certain funds "are understood to
be used at the discretion of our client," and then lists the
same four Gabon budget categories in the April 9th Rogers email, and
the same total of $111 million, "representing 8.5%" of the
[Gabon] Budget for1995." It states that "[w]e can assume
the same level of allocations exist in the 1996 Budget ... and the
1997 Budget." A later version of this memorandum, dated April
14, 1997, was given by the private bank to the OCC. [693] The
wording is almost identical to the April 11th version, except that
it characterizes the $111 million in the 1995 Gabon budget as funds
which "are at the disposal of the Presidency, without any
limitation."
- The plain meaning of these documents is that the private bank was
identifying Gabon government funds as a primary source of the funds
in the Bongo accounts. The OCC examiner told the Subcommittee staff
that was his understanding from the April 10th meeting and the April
1997 memorandum. He told the Subcommittee staff that he accepted the
information as accurate, because it was his understanding that
President Bongo had "carte blanche" authority over
government revenues. He also told the Subcommittee staff that,
because the $111 million in Gabon government funds was sufficient to
account for all of the monies in the Bongo accounts, he did not
press the private bank to obtain documentation of the President's
oil interests or determine the source of particular deposits, such
as $5 million paid into the OS account during 1995, and $21.9
million paid into the Tendin accounts in 1997.
- On June 18, 1997, after consulting with senior OCC officials, the
OCC examiner completed a memorandum describing his review of the
Bongo accounts and concluding that the Citibank private bank had
corrected certain deficiencies in its handling of the accounts and
was not required to file a Suspicious Activity Report. The
memorandum includes the following statements:
"We agree with the [Federal Reserve] that no
documents exist to detail the wealth source or future wealth
expectations. ... [P]resent KYC expectations strongly encourage
banks to complete a thorough analysis of clients, including
documenting their attempts to find out the original source of
wealth. ... Mr. Ober states that President Bongo does not provide
sufficient information to identify the source of wealth except to
say it is from his position as Head of State and revenues from oil
businesses. However, as a proxy for source of wealth, Citibank -
Paris performed an analysis of Gabon's last published budget (1995)
and found that President Bongo had approximately $111 million, or
8.5% of the total 1995 budget of Gabon, at his disposal. It is the
understanding of bank management that these funds are available to
the Presidency, without limitation. According to Mr. Ober, President
Bongo has substantial oil interests in Gabon and other African
countries. When combined, these factors serve as support for the
source of Tendin Investments funds."
The memo concludes:
"Based on our review of the information in all
related files and interviews with Mr. Ober, we conclude that this
relationship and related transactions do not meet the level of
suspicion expected for filing a Suspicious Transaction Report
because of the following reasons: President Bongo receives 8.5% of
Gabon's annual budget for the Presidency's unrestricted use. In
1995, that totaled $111 million. ... Based on the interview with Mr.
Ober, the transactions conducted through Citibank NA are the sort of
transactions that the customer has historically been making and are
normal for the Head of State of an African country."
Although this memorandum was not shown to the private bank, the
OCC examiner met with the private bank's top compliance officer and
legal counsel and conveyed its conclusions.
- In separate interviews conducted by the Subcommittee staff, Mr.
Ober and the OCC examiner each stated that he did not attempt to
verify the information provided about the Gabon budget in the April
9th Rogers email. Mr. Ober told the Subcommittee staff that he did
not see the 1995 Gabon budget papers, speak directly with the Gabon
government official, or ask President Bongo about the information to
confirm its accuracy. The OCC examiner told the Subcommittee staff
that he did not speak directly with Mr. Rogers or the Gabon
official, or request the 1995 Gabon budget documents. The OCC
examiner pointed out that no regulations currently spell out the
types of documentation banks must obtain to establish the source of
funds in a client's account. He explained that his responsibility
was to ensure that a bank was taking reasonable steps and had
adequate systems and procedures in place to evaluate their clients,
monitor their accounts, and report suspicious activity. He said
that, with respect to the particular documents in the Bongo
accounts, it was not his responsibility to "validate"
them, but instead to ensure the documents were on file so that, if
questions arose about the account, others could evaluate them.
- The Subcommittee staff did attempt to verify the information
provided to the OCC. After obtaining copies of the 1995, 1996 and
1997 Gabon budgets, the Subcommittee staff met with Gabon budget
experts from the International Monetary Fund (IMF). In addition, a
Library of Congress expert on African law evaluated the budget
documents and spoke with Gabon budget experts from World Bank.
- The Gabon budget experts at the IMF and World Bank were unanimous
in their rejection of the assertion that President Bongo received
$111 million or 8.5% of the 1995 Gabon budget for his personal use,
or received similar amounts in 1996 and 1997. The Gabon budget
experts indicated that no recent Gabon budget authorizes the Gabon
President to make personal use of government funds. Further, they
said that the four budget categories allegedly set aside for the
President's personal use refer to general budget categories
responsible for funding a wide range of expenses associated with the
Gabon Presidency and other governmental bodies. They indicated that,
with respect to the Presidency, only about $13 million was allocated
to pay for expenses related to the Presidency, such as expenses
associated with the Cabinet, Presidential staff, and operation of
the Presidential offices. They indicated that, as a practical
matter, these staff and operational expenses had to be and were paid
for with budgeted funds in 1995, 1996 and 1997, so that it was
implausible to suggest that the funds were wholly diverted for the
President's personal use.
- The Gabon budget experts indicated that, if anyone had attempted
to verify the budget items, they should have easily been able to
determine that the assertion that these budget items openly
authorized a $111 million set-aside for the President's personal use
was inaccurate, implausible, and plainly contrary to Gabon's budget
policy and actual spending.
- The IMF Gabon budget experts also told the Subcommittee staff
that, during 1997 and 1998, the Gabon government engaged in
extensive "extrabudgetary expenditures" on items not
specified in Gabon's enacted budgets. They said that these
expenditures exceeded 136 CFA (the currency used in Gabon) or about
$62 million. They said that, as a result, the IMF had stopped
authorizing loan disbursements to Gabon in October 1998. The IMF
indicated that an independent accounting of Gabon's actual budget
expenditures in 1997 and 1998 is now underway, and that no
additional loan disbursements would be made until the existing
budget questions were resolved.
- In addition to obtaining this information about the Gabon budget,
the Subcommittee staff interviewed Mr. Ober about the memorandum he
authored in 1997. When asked whether he had determined that Gabon
government funds were a primary source for the funds in the Bongo
accounts, Mr. Ober said that he had "never made that
determination." Mr. Ober maintained this position despite 1997
and 1998 client profiles he drafted which list government funds as
one of President Bongo's "Sources of Wealth": "As
Head of State, in excess of US$100mm of the state budget (=8%) are
put at OB's disposal on a yearly basis to cover all expenses related
to the Presidency." [X6302; X6698]
- When asked, if not government funds, what the source of funding
was, Mr. Ober said that the funds in the Bongo accounts derived
primarily from the $52 million deposit made in 1985. When asked
about those funds, Mr. Ober said the deposit took place before he
was employed by the private bank, the funds had been with the bank
for many years, and since the private bank was
"comfortable" with the funds, he was comfortable with
them. He told the Subcommittee staff that he did not ask President
Bongo directly where the funds came from "for reasons of
etiquette and protocol" and because he was "not sure what
the reaction would have been."
- Multi-Million Dollar Deposits. When asked about deposits
made while he was managing the accounts, including $5 million
deposited into the OS account in 1995, $3 million deposited into the
Tendin accounts in 1996, and $21.9 million deposited into the Tendin
accounts in 1997, Mr. Ober told the Subcommittee staff he had little
specific information about the funds, other than that they were
related to President Bongo's oil interests. The Subcommittee staff
found Mr. Ober's lack of information with respect to these deposits
troubling, since they were made on his watch, during the time he had
primary responsibility for monitoring the account activity. The
deposits totaled almost $30 million over three years.
- The $5 million deposit was made in 1995, to President Bongo's
newly opened special name account, OS. Mr. Ober indicated that this
account had been set up for the express purpose of receiving
payments from oil companies, and that President Bongo had made his
chief oil adviser, Samuel Dossou, a signatory with power of attorney
over the account. Oil revenues are a particularly sensitive matter
in Gabon, because oil revenues provide the largest source of
government funds, and there are longstanding rumors of government
corruption involving the oil industry, including government
officials' diverting oil revenues from the public treasury and
receiving bribes from oil companies. For these reasons, the
secretive name of the OS account, its intended use as an account to
receive oil company payments, and involvement of the President's oil
advisor all raise questions about why the private bank did not take
additional steps to review the source and nature of the deposits.
The timing of the OS account is also noteworthy, because it opened
in late 1995, around the same time that the IMF completed a new loan
agreement with Gabon imposing new restrictions on oil revenues and
greater accounting controls.
- Mr. Ober's lack of information about the 1996 deposits of $3
million and 1997 deposits of $21.9 million deposits is even more
troubling. These deposits were made about six months after President
Bongo had paid off his private bank loans with $31 million drawn
from his accounts, and the Tendin account totals dropped to a
10-year low of $28 million. Mr. Ober told the OCC and the
Subcommittee staff that President Bongo resolved to
"replenish" the Tendin accounts. Bank records indicate the
President started to do so in the fourth quarter of 1996, with the
$3 million in deposits, followed by the deposits of $21.9 million
during the first quarter of 1997.
- Mr. Ober told the Subcommittee staff during his interview that he
could not provide specific information about these deposits, even
when shown an email he sent on February 26, 1997, indicating that
three recent deposits into the Tendin accounts, for $12 million, $3
million and $5 million, were "proceeds from the sale of some
investments in the oil business in South Africa." [X4314] Mr.
Ober stated that he could not recall, and did not think he ever
knew, the particular oil companies involved, the nature of the
investments in South Africa, the transactions involved, or why there
were three payments of varying amounts.
- Subsequent to his interview, Citibank provided the Subcommittee
with additional documents related to these deposits. One set of
documents involves a $1.9 million deposit made in December 1996
through a wire transfer from the State Treasurer of Gabon. [X7063]
When asked to confirm the source of the funds, a Gabon Citibank
employee stated in a December 26, 1996 email: "Funds have come
from the state treasury. The treasurer called me to advise that the
payment is by order of the 'patron.'" On January 7, 1997 Mr.
Ober sent an email to the Cititrust trust officer in the Bahamas
administering Tendin's accounts, stating: "On 12-24-96, we
received a transfer for $1,886,792.45 for Tendin (by order of the
State Treasury via Citibank Gabon). Thus, we must invest this amount
...." [X7064]
- About one month later, in emails dated February 18 and 19, 1997,
Mr. Ober informed his colleagues, including the Bahamas trust
officer, that he had returned from a visit with President Bongo in
Africa with an additional $15 million to invest. [X7065] The emails
indicated that the funds had been wire transferred from three Swiss
banks at the direction of President Bongo's oil advisor, Samuel
Dossou, and "the money comes from the sale of investments in
South Africa in the oil sector." These were the investments
about which Mr. Ober had no specific information.
- Two weeks later, apparently after learning that none of the
recently received funds had been invested, Mr. Ober sent the Bahamas
trust officer a lengthy fax which included the following statements:
"This is a follow up to our phone conversation of
today during which you indicated that you were unable to send me
instructions to invest the $15.3 MM for Tendin since the Trust
company has compliance concerns with these funds. ... If you want to
return the funds, the sooner the better ... I am also amazed that
your office has problems with the 12/96 $1.9MM received from the
State Treasury of our client's country. No one so far has expressed
any concerns to me about it. ... [T]he Federal Examiners earlier
this year ... had no problem ... (neither do I). .... Mr. Muwaffak
Bibi (head of EMEA in NY) [and] Mr. Salim Raza, head of PBG Emerging
markets (including Africa) ... are satisfied with the source of
these monies. ... Please send me your instructions ASAP."
By the end of March 1997, $21.9 million had been invested on
Tendin's behalf.
- Mr. Ober's internal struggle to invest the $21.9 million took
place during the same month that the OCC initiated its review of the
Bongo accounts. The questions that the bank's own trust and
compliance personnel raised about the source of funds were repeated
by the OCC examiner, who apparently was not told of the compliance
concerns being raised within the bank. The OCC examiner told the
Subcommittee staff that he requested but never learned the source of
the $20 million increase in the Bongo accounts in 1997. He said that
he finally decided not to press the private bank about the deposits
because it had already identified sufficient government funds to
explain all of the monies in the Tendin accounts.
- French Criminal Investigation. The compliance concerns in
early 1997 over the $21.9 million in deposits were not the only
development affecting the Bongo accounts during the OCC review. In
April 1997, a number of articles appeared in the press describing an
unfolding criminal investigation by French authorities into
corruption allegations involving the French oil company, Elf
Aquitaine, and its subsidiary Elf Gabon, over bribes to government
officials.
- In April 1997, five articles in the major French paper, Le Monde,
raised questions about President Bongo's role in the scandal. One
headline stated: "Omar Bongo Could be Implicated in the Elf
Affair." Among other allegations, the articles reported that
two Swiss bank accounts containing millions of dollars in allegedly
improper payments by Elf had been frozen by Swiss authorities at the
request of French criminal investigators. One account was in the
name of a shell corporation called Kourtas Investment, while the
other was a special name account called Colette both were linked to
President Bongo through his oil advisor Samuel Dossou. The articles
also reported that President Bongo had sent an angry letter to
French President Jacques Chirac on March 18, 1997; telephoned him
late at night on March 29th; and canceled a state visit to France
planned for April, to protest the ongoing criminal probe. Other
major papers carried similar articles, such as the April 8th article
in the London Guardian entitled, "Gabon Chief Threatens Oil
Deals After Fraud Charges." On August 6, 1997, Le Monde
reported that the Swiss prosecutor defending the freeze on the
Kourtas account declared in open court that President Bongo was
"the head of an association of criminals."
- Mr. Ober told the Subcommittee staff that he was aware of the Le
Monde articles and the allegations against President Bongo, but said
that because his colleagues in Gabon expressed doubt about their
credibility, he did not attempt to find out more and did not discuss
the matter with his supervisors. However, subsequent to this
interview, Citibank provided the Subcommittee with a copy of an
April 28, 1997 email from Mr. Rogers, head of the private bank's
African market, to Mr. Ober and several supervisors in the private
bank about the press coverage. Mr. Rogers wrote:
"[Francois] Herve [then head of the Paris office]
and I feel quite strongly that all of us need to be very thoughtful
and selective about the press coverage we choose to interpret and
share about our top customers. In the case at hand, the information
which has come to light recently is part of an ongoing controversy
which stretches back well into last year, and which largely
transcends the sole question of our customer's personal and
financial dealings. I am unable to interpret the current press
allegations insofar as they might touch upon the Bank but would not
be tempted to try because of the doubts it could raise in people's
minds about our own relationship with our customer. ... [W]e ought
to be extremely careful about sharing such information with
regulatory authorities, because we can't answer for it. ... [W]e
should stay as far away as possible from this mess, unless and until
any one of us has firm or verifiable evidence which would lead us to
suspect the Bank's interests are at risk." [X7054-55; emphasis
added]
This email was also forwarded to the private bank's legal
counsel. [X7076]
- In addition, without Mr. Ober's knowledge or participation,
someone determined that the head of the private bank should be made
aware of the articles and allegations. Documents prepared for an
October 1997 annual review by the private bank head of public figure
accounts in the EMEA Division, state in the entry for President
Bongo: "Newspaper reports 4/1997 claim he has accepted bribes
from ELF-Aquitaine." [CS1889]
- 1997 Public Figure Review. President Bongo's accounts were
formally reviewed in October 1997, through the annual public figure
review process, by Mr. Aziz, then head of the private bank. The
decision was to leave them open. This decision was made despite the
private bank's awareness of the bribery allegations and criminal
probe, despite the criminal probe's focus on suspect funds in bank
accounts linked to President Bongo through his oil advisor Mr.
Dossou in arrangements mirroring the OS account, and despite bank
regulators' expressing concerns about the Bongo accounts. The
Subcommittee's investigation indicates that no one in the private
bank asked, in connection with the 1997 review, any questions about
the $21.9 million, the largest payment into the Bongo accounts in
ten years. No one asked questions even though Mr. Ober had let it be
known through his February emails that the money related to
President Bongo's dealings in oil, the very subject of the criminal
probes.
- The accounts were also left open throughout 1998, despite a
renewed focus in the private bank on public figure accounts and
continued press reports on President Bongo's frozen bank accounts in
Switzerland, including a third account in the name of Davenport
Associated SA, again linked to President Bongo through Mr. Dossou,
and again frozen by Swiss authorities at the request of the French.
In January 1998, an internal quality assurance review of the Bongo
client profile determined that additional information was needed on
the source of the funds in the accounts. [X2478,3415] Mr. Ober told
the Subcommittee staff that he revised the profile in response to
the quality assurance requests. In addition to referencing Gabon
government funds and oil interests, including shares in Elf Gabon,
the profile was revised to include references to President Bongo's
ownership of real estate in Gabon and France, and ownership of
shares in a French bank, car dealership, and salt and rice
distribution companies. Mr. Ober told the Subcommittee that he did
not obtain this information directly from the client, but from
public sources and other Citibank offices doing business with
President Bongo. There is no evidence in the account documentation,
however, that any of the funds in the Bongo accounts at the Citibank
private bank actually came from real estate investments or the named
businesses.
- Closing the Accounts. In late 1998, the private bank head
began an intensive review of all of the public figure accounts at
the private bank. Accounts which had passed muster for years began
to be questioned. The private bank compliance head told the
Subcommittee staff that the Bongo accounts were the subject of
several discussions in late 1998.
- Subsequent to the interviews provided by the private bank staff,
Citibank provided a copy of a November 6, 1998 email from
Christopher Rogers to Salim Raza and others warning of the
consequences of closing the Bongo accounts. [X7045] Mr. Rogers
wrote:
"We ought to ensure that we face this issue and
its possible implications with our eyes wide open. Whatever internal
considerations we satisfy, the marketing fallout is likely to be
serious. ... Sam [Dossou] gets his marching orders from Tendin. ...
Tendin has been vitally instrumental in our franchise's success over
the years. ... Sam helped the Branch considerably over the last two
years to obtain a more reasonable and rightful share of public
sector deposits, with Tendin's blessing. The probability of this
support being reversed indefinitely should be weighed seriously. ...
Tendin's family and friends extend far. ... The impact on [private
bank] marketing in Francophone Africa will be serious. Beyond this,
there would be legitimate grounds for concern in many people's minds
about whether Citibank was abandoning this part of the
Continent."
- On December 21, 1998, Mr. Ober sent an email to Mr. Rogers
indicating he'd received "an impromptu visit" from the
private bank head, Mr. Aziz, and Western Hemisphere Division head,
Mr. Montero, who brought up the Bongo accounts and discussed closing
them. [X7048] On December 24, Mr. Rogers sent an email to Mr. Raza
stating that, after lengthy discussions with Mr. Ober and others,
he'd like to make the following proposal:
"It is possible ... we could [i]nduce Tendin to
maintain a completely transparent relationship .... The idea of
setting new target and acceptance criteria for top public figures
who are whistle-clean and agree to total transparence in exchange
for the privilege of banking with us might be compelling to Saukat [Aziz]
and others. We would be adapting to the times instead of jettisoning
quality assets .... In extremis, we could demonstrate to anyone that
our customer is not bleeding a poor country because all balances and
sources of funds would have been vetted by us at the source."
- In January 1999, when the Bongo accounts came up for formal
review, Mr. Aziz decided to close them. When asked why, the private
bank's top management told the Subcommittee staff that the accounts
had inspired too many questions, required too much paperwork, and
incurred too many "incremental costs." The compliance head
told the Subcommittee staff the account "just wasn't worth
keeping open." Neither he nor the private bank head made any
mention of the ongoing criminal investigation into President Bongo
or the Colette, Kourtas and Davenport bank accounts which had been
frozen by Swiss authorities for suspect funds.
- In early 1999, the private bank developed an exit strategy to
close the accounts, allowing President Bongo to move his funds in an
orderly fashion to other financial institutions. As of October 1999,
while millions of dollars had been moved out of the accounts,
millions of dollars still remain in the accounts at Citibank private
bank. Private bank personnel told the Subcommittee staff they expect
the accounts to be completely closed sometime in the year 2000.
- The Issues
- The 1997 due diligence questions raised about the Bongo accounts
arose after the problems with the Salinas and Zardari accounts.
Unlike the Salinas and Zardari matters, the Bongo accounts did not
escape the attention of regulators. In 1996, the Federal Reserve
identified the account as troublesome. In 1997, the OCC began asking
hard questions about the source of funds and required the private
bank to respond. The private bank's response was marked by customer
deference and a lack of sensitivity to due diligence problems.
President Bongo apparently provided little information or
documentation about the source of his funds, and the private bank
was reluctant to ask him for information, not only because he was a
longstanding client, but also because he was a head of state. So to
obtain the file documentation requested by regulators, the private
bank decided to manufacture the appropriate documentation itself.
The one-page file memorandum it produced relied on second-hand
information gathered in a short period of time, without supporting
documentation and without client verification.
- More striking than these procedural deficiencies is the
substantive result of the bank's due diligence efforts the
determination that a primary source of the funds in the Bongo
accounts was over $100 million in Gabon government funds each year.
- Mr. Ober maintains he never made that determination. One of the
supervisors on the account, Salvatore Mollica, told the Subcommittee
staff that it was highly unusual for government funds to be cited as
a client's source of wealth. Yet the $111 million figure appears in
every Bongo profile after April 1997. Even when faced with comments
such those in the Rogers email that the President's control over the
$111 million was "not spelled out for obvious reasons," no
one in the private bank seemed to realize that their own due
diligence efforts were raising troubling questions about the source
of the client's funds. Compliance concerns raised about specific
deposits, the $1.9 million from the Gabon Treasurer and the $20
million from Swiss bank accounts, were apparently resolved without
any conducting any investigation into the sources of the funds.
- Even when the private bank's top management was informed of a
criminal probe into corruption allegations involving President Bongo
during an October 1997 review of his accounts, there appeared to be
no realization of any risk the private bank was taking in
maintaining his accounts. When the private bank decided to close the
accounts in 1999, management told the Subcommittee staff that the
decision was made because of the costs incurred in answering
questions about them, rather than because of any concerns about
President Bongo's conduct or reputational risk to the bank.
- The private bank's lack of concern over the Bongo accounts in
October 1997 can be attributed in part to the actions of regulators.
Four months earlier, the OCC had told the private bank that its file
memorandum was enough to establish the source of funds in the Bongo
accounts and there was no need to file a Suspicious Activity Report.
The OCC offered no criticism of the file memorandum for lacking
supporting documentation or client verification. There was no
criticism of the client's lack of cooperation. There was no
insistence that the private bank obtain specific information about
President Bongo's oil interests or the $21.9 million just deposited.
The OCC expressed no concern over the two alleged sources of funds
in the Bongo accounts government funds and oil revenues even after
being told by the private bank, as recorded in handwritten meeting
notes, about the Elf criminal investigation into matters related to
President Bongo. Instead, the OCC gave its approval to the private
bank's management of the Bongo accounts.
- In defense of the OCC's decision, it must be noted that there is
currently no statutory, regulatory or industry guidance on what is
adequate due diligence. In addition, there is the dilemma of how far
a regulator can go in compelling a private bank to get information
from a head of state, senior government official, or relative.
- (4) Abacha Sons Case History
- The Facts
- The fourth and final case history involves Citibank private bank
accounts belonging to Mohammed, Ibrahim, and Abba Sani Abacha. These
three individuals are sons of General Sani Abacha, who was the
military leader of Nigeria from 1993 until his death in 1998, and
who is widely condemned as responsible for one of the most corrupt
and brutal regimes in Africa. The private bank had decided in early
1999 to close the accounts, but was prevented from doing so by a
court order freezing the funds.
- Background. Nigeria is located in western Africa. It is the
continent's most populous state, with 107 million people. Since
declaring its independence from Britain in 1960, Nigeria has
undergone frequent internal conflict and military coups. In June
1993, Nigeria held its first election in almost a decade, which was
believed to have been won by Chief Moshood K.O. Abiola, a Yoruba
businessman. Military leaders annulled the election, and in November
1993, General Abacha took power. He remained in office until his
death due to a sudden heart attack in June 1998. His tenure was
frequently criticized for human rights abuses and corruption. For
example, a 1999 Nigeria Human Rights Report describes the Abacha
administration as involving "years of terror and
brutality" in which "extra-judicial killings, torture,
assassinations, imprisonment and general harassment of critics and
opponents was commonplace." The September 1999 CRS Issue Brief
on Nigeria states that Western officials believe General Abacha
"may have stolen over $3.5 billion over the course of his five
years in power" and describes severe problems caused by
"large-scale theft from the now almost bankrupt Nigerian
treasury."
- After General Abacha's death, General Abdulsalam Abubakar took
control of the country, initiating political, economic and social
reforms. Elections were held in February 1999, and former military
leader General Olusegun Obasanjo, imprisoned for three years under
the Abacha regime, became the new President of Nigeria.
- According to press reports, a few weeks after General Abacha's
death in 1998, his wife Maryam was stopped at a Nigerian airport
with 38 suitcases "stuffed full of foreign currency"; and
a son was "caught with about $100 [million] on him."
Within a few months, the Nigerian government announced that it had
recovered $750 million from the Abacha family through these and
other seizures, and requested the assistance of the United States
and other countries in recovering additional funds believed to have
been illegally obtained and transferred abroad by the Abacha family
and associates. The United States agreed to provide this assistance,
and the Swiss have already done so, issuing orders on October 14,
1999, freezing accounts held by Abacha family members and associates
at five Swiss banks, pending legal filings by the government of
Nigeria. In addition, Nigeria has arrested Mohammed Abacha, along
with five others, for the murder of Kudirat Abiola, wife of the late
opposition politician, Moshood Abiola.
- Structure of Private Bank Relationship. Abacha sons
Mohammed and Ibrahim first became clients of the Citibank private
bank in 1988. They began by opening accounts in the London office,
which grew in number over time, including a special name account
called "Navarrio" opened in 1994, and accounts opened in
1995 in the name of a shell corporation, Morgan Procurement
Corporation. These accounts were used, according to account
documentation, for commodity trading, pharmaceutical company
commissions, petroleum proceeds, and other business transactions, as
well as personal investments. [CS2937; CS3252; CS3277] The funds in
the London accounts fluctuated considerably over time but increased
overall, with records showing overall totals of $18.5 million in
1996 [CS1893]; $45 million in 1997 [CS1890]; and $60 million in 1998
[CS2137].
- After General Abacha's death in June 1998, and the initiation of a
government investigation into bank accounts held by him and his
family, the Abacha sons made an urgent request to the Citibank
private bank in September 1998, to move $39 million out of their
London accounts. The funds were then in a time deposit that would
not mature for two weeks and which, if the deposits were withdrawn
prematurely, would result in a hefty penalty. The Abacha sons asked
and the private bank agreed to allow them to incur an $39 million
overdraft secured by the time deposit and transfer the $39 million
out of Citibank immediately. The bank then satisfied the loan when
the time deposit matured two weeks later. In this way, the Abacha
sons were able to move $39 million out of their accounts in the face
of an ongoing government investigation into their funds, without
even incurring a financial penalty. The London account totals then
dropped to about $17.5 million.
- The Abacha sons' relationship with the private bank in the United
States began in 1992, when Mohammed and Ibrahim opened a special
name account in New York called "Gelsobella." The account
was opened, according to account documentation, to handle funds
associated with an airline business the sons were starting through
their company Selcon Airlines, to operate flights between New York
and Lagos, Nigeria. A third signatory on the account was Yaya
Abubakar, a "business partner." [CS4787] In 1994, after a
third party attempted fraudulently to gain access to funds in the
Gelsobella account, the sons allowed the account to go dormant and
opened a second special name account in New York called "Chinquinto."
In January 1996, after Ibrahim Abacha died in an airplane accident,
Mohammed added another brother, Abba, to the accounts. However, the
New York accounts were rarely used after Ibrahim's death and closed
in late 1997.
- The funds in the New York accounts fluctuated over time. For the
first two years, the monthly account balances generally stayed under
$2 million [CS1961], which was in line with the expectations for the
account [CS4787]. Then, for about six months, deposits increased
dramatically, jumping to $15 million at the end of 1994, and a high
of $35 million in early 1995. The deposits then dropped just as
suddenly, falling to $400,000 by the end of the year, and $5,000 by
1996. Altogether, about $47 million went through the New York
accounts, almost all of which moved through the accounts during a
six-month period in late 1994 and early 1995.
- The account documentation refers to still another account in the
Isle of Jersey [CS3285], but no additional information on the nature
of this account or the amounts involved was provided.
- In addition to checking, money market, time deposit and investment
accounts, the private bank extended credit to the Abacha sons
through several mechanisms, including letters of credit, trade
financing arrangements, overdraft facilities, and multiple credit
cards. On one occasion in 1997, the private bank facilitated the
cash purchase of a London apartment for about œ 363,000. [CS3171,
3179, 3189] In another instance in 1998, already described, the
private bank permitted the sons to incur a $39 million overdraft,
which the bank repaid when an existing time deposit matured a few
days later.
|