Commentary: How to Wring Out Money Launderers
Citigroup Chairman and Co-Chief Executive John S. Reed wants the world to know that his company's private bank has cleaned up its act.
In a rare public appearance, Reed candidly testified on Nov. 9 to the Senate permanent subcommittee on investigations that "legitimate criticisms can be made" against Citibank for helping such public figures as Raul Salinas de Gortari, the imprisoned brother of Mexico's ex-President, transfer huge sums without knowing the money's origin. "We have had failures," Reed pronounced, but the bank will no longer tolerate such lax banking practices.
It remains to be seen whether Citibank really has changed. The case of the tiny oil-producing country of Gabon, on the west coast of Africa, helps explain why. Gabon President Omar Bongo has been a Citi client since 1970, and Senate investigators say Bongo has moved at least $130 million through Citi accounts in eight countries. But even though the French and Swiss governments two years ago began looking into allegations that oil company Elf Aquitaine had paid bribes to Bongo, the accounts remained open. Only in January did Citibank move to close them.
Bongo has not been charged with anything, and a Gabon Embassy spokesman in Washington did not return phone calls. But the point is: When there were broad hints of corruption, Citi acted to protect an easy source of revenue--about $1 million in fees a year, Senate staffers say. In this and other cases, Citibankers failed to follow numerous internal policies calling on bankers to "know your customer," a central banking canon meaning asking about and documenting a client's source of wealth.
Reed claims the Gabon case "couldn't happen today." Senator Carl M. Levin (D-Mich.), ranking minority member of the investigative panel, is skeptical. It's not that he doubts Citibank's resolve. The bank, after all, has spent $70 million since 1996 to develop software and train staff to comply with new policies that, on paper, are a model anti-money-laundering program.TIGHTER DEFINITION. Instead, Levin believes Citibank has demonstrated time and again that cultural changes won't happen unless Congress and federal regulators impose tighter rules and tougher consequences. He may be right on the money.
Congress, for example, must tighten the definition of money laundering. Current law includes the proceeds of drug trafficking and terrorism. But this puts off-limits to prosecutors financial institutions that accept such ill-gotten gains as raids on a national treasury, bribery, and kickbacks. The Administration on Nov. 10 announced its support for the additions.
But Congress could do a lot more. For instance, it could outlaw the use of fake names on accounts. And it should require banks to always identify the ultimate account holder, or beneficial owner, on wire transfers and account documents that help law-enforcement agencies and examiners trace the movement of money. Today, even Swiss banks are required to keep a form on file naming all beneficial owners. And regulators could discourage so-called concentration accounts--where an individual's funds are commingled with the bank's own money, then moved across borders. Citibank used this tactic to disguise Salinas' millions as they moved from Mexico to Switzerland.
And there's another loophole that Washington can close. Securities firms are now required to comply with most, but not all, money-laundering rules. They have to file transaction reports when transferring more than $10,000 for a client, for example. But brokers aren't required to file suspicious activity reports. SARs alert investigators when a customer who normally deposits a $2,500 payroll check suddenly starts depositing million-dollar checks. "By and large, the securities industry is five years behind the banking industry," says Peter G. Djinis, who oversees regulatory policy at the Treasury Dept.'s Financial Crimes Enforcement Network.
Now that Congress has passed legislation allowing securities firms, banks, and insurers to live under a single roof, Congress should direct Treasury Secretary Lawrence H. Summers to preserve the integrity of the financial system and require brokers to file SARs. That, and many other useful measures urged by Levin, would go a long way to prevent the next big money-laundering scandal.By Paula Dwyer