The Citi That Slept?

The new Citigroup inherits a tangle of money-laundering accusations

It was a major step in one of the most important and prominent money-laundering cases on record. On Oct. 20, the Swiss government in Bern announced it had compiled sufficient evidence to prove that some $95 million in Swiss bank accounts belonging to Raul Salinas de Gortari, the jailed brother of the former Mexican President, were protection payoffs from drug traffickers. The Swiss federal prosecutor proceeded to file legal papers to officially seize most of the funds, which had lain dormant since shortly after Salinas' 1995 arrest.

All of this had been expected. But it was still bad news to two very interested parties in the case: John S. Reed and Sanford I. Weill, the co-chairmen of Citigroup Inc., the product of an Oct. 8 merger of Citicorp and Travelers Group. After all, it was the private bank at Citibank, a unit of the former Citicorp, that had transferred most of the Salinas money to Switzerland. Now, more bad news is on the way. The General Accounting Office, the congressional watchdog, soon is expected to issue a hard-hitting report of Citibank's involvement in the Salinas affair. That report may lead to oversight hearings next year into Citibank's operations.

Together, the Swiss moves and the GAO investigation are likely to revive a long-stalled Justice Dept. probe of Citibank. And if the evidence gathered by the dogged Swiss investigators holds up, even Citibank lawyers concede the likelihood increases that the bank could be indicted for money laundering. At Citicorp's 1997 annual meeting, Reed acknowledged that Citibank "would be subject to criminal indictment and conviction" if the government were able to prove Citi transferred illicit funds overseas. But Reed added he doesn't believe the government will be able to make such a case, and said that the bank has done nothing wrong.

As serious as Citi's legal problems seem to be, the worries about the venerable bank are more fundamental. The Salinas case is just one in a series of blunders by Citi, the third-largest commercial bank in the U.S. with $331 billion in assets. A BUSINESS WEEK investigation shows that while the Salinas case was unfolding in 1995-96, Citi's top managers either could not or did not move swiftly enough to prevent similar episodes from occurring, and thus failed to protect the bank's most important asset--its brand name.

Indeed, just as the Salinas case was breaking, Citi private bankers allowed the spouse of another head of state to open a Swiss bank account, which, according to Swiss and Pakistani authorities, also was used to launder ill-gotten gains. Citi further failed to detect a six-year, multimillion-dollar fraud against it by one of its own private bankers. And earlier this year, Citi closed a deal to buy a troubled Mexican bank only to discover a week later that while it had been doing due diligence, the U.S. government was conducting a sting operation--and had laundered drug money through the Mexican bank's branches--right under Citi's nose.

HIGHLY DECENTRALIZED. Worries about the bank come at a critical moment in its history. The newly minted Citigroup, with total assets of $751 billion, hopes to succeed as a global financial supermarket. But the sheer size and breadth of the new group gives regulators pause. It will be largely self-regulating, even more than other large financial institutions, because it offers more services and has more operations overseas. Federal overseers are left monitoring the risk-management systems Citigroup puts in place. The company thus is reliant more than ever on its internal culture and controls to prevent disasters. But Citi's recent history indicates that these systems may need rethinking.

Citi has always been highly aggressive in going after market share and is a recognized innovator. But the bank pits managers against one another in a process that Citi execs call "creative destruction." Managers who meet their goals are kept on, while those who don't are quickly pushed out. Regulators and former executives are concerned about the high turnover among senior management, which may leave the bank short of seasoned execs and perhaps adequate checks and balances. Prior to the merger, in fact, Reed had no heir apparent. The bank also is highly decentralized, making it difficult for marching orders to trickle down to the operating level, or to be enforced once they do. While these attributes alone didn't cause Citi's recent mishaps, regulators, law-enforcement officials, and former managers all agree that they played a role. Citi spokesman Richard J. Howe says management turnover and internal competition are not unusual for a bank of Citi's size, and that while Citi is decentralized, tighter risk management and other controls put in place by Reed have greatly improved the ability of senior managers to oversee operating units.

Despite the alliance with Travelers, which has a risk-averse culture, Citi's culture is likely to prevail, especially overseas where Citi already is in 100 countries. Many of these countries are emerging markets without strong banking customs or an established rule of law to enforce standards of conduct. And while Citi has profited from its access to the ruling elite, that entree also exposes it to the abuses of crony capitalism, or even outright corruption.

Reed admitted the inherent dangers of the bank's global strategy at an April, 1998, Securities & Exchange Commission conference. "Money laundering is a major problem for us because of the markets we operate in," said Reed. "We've been forced to institute some new procedures to protect ourselves." One such new procedure, put in place only last fall, requires all Citibank's private-bank branches to comply with a uniform policy to fight money laundering, including obtaining numerous details about the origins of a customer's funds. Previously, each Citibank region had its own compliance rule book.

"WINDOWS ON RISK." Despite the mishaps, Reed wins kudos for refocusing the bank away from corporate lending and toward global consumer banking. And he restored its profitability after the debacle of the 1980s and early 1990s, when Citi was brought to the brink of insolvency due to heavy losses in its real estate portfolio and by overlending to Latin America. Now Citi is riding high: In the first nine months of this year, net income is up 6% to $2.7 billion on revenues of $18.9 billion, up 9% from the 1997 period.

Since its loan troubles, Reed also has sought to prevent more meltdowns by establishing the "Windows on Risk" committee, which consists of top managers who meet often to evaluate lending, underwriting, trading, and other risks around the world. The committee, for example, tries to spot--and correct--excessive lending to any single industry, country, or client. Reed also touted a new state-of-the-art anti-money-laundering program, which often was cited by regulators as the best in the industry. Now they wonder what went wrong. Says Ronald K. Noble, a New York University professor and former Treasury Under Secretary for Enforcement: "Before Salinas, I'd have said Citi had the right culture. But now, I just don't know."

One theory: Citi's strategy of expanding into new markets by courting political elites and wealthy business leaders means that the bank knows its customers too well and can't afford to alienate them by rejecting their business. Not only would that delay ambitious revenue goals, but it also might hurt Citi's reputation in the very echelons of society it's trying to attract. "Citi had the reputation for being both aggressive and clean," adds Noble. "But overnight, Citi went from being the standard-bearer of know-your-customer to the problem child of what could go wrong if you have the wrong customers."

This is apparent in the Salinas case--the one that most threatens Citi. Raul Salinas has been in jail since February, 1995, on charges of illicit enrichment and conspiracy to commit murder. In the highly publicized case, New York-based Citibank relationship manager Amy C. Elliott, who specializes in handling wealthy Mexicans' money, opened accounts for Salinas in New York, London, and Zurich in the spring of 1992. Previously he had been using false identities and passports to transfer money on his own to Swiss banks without alerting Mexican authorities. According to law-enforcement officials, Elliott instead used a web of concealed money flows, dubbed the "Confidas system," to move more than $80 million offshore. Elliott is still at Citi and an employee in good standing. Through her lawyers, she declined comment.

The system consisted of a trust, which was called Trocca Ltd., that held Salinas' funds. Trocca's directors were Cayman Islands shell corporations. Trocca itself was run by a Swiss trust company and a Citi subsidiary that was called Confidas. In a statement to Swiss police, Salinas said that if he'd known about the Confidas system earlier, he never would have resorted to using the false passports.

The bank appears to have violated several of its own internal rules. First, Elliott did not ask Salinas for two bank references, as Citi guidelines dictate. As a vice-president, Elliott had the authority to waive that requirement and substitute other references, but Citi won't say whether she did so with Salinas. Second, as the brother of Mexico's then-President, Raul could have been turned down altogether because of what one former Citi exec says is another rule: that private bankers should be wary of accepting heads of state and their families as customers. A Citi spokesman says the bank does not forbid public officials from opening accounts, even though other Western banks increasingly are refusing to do so because of the risks involved.

KNOW YOUR CUSTOMER. Citibank may have further stumbled when it took Salinas on as a customer without knowing the source of his funds. Like all banks, Citi has strict know-your-customer rules that are meant to protect it from prosecution under federal money-laundering laws, which require banks to make sure their clients' funds are legal. A Citi spokesman declines to comment on whether Elliott ever asked Salinas for such verification. Says a former top Federal Reserve official: "If it wasn't money laundering, it was reckless disregard for the franchise name."

Soon, the money flow into the account became a torrent, reaching an astounding $50 million in mid-1993. Raul Salinas previously had been collecting only a $192,000 government salary. Two government sources say Citi never filed a report to alert the Treasury Dept. to the large amounts of money Salinas was funnelling overseas. Citi declined comment. A source with knowledge of Citibank's actions says that, even if the bank didn't know where Raul Salinas' money came from, it had reasons not to question him: First, Carlos Salinas de Gortari, his brother, was then the highly respected President of Mexico; and second, it was plausible for the First Brother to have had access to a lot of money because he had married into wealthy families two times. Besides, the source argues, there simply was no reason to suspect Raul Salinas then.

But even on that point, Citi's case may be weak. Law enforcement agents assigned to Mexico at the time say street talk about Raul Salinas centered on his reputation as "Mr. Ten Percent," meaning that government deals awarding him a 10% cut often got priority. "The rumors of corruption, kickbacks, and influence peddling all were being talked about back in 1992," says Jorge G. Castaneda, a well-known Mexican political scientist. "[Citi] should have asked questions, obviously, about where the money they were moving was coming from."

With investigators bearing down on Salinas' alleged involvement with drug lords, Citi's legal situation could get precarious. Swiss Federal Prosecutor Carla del Ponte now claims she has amassed evidence that Salinas used his position as First Brother to protect Colombian drug cartels' shipments through Mexico to the U.S. "Raul Salinas was making enormous sums of money from the Medellin and Cali cartels and shipping it to Switzerland," mostly via Citibank, says Valentin Roschacher, chief of the Swiss federal police unit handling the case. He says there is no indication that Carlos Salinas, Mexico's President from 1988-94, was involved.

If the Swiss evidence, which so far consists of statements from 78 mostly unnamed witnesses, holds up in court, and if the U.S. can show that Citibank turned a blind eye to warnings about Raul Salinas, the bank could be subject to money-laundering charges in the U.S. Legal experts, however, caution that the Swiss are bringing a civil forfeiture and not a criminal case, and so their standard of proof is lower than what a U.S. prosecutor would require. While the Swiss have moved to confiscate Raul Salinas' funds, they simultaneously dropped their own case against him, and instead deferred any criminal prosecution to Mexican authorities. Meanwhile, Salinas' lawyers say that the case rests heavily on unreliable witnesses, such as convicted drug smugglers, and insist that the money came not from drug traffickers but from wealthy friends who wanted Salinas to invest it.

Still, trouble with the Salinas accounts didn't deter Citibank from performing many of the same services for other public figures. Citi, for example, opened private bank accounts in Geneva for Asif Ali Zardari, husband of then-Prime Minister of Pakistan Benazir Bhutto, in 1995. The application was for a British Virgin Islands company called Capricorn Trading, but documents obtained by BUSINESS WEEK clearly show that Citibank understood Zardari to be the owner (see graphic, page 98). Zardari, for example, gave his address as Bilawal House in Karachi--the Pakistani equivalent to the White House or 10 Downing Street.

Within months, Zardari deposited some $40 million into the accounts. The funds, the Pakistani government charges, are just a portion of some $1 billion Zardari and Bhutto received in bribes and payoffs from government contractors. Both are awaiting trial now that criminal charges have been brought against them by Pakistani and Swiss officials. The couple claims the charges are part of a political vendetta by incumbent Prime Minister and Bhutto archenemy Nawaz Sharif.

The parallels between Zardari and Salinas are almost eerie. Zardari, too, is known as Mr. Ten Percent in his home country. He is currently in jail in Pakistan on charges of murder in connection with the 1996 death of Bhutto's estranged brother. Zardari already had spent two years in jail on corruption charges.

"COLD FEET." A Citibank source says the bank uncovered Zardari's alleged money laundering in mid-'96. And less than 18 months after opening his accounts, Citi private bankers closed them and began cooperating with investigators in Islamabad. But Bhutto allies suggest they acted only when the political winds shifted in Pakistan and it appeared Bhutto would be ousted. Citi spokesman Howe says "that allegation is nonsense."

Most observers doubt Citibank will get dragged into the legal case now that two top Citi execs who are Pakistani natives are playing leading roles in advising the government. One is Shaukat Tarin, who is on leave as Citi's most senior officer in Pakistan while preparing the country's largest bank, Habib Bank Ltd., for privatization. Citibank, the largest foreign bank in Pakistan, is advising the government on the deal. The other, Shaukat Aziz, heads up the Citibank private bank and is rumored to be in line for Finance Minister. A Citi spokesman says Aziz has consistently turned down such offers in the past.

Despite the near miss in Pakistan and the scrutiny of the Salinas account, Citibank officials earlier this year found themselves enmeshed in another embarrassment--the pending acquisition of Banca Confia, a small, troubled Monterrey (Mexico) bank.

In 1996, the U.S. Customs Service began planning an elaborate sting operation to snare Mexican banks suspected of laundering drug money. Confia had been the subject of rumors about shady dealings involving offshore accounts and fraudulent investment schemes. Indeed, when first approached by undercover agents in 1997, bankers in one Confia branch were so eager to help disguise what they were told were Colombian drug proceeds that they suggested ways to improve Customs' money-laundering sham.

Within weeks, Confia began accepting money confiscated from drug dealers off the streets of Chicago and New York. In the eight months prior to February, 1998, Customs agents moved $24 million in 22 separate transactions through Confia accounts in New York, Mexico, and the Cayman Islands. For its labors, Confia received nearly $1 million in commissions--and an indictment on May 18. Citi had announced its interest in Confia the previous summer, and closed the deal on May 11, just one week before the indictment.

According to informed sources, Citi now claims that its auditors did uncover the money laundering, but were not allowed by the Mexican government to investigate it. KPMG Peat Marwick, which was hired to examine Confia's books, declines to comment. A Citibank spokesman also refused to comment but points out that Citi was not responsible for Confia until after the sale.

Citibank didn't detect for six years the unauthorized transactions of its own private banker, Carlos Gomez, who was employed in New York as an assistant to private banker Elliott. From 1990 until his resignation in 1997, Gomez obtained fraudulent loans by forging signatures of two bank clients and by using the names of fictitious clients. Altogether, Gomez pleaded guilty to defrauding Citi of $18 million, which he used to finance a glamorous lifestyle. Citi also takes credit for eventually uncovering Gomez' deceptions, but it didn't do so until a routine audit was done once Gomez left the bank.

Citi spokesman Howe says that anytime the bank has a problem, "we draw lessons from it. We reemphasize the importance of know-your-customer and other compliance policies. We do this globally and routinely." Because of the Gomez case, for example, Citi requires more senior officers' signatures on loan documents and more face-to-face meetings with clients.

There is a broader lesson in all this. Most attention these days focuses on the financial stability of banks. Citibank's experience shows that the franchise of even the most profitable bank can be tarnished by a single questionable customer.

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