S. Hrg. 107–84

ROLE OF U.S. CORRESPONDENT BANKING IN

INTERNATIONAL MONEY LAUNDERING

HEARINGS

BEFORE THE

PERMANENT SUBCOMMITTEE ON

INVESTIGATIONS

OF THE

COMMITTEE ON

GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MARCH 1, 2, AND 6, 2001

VOLUME 1 OF 5

Printed for the use of the Committee on Governmental Affairs

(

U.S. GOVERNMENT PRINTING OFFICE

71–166 cc WASHINGTON : 2001

S. Hrg. 107–84

ROLE OF U.S. CORRESPONDENT BANKING IN

INTERNATIONAL MONEY LAUNDERING

HEARINGS

BEFORE THE

PERMANENT SUBCOMMITTEE ON

INVESTIGATIONS

OF THE

COMMITTEE ON

GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SEVENTH CONGRESS

FIRST SESSION

MARCH 1, 2, AND 6, 2001

VOLUME 1 OF 5

Printed for the use of the Committee on Governmental Affairs

(

For sale by the Superintendent of Documents, Congressional Sales Office

U.S. Government Printing Office, Washington, DC 20402

(II)

COMMITTEE ON GOVERNMENTAL AFFAIRS

FRED THOMPSON, Tennessee, Chairman

JOSEPH I. LIEBERMAN, Connecticut, Ranking Democrat

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

GEORGE V. VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

JUDD GREGG, New Hampshire

ROBERT F. BENNETT, Utah

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

THOMAS R. CARPER, Delaware

JEAN CARNAHAN, Missouri

HANNAH S. SISTARE, Staff Director and Counsel

JOYCE A. RECHTSCHAFFEN, Democratic Staff Director and Counsel

DARLA D. CASSELL, Chief Clerk

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

SUSAN M. COLLINS, Maine, Chairman

CARL LEVIN, Michigan, Ranking Democrat

TED STEVENS, Alaska

GEORGE V. VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

JUDD GREGG, New Hampshire

ROBERT F. BENNETT, Utah

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

THOMAS R. CARPER, Delaware

JEAN CARNAHAN, Missouri

CHRISTOPHER A. FORD, Chief Counsel and Staff Director

LINDA J. GUSTITUS, Democratic Chief Counsel and Staff Director

ELISE J. BEAN, Democratic Deputy Chief Counsel

ROBERT L. ROACH, Democratic Counsel and Chief Investigator

MARY D. ROBERTSON, Chief Clerk

(III)

C O N T E N T S

Opening statements: Page

Senator Collins.......................................................................................... 1, 51, 101

Senator Levin............................................................................................ 4, 53, 102

Senator Carnahan ............................................................................................ 9

WITNESSES

THURSDAY, MARCH 1, 2001

John M. Mathewson, former owner of Guardian Bank and Trust (Cayman)

Ltd., accompanied by Oscar C. Gonzalez, Esq. .................................................. 10

James C. Christie, Senior Vice President, Global Treasury Risk Management,

Bank of America, Oakland, California ............................................................... 22

David A. Weisbrod, Senior Vice President, Treasury Services Division, The

Chase Manhattan Bank, New York, New York ................................................. 27

FRIDAY, MARCH 2, 2001

Jack A. Blum, Partner, Lobel, Novins and Lamont, Washington, DC ................ 57

Anne Vitale, former Managing Director and Deputy General Counsel, Republic National Bank of New York, and Current Special Litigation Counsel,

HSBC USA, Inc., New York, New York ............................................................. 60

Robb Evans, Managing Partner, Robb Evans and Associates, Sun Valley,

California .............................................................................................................. 62

Jorge A. Bermudez, Executive Vice President and Head of e-Business,

Citibank, N.A., New York, New York ................................................................. 75

Carlos Fedrigotti, President and Country Corporate Officer for Citibank Argentina, Buenos Aires, Argentina ....................................................................... 78

Martin Lopez, Vice President and Citibank Corporate Bank Head, Republic

of South Africa ...................................................................................................... 80

TUESDAY, MARCH 6, 2001

Arthur O. Jacques, Esquire, Jacques Little Barristers and Solicitors, Toronto,

Ontario, Canada ................................................................................................... 105

Joseph M. Myers, Acting Deputy Assistant Secretary (Enforcement Policy),

U.S. Department of the Treasury, Washington, DC ......................................... 117

Mary Lee Warren, Deputy Assistant Attorney General, Criminal Division,

U.S. Department of Justice, Washington, DC ................................................... 120

ALPHABICAL LIST OF WITNESSES

Bermudez, Jorge A.:

Testimony .......................................................................................................... 75

Prepared statement with attachments ........................................................... 180

Blum, Jack A.:

Testimony .......................................................................................................... 57

Prepared statement .......................................................................................... 162

Christie, James C.:

Testimony .......................................................................................................... 22

Prepared statement .......................................................................................... 143

Evans, Robb:

Testimony .......................................................................................................... 62

Prepared statement .......................................................................................... 172

Fedrigotti, Carlos:

Testimony .......................................................................................................... 78

Prepared statement .......................................................................................... 223

Page

IV

Jacques, Arthur O.:

Testimony .......................................................................................................... 105

Prepared statement with attachments ........................................................... 241

Lopez, Martin:

Testimony .......................................................................................................... 80

Prepared statement .......................................................................................... 233

Mathewson, John M.:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 139

Myers, Joseph M.:

Testimony .......................................................................................................... 117

Prepared statement .......................................................................................... 250

Vitale, Anne:

Testimony .......................................................................................................... 60

Prepared statement .......................................................................................... 168

Warren, Mary Lee:

Testimony .......................................................................................................... 120

Prepared statement .......................................................................................... 256

Weisbrod, David A.:

Testimony .......................................................................................................... 27

Prepared statement .......................................................................................... 156

APPENDIX

‘‘Correspondent Banking: A Gateway to Money Laundering,’’ report by the

Minority Staff Report of the Permanent Subcommittee on Investigations

(see contents for report on page 274) ................................................................. 273

EXHIBITS

* May be found in the files of the Subcommittee Page

1. Diagrams on correspondent banking .............................................................. 692

2. American International Bank marketing documents .................................... 694

3. Three nested banks at American International Bank ................................... 697

4. Bank of America call memo on American International Bank ..................... 698

5. American International Bank’s correspondent account history .................... 699

6. Internet gambling advertisement naming Bank of America ......................... 700

7. Fortuna Alliance deposits into Swiss American Bank account at Chase

Manhattan ......................................................................................................... 702

8. Chase Manhattan Bank e-mail of 9/10/99 concerning Swiss American/

Antigua Bank .................................................................................................... 703

9. Chase Manhattan Bank e-mail of 8/5/98 regarding Swiss American Bank . 706

10. Chase Manhattan Bank memo of 11/17/98 regarding Swiss American

Bank ................................................................................................................... 707

11. Frauds through Swiss American Bank/Swiss American National Bank ..... 708

12. Chase Manhattan Bank e-mail of 12/6/99 regarding Swiss American

Bank ................................................................................................................... 709

13. Internet gambling advertisements naming Chase Manhattan Bank ........... 710

14. Chase Manhattan Bank e-mail of 3/19/93 regarding Swiss American

Bank ................................................................................................................... 718

15. Citibank summary of M.A. Bank seizure ....................................................... 719

16. Letter of 9/29/00 from Citibank counsel to the Permanent Subcommittee

on Investigations regarding M.A. Bank. ......................................................... 721

17. Seizure Warrant of 5/14/98 regarding M.A. Bank ......................................... 725

18. Subpoena to Citibank New York dated 5/18/98 regarding M.A. Casa de

Cambio ............................................................................................................... 727

19. Example of an M.A. Bank withdrawal slip .................................................... 731

20. Citibank e-mail of 12/3/99 regarding anti-money laundering procedures .... 732

21. Letter of 9/29/00 from Citibank counsel to the Permanent Subcommittee

on Investigations regarding correspondent banking policy ........................... 734

22. Report of Citigroup Anti-Money Laundering Unit ......................................... 740

23. Schedule of wire transfers through Citibank New York and American

Exchange Company .......................................................................................... 742

24. Monthly statements of Citibank New York correspondent accounts for

Banco Republica, American Exchange Company, and Federal Bank .......... 743

25. Ownership diagram of Grupo Moneta ............................................................. 749

Page

V

26. Excerpts from Citibank documents regarding relationship with Grupo

Moneta ............................................................................................................... 751

27. Citibank and Central Bank of Argentina documents regarding the antimoney laundering program of Federal Bank .................................................. 752

28. Excerpt from Resolution No. 395/96 of the Central Bank of Argentina ....... 754

29. Excerpt from Citibank memo regarding ownership of Federal Bank .......... 756

30. Citibank account opening steps ....................................................................... 757

31. Excerpts regarding Citibank’s policy on opening accounts for offshore

shell banks ........................................................................................................ 758

32. Series of letters exchanged between the Central Bank of Argentina and

Citibank Argentina regarding ownership of Federal Bank ........................... 760

33. British Trade and Commerce Bank certificates of deposit ............................ 782

34. British Trade and Commerce Bank documents ............................................. 784

35. Internet advertisements for offshore shell banks .......................................... 789

36. Treasury Regulations on Suspicious Activity Reports ................................... 804

37. 1997 Citibank memo regarding Grupo Moneta .............................................. 805

38. Bank of America and Chase Manhattan Bank comments on Swiss American Bank .......................................................................................................... 807

39. Chase Manhattan Bank e-mail of 10/12/95 regarding Swiss American

Bank ................................................................................................................... 809

40. Chase Manhattan Bank call memo of 1/23/96 regarding AIB ...................... 810

41. Chase Manhattan Bank e-mail of 9/9/99 regarding Swiss American Bank . 812

42. Bank of America call memo of 9/4/92 regarding Swiss American Bank ...... 813

43. Letter of 3/12/97 from Chase Manhattan Bank to AIB regarding account

closing ................................................................................................................ 814

44. Chart entitled ‘‘Gateway to U.S. Banks’’ ........................................................ 815

45. Summary of Gold Chance Fraud prepared by the Minority Staff of the

Permanent Subcommittee on Investigations, March 6, 2001 ........................ 816

46. Guardian Bank and Trust Visa Card produced by John Mathewson at

the March 1, 2001, Permanent Subcommittee on Investigations hearing ... 823

47. Permanent Subcommittee on Investigations’ staff rendition of a chart

entitled ‘‘$3 Million Deposit of Gold Chance Funds Depleted in Wire

Transfers By British Trade & Commerce Bank to 33 Bank Accounts

in 45 Days, December 1999-January 2000’’ included in the testimony

of Arthur Jacques before the Subcommittee on March 6, 2001 .................... 824

48. Supplemental remarks of Jorge Bermudez .................................................... 825

49. Supplemental remarks of Carlos Fedrigotti ................................................... 827

50. Supplemental questions and answers of the U.S. Department of Justice ... 829

51. Supplemental questions and answers of U.S. Department of the Treasury 855

52. Supplemental questions and answers of Citibank ......................................... 863

53. Supplemental questions and answers of Bank of America ........................... 867

54. Supplemental questions and answers of J.P. Morgan Chase ........................ 868

55. Documents from foreign governments relevant to the Permanent Subcommittee on Investigations staff report or hearings on money laundering:

a. Government of Antigua and Barbuda letter dated July 14, 2000 ........... 871

b. Jersey Financial Services Commission letter dated March 13, 2001 ...... 874

c. Guernsey Financial Services Commission letter dated March 15, 2001 . 876

d. Government of Anguilla Statement of Facts ............................................. 879

e. Press articles on new shell bank prohibitions in the Bahamas and

Cayman Islands ........................................................................................... 883

VOLUME 2

56. Documents related to American International Bank, Caribbean American

Bank or Overseas Development Bank and Trust Company (Case Studies

No. 1–3):

a. American International Bank general documents .................................... 885

b. Ford/Forum documents ............................................................................... 950

c. Mark Harris bank documents ..................................................................... 998

d. Carribean American Bank documents ....................................................... 1024

e. Bank of America documents ....................................................................... 1196

f. Toronto Dominion Bank (New York) documents ....................................... 1225

g. Chase Manhattan Bank documents ........................................................... 1234

h. Popular Bank of Florida (now BAC Florida Bank) documents ............... 1249

i. Overseas Development Bank and Trust documents ................................. 1297

Page

VI

j. First National Bank of Commerce (now Bank One Corporation) documents ............................................................................................................ 1449

k. AmTrade International Bank documents .................................................. 1481

57. Documents related to British Trade and Commerce Bank (Case Study

No. 4):

a. British Trade and Commerce Bank (BTCB) general documents ............. 1493

b. BTCB financial documents ......................................................................... 1604

c. BTCB management and employee documents .......................................... 1729

VOLUME 3

d. BTCB high yield investment program documents .................................... 1823

e. Internet gambling documents ..................................................................... 1842

f. Banco Industrial de Venezuela documents ................................................ 1908

g. Security Bank documents ........................................................................... 1989

h. First Union National Bank documents ..................................................... 2027

i. Koop fraud documents ................................................................................. 2099

j. Cook fraud documents ................................................................................. 2238

k. Gold Chance fraud documents ................................................................... 2287

l. $10 million CD interpleader documents .................................................... 2484

m. Miscellaneous documents relating to BTCB:

1. KPJ Trust/Tiong documents .............................................................. 2621

2. Brett/Bailett documents ..................................................................... 2670

3. Vector Medical Technology documents ............................................. 2682

n. Permanent Subcommittee on Investigation Deposition of John G. Long

IV, February 26, 2001 ................................................................................. *

o. SEALED EXHIBIT: Suspicious Activity Reports .................................... *

VOLUME 4

58. Documents related to Hanover Bank (Case Study No. 5):

a. Hanover Bank general documents ............................................................. 2789

b. Harris Bank International and Standard Bank Jersey Ltd. documents 2857

c. Clerical Medical documents ........................................................................ 2907

d. Eric Rawle Samuel documents ................................................................... 2919

e. Koop fraud documents ................................................................................. 2943

f. Casio Computer fraud documents .............................................................. 2984

g. FSA investigation documents ..................................................................... 3016

h. Unanswered information request to Richard O’Dell Poulden ................. 3043

59. Documents related to British Bank of Latin America (Case Study No.

6):

a. British Bank of Latin America general documents .................................. 3049

b. Bank of New York documents .................................................................... 3100

c. 1999 and 2000 National Money Laundering Strategy excerpts ............... 3127

d. Operation Casablanca and Operation Juno documents ........................... 3138

e. SEALED EXHIBIT: Proprietary information on British Bank of Latin

America ......................................................................................................... *

60. Documents related to European Bank (Case Study No. 7):

a. European Bank general documents ........................................................... 3182

b. Citibank documents ..................................................................................... 3219

c. Taves fraud documents ................................................................................ 3319

d. Benford account documents ........................................................................ 3435

e. Internet Processing Corp. account documents .......................................... 3627

f. Nest Bank documents .................................................................................. 3682

VOLUME 5

61. Documents related to Swiss American Bank and Swiss American National Bank (Case Study No. 8):

a. Swiss American Bank and Swiss American National Bank general

documents .................................................................................................... 3703

b. Bank Ownership .......................................................................................... 3715

c. Bank Leadership .......................................................................................... 3735

d. Fitzgerald case documents .......................................................................... 3814

e. Gherman fraud documents ......................................................................... 3931

f. Debella fraud documents ............................................................................ 3957

g. Fortuna Alliance fraud documents ............................................................. 4035

h. Documents related to other frauds or questionable accounts .................. 4083

Page

VII

i. Bank of New York documents .................................................................... 4122

j. Bank of America documents ....................................................................... 4175

k. Chase Manhattan Bank documents ........................................................... 4222

l. InterSafe Global documents ........................................................................ 4269

m. Documents related to Peter Herrington .................................................... 4282

62. Documents related to M.A. Bank (Case Study No. 9):

a. M.A. Bank general documents ................................................................... 4391

b. Permanent Subcommittee on Investigations correspondence with M.A.

Bank representatives .................................................................................. 4411

c. Permanent Subcommittee on Investigations correspondence with M.A.

Bank agents in Uruguay ............................................................................. 4422

d. Court filings and U.S. Department of Justice correspondence ................ 4434

e. M.A. Bank documents related to Mr. DiTullio .......................................... 4474

f. U.S. Customs records of interviews ........................................................... 4477

g. Permanent Subcommittee on Investigations correspondence with

Citibank ........................................................................................................ 4501

h. Citibank documents related to M.A. Bank ................................................ 4504

63. Documents related to Federal Bank (Case Study No. 10):

a. Central Bank of the Bahamas documents ................................................. 4585

b. CEI related documents ................................................................................ 4617

c. Account opening and closing documents .................................................... 4629

d. Resolution No. 395 of the Central Bank of Argentina ............................. 4647

e. Analyses of Banco Republica, Federal Bank and other Grupo Moneta

entities in Citibank files .............................................................................. 4665

f. Excerpts from the audits of Banco Republica by the Central Bank

of Argentina ................................................................................................. 4793

64. Koop Fraud documents related to Overseas Development Bank and Trust,

British Trade and Commerce Bank, and Hanover Bank .............................. 4835

(1)

ROLE OF U.S. CORRESPONDENT BANKING IN

INTERNATIONAL MONEY LAUNDERING

THURSDAY, MARCH 1, 2001

U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS, OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS, Washington, DC.

The Subcommittee met, pursuant to notice, at 9:34 a.m., in room

SD–342, Dirksen Senate Office Building, Hon. Susan M. Collins,

Chairman of the Subcommittee, presiding.

Present: Senators Collins, Levin, and Carnahan.

Staff Present: Christopher A. Ford, Chief Counsel and Staff Director; Mary D. Robertson, Chief Clerk; Rena Johnson, Deputy

Chief Counsel; Frank Fountain, Senior Counsel; Eileen Fisher, Investigator; Claire Barnard, Detailee/HHS; Linda Gustitus, Democratic Staff Director and Chief Counsel; Elise Bean, Democratic

Deputy Chief Counsel; Bob Roach, Democratic Counsel; Laura

Stuber, Democratic Counsel; Ken Saccoccia, Congressional Fellow;

Anne Fisher and Judy White (Senator Cochran); Kathleen Long

(Senator Levin); Marianne Upton and Karla Mitchell (Senator Durbin); and Sandy Fried (Senator Carnahan).

OPENING STATEMENT OF SENATOR COLLINS

Senator COLLINS. The Subcommittee will come to order. Good

morning.

During the next few days, the Permanent Subcommittee on Investigations will examine the complex world of correspondent banking and the extent to which the international correspondent banking system can involve U.S. banks in money laundering, allowing

criminals to exploit our financial system. These hearings, initiated

by the Subcommittee’s Ranking Minority Member Senator Levin,

are the culmination of a lengthy investigation into correspondent

banking by his staff and represent the second phase of the Subcommittee’s examination of money laundering and its effect on our

financial system.

Correspondent banking is the means by which one bank, the correspondent bank, provides financial services to another bank, often

referred to as the respondent bank. Typically, the respondent bank

has no physical presence in the jurisdiction in which it maintains

a correspondent account. Correspondent banking thus enables the

respondent bank to provide services to its customers that otherwise

would be unavailable because of geographic limitations.

Correspondent banking is an integral part of the domestic and

international banking systems. Without correspondent banking, in

2

fact, it would often be impossible for banks to provide comprehensive nationwide and international banking services—among them,

the vital capacity to transfer money by wire with amazing speed

and accuracy across international boundaries. U.S. banks maintain

thousands of correspondent relationships, through which billions of

dollars move every day.

American banks provide some correspondent clients with feebased products only, such as currency exchange services, interestbearing and demand-deposit accounts, and wire transfers to investment services. For other clients, U.S. banks also offer credit-related

products, such as loans, credit extensions, and lines of credit. This

distinction between the provision of fee-based products and servicebased products is significant because the Minority investigation

has shown that some U.S. banks conducted more due diligence

when evaluating potential correspondent banking clients for credit

relationships—in other words, when their own finances were at

stake—than when only fee-based services were at issue.

Not surprisingly, money launderers have capitalized on this relative lack of scrutiny for non-credit relationships. They too often

can fly under the radar of the U.S. banks. In other words, money

launderers gamble that the banks will not notice—or perhaps not

scrutinize—the source of funds flowing through their correspondent

accounts.

The Subcommittee investigation has shown that, in some instances, the gamble has paid off. Through such accounts, the perpetrators of criminal schemes have succeeded in moving their illgotten gains around the world ahead of law enforcement officials,

in many cases ultimately returning these funds to the United

States in a laundered form that they can enjoy with impunity.

Regrettably, the source of these monies was often fraudulent

schemes perpetrated by Americans against Americans. For example, Melvin Ford of Maryland was the central figure in the Forum,

which appears to be a Ponzi-type investment scheme. Ford targeted

low- and middle-income African Americans who attended his seminars and rallies, promising them extraordinarily high returns for

their investment. The Forum established a relationship with American International Bank in 1993 and accounted for perhaps as

many as 6,000 of American International Bank’s 8,000 customers.

By 1997, in fact, more than half of American International Bank’s

$110 million in assets were attributable to the Forum and its investors.

The Subcommittee’s investigation has established that three

types of foreign banks are particularly high risk, that is, prime candidates to harbor the funds of money launderers. They are: First,

‘‘shell’’ banks; second, offshore banks; and, third, banks in jurisdictions with strong bank secrecy and weak anti-money laundering

laws. ‘‘Shell’’ banks do not maintain a physical presence anywhere,

which makes it very difficult for the licensing jurisdiction to regulate them.

Offshore banks are not able to conduct business with the residents of their licensing jurisdiction. Because they have no effect

upon local citizens, and because they are often lucrative profit centers for the licensing jurisdiction, local government regulators often

have very little incentive to engage in serious oversight.

3

The third category of high-risk foreign banks consists of banks in

jurisdictions that simply have weak anti-money laundering laws.

The lax regulatory environment obviously attracts those who wish

to launder money. U.S. banks that rely upon local regulators in

such cases to police respondent banks hang their hopes only upon

a shadow.

The investigation revealed troubling gaps in U.S. banks’ oversight of their correspondent relationships with these three types of

banks. Moreover, labyrinthine banking relationships can also make

due diligence more difficult. In several cases, U.S. banks were actually surprised to learn that they were conducting transactions for

foreign banks with whom they had no direct correspondent account.

These foreign banks had established correspondent accounts at

other foreign banks, which in turn maintained correspondent accounts at the U.S. institutions.

Given the intricate nature of the schemes that criminals use to

launder money, there are obviously some practical limitations upon

the intensity of scrutiny that U.S. banks can give to the customers

of their correspondent banking clients, or to any particular link in

the chain of ‘‘nested’’ correspondent accounts. A requirement that

U.S. banks thoroughly investigate the business dealings of each

and every customer of a correspondent banking client—in other

words, their customers’ customers—might well provide burdensome

and impractical, doing more harm to the financial industry than

good in preventing money laundering.

Nevertheless, the investigation’s case studies make it equally apparent that U.S. banks must do a better job, first, of initially

screening correspondent banking clients and then of monitoring

these clients’ accounts once they are opened. For example, some

U.S. banks neglected to verify that their correspondent banking

customers had effective anti-money laundering procedures in place

at the time that they opened correspondent accounts. Moreover,

U.S. banks have sometimes been far too slow to react to information they receive from government officials and from the media

about suspicious activity by their correspondent banking customers. There is clearly much room for improvement here.

I see the goals of these hearings as twofold: First, a careful examination of the case studies of those who have successfully manipulated the correspondent banking system to launder money

should shed some light on how these schemes have worked and

point out some weaknesses in current anti-money laundering procedures and protections. These disclosures should make it possible

for U.S. banks to better understand and act upon the warning

signs of money laundering in correspondent banking, helping to

prevent such abuses in the future.

Second, we must consider whether both banks and regulators

have the tools they need to prevent money laundering through correspondent banking. I want to emphasize that the banking industry has made great strides in its efforts to stem money laundering.

For example, the Office of the Comptroller of the Currency has

noted that banks have generally complied successfully with their

obligations under the Bank Secrecy Act to implement good currency transaction reporting programs. Nevertheless, gaps in oversight clearly still occur, and they are serious ones. One way of preVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 71166.TXT SAFFAIRS PsN: SAFFAIRS
4

1See Exhibit No. 44 that appears in the Appendix on page 814.

venting such gaps is for the banking community to work more

closely with the regulators and law enforcement officials to exchange information.

I look forward to hearing the testimony of our witnesses today

and in the subsequent 2 days of hearings.

At this time I would like to recognize the distinguished Ranking

Minority Member of the Subcommittee, Senator Levin, for his opening statement, but before I do so, I first want to thank him and

his staff for their extraordinary and extensive work on this very

complex investigation.

Senator Levin.

OPENING STATEMENT OF SENATOR LEVIN

Senator LEVIN. Thank you very much, Madam Chairman, for

calling these hearings, for convening them, and for your very kind

remarks.

Today we are going to be taking an insider’s look at how U.S.

banks are being used by rogue and high-risk foreign banks and

their criminal clients to launder the proceeds of crimes such as

drug trafficking, financial fraud, Internet gambling, and tax evasion.

Now, what does it mean to launder money? It means that you

take the dirty money that you get from selling drugs or accepting

a bribe or defrauding someone and you move it through bank accounts or businesses in order to lose any link between the money

and its source. And then you can spend that money without anyone

asking any questions. One way you can do that is to move the

money through correspondent bank accounts at U.S. banks.

The U.S. banking system is one of the premier banking systems

in the world. It is also one of the safest and soundest. Our strong

regulatory environment helps to ensure that. And our dollar is the

strongest currency in the world, which is one of the reasons why

U.S. banks are so attractive.

So if criminals can move their money through U.S. banks, they

can not only disguise their money but they can also acquire the

prestige of the U.S banking system and the services that banking

system provides.

Here is a rather simple chart that shows how the proceeds from

criminal activity and corruption can make its way into U.S. banks.1

Ordinarily, the dirty money from criminal activity cannot get into

a U.S. bank directly. It cannot go directly down to a U.S. bank, as

shown on the right-hand side of that chart. That is because U.S.

banks have to report cash transactions over $10,000, and they keep

watch on the activities of their individual banking clients. But that

same money can get into the same U.S. bank, by using an offshore

bank that has a correspondent account at the U.S. bank. In other

words, instead of going directly into the bank, which it is frustrated

from doing by our regulatory apparatus, if it can move to an offshore bank and then use that offshore bank’s account at the U.S.

bank, it can accomplish very simply what it cannot do directly.

That is what has happened over and over and over again in the

high-risk foreign banks investigated by my staff.

5

For most Americans, a bank conjures up positive images of respectability and sound fiscal management. We picture a well-maintained building, a trained staff, a prudent bank president, all operating under regulations that ensure the bank’s safe, sound and

lawful operation. But not all banks fit that image. Some banks in

the world are quite the opposite. They operate without controls,

without regulatory oversight, and even without physical offices or

trained staff. Some of these high-risk foreign banks are themselves

engaged in criminal behavior, such as financial frauds; some have

clients who are engaged in criminal behavior, such as drug trafficking and political corruption; and some have such poor antimoney laundering controls that they don’t know—and some don’t

care—whether or not their clients are engaged in criminal behavior.

One might suppose that those kinds of foreign banks would be

unable to open accounts at U.S. banks, that U.S. banks would recognize them as posing such high money laundering risks that they

would not give them entry into the U.S. financial system. But you

would be wrong.

A year-long investigation by my Subcommittee staff has found

that high-risk foreign banks have been able to open accounts at

U.S. banks, and some of these U.S. accounts have become conduits

for criminal proceeds. When one bank opens an account for and

provides banking services to another bank, it is called correspondent banking. The bank that provides the banking services

is called the correspondent bank. The client that uses the services

is called the respondent bank. Correspondent banking is essential

to the movement of money around the world for international trade

and commerce. But because many U.S. banks have failed to adequately screen and monitor foreign banks which open accounts, correspondent banking has also become a gateway to the U.S. financial system for criminals and money launderers.

Based on its work over the past year, the staff investigation identified three categories of foreign banks that pose high money laundering risks, as outlined by the Chairman: Shell banks, offshore

banks, and banks in foreign jurisdictions that do not cooperate with

international anti-money laundering efforts.

‘‘Shell bank,’’ as we use that term, means a bank that does not

have a fixed physical presence in any country. It is a bank that

does not have a physical office where customers go to conduct

banking transactions or where regulators can go to inspect records

and observe bank operations. Instead, these shell banks enjoy a

shadowy existence, operating out of the offices of a related company, or from an undisclosed location that may be hinted at but

never named. We found one shell bank that was operated out of

the owner’s home.

Due to their lack of visibility and presence, these shell banks

have largely evaded the public spotlight, and U.S. banks opening

accounts for them appear too often not to care how they operate.

The staff conducted an in-depth investigation of four shell banks:

Caribbean American Bank, Federal Bank, Hanover Bank, and M.A.

Bank. In all four cases, the investigation found the shell bank to

be operating far outside the parameters of normal banking practice, without basic administrative controls, and without anti-money

6

laundering safeguards. The investigation found that the banks had

avoided regulatory oversight both in their licensing jurisdiction and

in the countries where they conducted transactions. All four shell

banks used accounts at U.S. banks to move millions of dollars in

suspect funds across international lines, funds associated with drug

trafficking, financial fraud, bribe money, or other misconduct.

Offshore banks are banks whose licenses bar them from

transacting banking activities with the citizens of their own home

jurisdiction, but empower them to transact business ‘‘offshore’’ with

the citizens of other countries. In other words, the countries that

create these banks protect their own citizens from them, but unleash them on the rest of the international community. One might

ask why any U.S. bank would want to do business with a bank

which is not allowed to transact business in its home jurisdiction,

but they do. Major U.S. banks have opened accounts for hundreds,

if not thousands, of offshore banks.

About 4,000 offshore banks now hold licenses from about 60

countries around the world and control almost $5 trillion in assets.

About half of these offshore banks are thought to be located in the

Caribbean and Latin America, with the rest in Europe, Asia, Africa, and the Middle East. The offshore banking sector continues to

grow, even as the international outcry over their association with

crime and corruption is also increasing.

One reason that offshore banks pose high money laundering

risks is that the country licensing the bank has less incentive to

police it, since that bank is barred from doing business with the

country’s own citizenry. Another reason is that offshore banking is

a money-making enterprise for the governments of small countries

which license them, and the less demands made by the government

on bank owners, the more attractive the country becomes as a licensing locale. Offshore banks often rely on these disincentives to

minimize regulatory oversight of their operations, increasing the

risk that some will become vehicles for money laundering, tax evasion, or other crimes.

The third category of high-risk foreign banks are banks that are

licensed by jurisdictions that do not cooperate with international

anti-money laundering efforts. In June of 2000, the Financial

Action Task Force on Money Laundering, which is the leading

international body fighting money laundering, issued a list of 15

countries determined to be non-cooperative with international antimoney laundering efforts. Together, these 15 jurisdictions have

licensed hundreds and perhaps thousands of banks, all of which introduce money laundering risks into international correspondent

banking. In July of 2000, U.S. banking regulators issued advisories

warning U.S. banks against doing business with banks in the listed

jurisdictions. But if you thought that these advisories caused U.S.

banks to stop doing business with those banks, think again.

Now, why do U.S. banks open correspondent accounts for these

high-risk banks? For some banks, correspondent accounts are easy

money. When a U.S. bank isn’t extending credit, correspondent accounts carry no monetary risk to the U.S. bank, they provide income through the fees charged for the services rendered, and the

attitude has been that ‘‘a bank is a bank is a bank.’’ We know,

though, that that is not true. Some U.S. banks are apparently unVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 71166.TXT SAFFAIRS PsN: SAFFAIRS
7

aware of the money laundering involved; others seem to assume

their systems will catch specific problems. But too often U.S. banks

have failed to conduct the initial and ongoing due diligence which

is needed to get a clear picture of the foreign banks using their

services. And when negative press reports or information regarding

suspicious activity did come to the attention of U.S. banks, in too

many cases the information did not result in a serious review of

the foreign banks involved or in concrete actions to prevent money

laundering.

The result is that U.S. banks, through their correspondent account services, become aiders and abetters, unwittingly—but aiders

and abetters, nonetheless—of laundering the proceeds of drug trafficking or financial fraud or tax evasion or Internet gambling or

other illegal acts. We cannot spend billions of taxpayer dollars to

interdict drugs and eradicate coca farms and at the same time let

drug lords deposit illegal drug profits in foreign banks with U.S.

correspondent accounts. We cannot be consistent and are not consistent if we condemn corruption in foreign business practices and

make illegal the payment of bribes by our businesses to foreign

government officials, and then let bribe money be deposited in U.S.

bank accounts earning interest.

We cannot fight for human rights in all parts of the globe and

then let corrupt public officials from other countries steal from

their own people and place corrupt funds in U.S. bank accounts to

enjoy the safety and soundness of the U.S. banking system. Money

laundering not only finances crime, it pollutes international banking systems, it impedes the international fight against corruption,

it distorts economies, and it undermines honest government.

The Subcommittee is devoting 3 days of hearings to the money

laundering problems posed by high-risk foreign banks’ opening correspondent accounts at U.S. banks. Again, I want to thank our

Subcommittee Chairman, Senator Collins, for her support of this

investigation and for allocating these 3 days of hearings to this

subject.

Today we are going to look at how high-risk banks work and how

U.S. banks respond to them. Tomorrow’s hearing will focus on the

special problems posed by foreign offshore shell banks. And the

third day of hearings, next Tuesday, will focus on what can and

should be done to strengthen anti-money laundering safeguards in

U.S. correspondent banking. Based on the testimony and recommendations received, I will be introducing legislation in the near

future to try to strengthen U.S. law in this area in order to close

the net around criminals using accounts of high-risk foreign banks

in U.S. banks to launder money.

Today we are going to hear first from a U.S. citizen, John

Mathewson, who used to own and manage an offshore bank in the

Caribbean called Guardian Bank and Trust. After 10 years at the

bank, Mr. Mathewson was arrested in the United States for tax

evasion and money laundering. He pled guilty to charges and

agreed to cooperate with U.S. law enforcement. One action which

he took, which was the first and so far the only time that I know

of in U.S. law enforcement history that it has happened, Mr.

Mathewson turned over a year’s worth of offshore banking records

for inspection and review. These records not only provided invaluVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 71166.TXT SAFFAIRS PsN: SAFFAIRS
8

able information about how an offshore bank operates, but has also

enabled U.S. law enforcement to initiate prosecutions of numerous

of his bank’s clients for tax evasion and other misconduct. Mr.

Mathewson has since provided valuable testimony in many of these

prosecutions, and today he will provide testimony about how an offshore bank and its clients have used U.S. bank accounts to launder

funds. He will also explain how dependent offshore banks are on

other banks to conduct their operations and how U.S. banks hold

tremendous power in their hands to decide which offshore banks

will gain access to the U.S. banking system.

We will then hear from two U.S. banks, Bank of America and

Chase Manhattan Bank, that opened correspondent accounts for

offshore banks. One case involves American International Bank, an

offshore bank that was able to open accounts at these as well as

other U.S. banks, despite having a bad local reputation, its own

correspondent accounts for rogue banks, and increasing evidence

that the bank’s accounts held suspect funds related to major financial frauds. Another offshore bank, Swiss American Bank, opened

accounts at both banks as well. It maintained these accounts for

years, despite mounting evidence that the Swiss American Bank’s

accounts were repositories for funds associated with financial

frauds or Internet gambling or other illicit activities. In the face of

repeated evidence of questionable activities, our U.S. banks kept

open the Swiss American Bank accounts, and today we are going

to find out how that could happen. Last year, U.S. taxpayers spent $600 million in the fight against

money laundering. U.S. banks are required by law to join in this

fight by operating anti-money laundering programs designed to detect and stop criminals from washing their dirty money through

U.S. banks. We cannot condemn jurisdictions with weak antimoney laundering controls, weak banking oversight, and unregulated offshore sectors, and then tolerate U.S. banks doing business

with the very banks that those jurisdictions license and unleash on

the world.

Since the report was issued last month, we have already seen

some results. With respect to the high-risk foreign banks that were

the subject of the case histories, the governments of Antigua-Barbuda, the Bahamas, and Dominica have revoked or suspended the

license of four of the banks. The Cayman Islands also announced

that by the end of this year, all of its offshore banks that are not

branches or units of other banks, of which there are 62, will have

to enhance their physical presence on the island by opening an office with bank records and a resident manager. In the United

States, the New York Clearing House Association, which is composed of a dozen of the largest correspondent banks in the United

States, has announced its intention to develop a code of best practices for the industry. And we have also been told by banks like

Chase Manhattan that they have begun top-to-bottom reviews of

their correspondent accounts. These are encouraging signs, although obviously much more must be done.

Our banks, our U.S. banks, are the gatekeepers through which

foreign banks and their clients have to pass to get access to U.S.

dollars; U.S. banking services such as wire transfers, investments,

and credit; and the U.S. banking system, which is surely one of the

9

best in the world. When it comes to high-risk foreign banks, U.S.

banks have too often not lived up to that gatekeeping role. They

need to do a better job in screening and monitoring the high-risk

foreign banks that want access to our banking system. Only then

will we end the money laundering activities and help to ensure

that crime doesn’t pay.

Thank you.

Senator COLLINS. Senator Carnahan, I want to welcome you as

a new Member of the Subcommittee, and I would call upon you for

any opening comments that you might have.

OPENING STATEMENT OF SENATOR CARNAHAN

Senator CARNAHAN. Thank you, Senator Collins. I commend you

for calling this hearing, and I look forward to working with you in

the days ahead on future investigative hearings.

Senator Levin, I would like to thank you for your leadership on

this investigation and in developing this very valuable report.

I am greatly concerned about this issue. I think the average

American would be shocked to learn how easy it is for drug dealers

and scam artists to launder money or evade taxes. And as a result,

we are spending a tremendous amount of money dealing with the

consequences of this illicit activity. I am pleased that Senator

Levin and the Subcommittee have exposed this problem and made

recommendations on how to prevent this fraud and abuse on American consumers.

Thank you.

Senator COLLINS. Thank you.

We will be using our timing system today. Each witness will be

asked to limit their oral testimony to 10 minutes. Your entire written testimony will be submitted in the record. There is a timing

system that we use. When the red light comes on, you have about

1 minute to conclude your comments. We will also be doing rounds

of questioning that will be 10 minutes in length also.

Without objection, I am going to make all of the exhibits that are

used today part of the hearing record.

I would now like to introduce our first witness this morning. He

is John Mathewson, who formerly owned Guardian Bank in the

Cayman Islands. Mr. Mathewson’s testimony will provide insider

knowledge regarding how an offshore bank can use the products

and services available through its correspondent accounts to conceal the proceeds of crime. Mr. Mathewson will be accompanied

this morning by his attorney, Oscar Gonzalez.

Pursuant to Rule VI, all witnesses who testify before the Subcommittee are required to be sworn. At this time I would ask that

the witness please stand and raise his right hand. Do you swear

that the testimony you are about to give to the Subcommittee will

be the truth, the whole truth, and nothing but the truth, so help

you, God?

Mr. MATHEWSON. I do.

Senator COLLINS. Mr. Mathewson, you may proceed with your

statement.

10

1The prepared statement of Mr. Mathewson appears in the Appendix on page 139.

TESTIMONY OF JOHN M. MATHEWSON,1 FORMER OWNER OF

GUARDIAN BANK AND TRUST (CAYMAN) LTD., ACCOMPANIED BY OSCAR C. GONZALEZ, ESQ.

Mr. MATHEWSON. First, I would like to express my appreciation

and surprise at the amount of knowledge both Senator Collins and

Senator Levin have elicited in their opening statements. And, also,

I should address Senator Collins, Senator Levin, Senator

Carnahan, distinguished persons. Having spent more than 10 years

in the offshore industry, it is surprising to hear a couple of Americans who have accumulated the knowledge that the two of you

have accumulated for purposes of protecting the United States from

offshore banking.

I prepared a written statement, sent it to Elise Bean, asked her

what portion of it I should read to the Committee, and she told me

none of it because if I read it, everyone’s eyes would begin to glaze

over. And I said, ‘‘Well, all right. What should I do?’’ And she said, ‘‘Well, wing it.’’ So I’m winging it.

I’m 72 years old. I’m an ex-Marine. I served in China. I’m one

of the few survivors of that era. I’m rather proud of having been

in the Marine Corps. I appreciate the United States. I thank God

I was born in this country, especially after seeing other countries

and what goes on in them.

I have been asked, Why have you cooperated to the extent that

you have with the U.S. Government? And the reasons are twofold:

One, my appreciation for being able to live and also for having been

born in the United States; and, two, individuals in New Jersey who

dealt with me. One was William Waldie of the FBI. He would erase

any thoughts that one might have about the recent FBI individual

who had done work for the Russians. Waldie is a man of his word.

He is very honorable. And also John Carney, who is the Assistant

U.S. Attorney in New Jersey, who lived up to his word, is honorable. And without those two, I would not have cooperated to the extent that I have cooperated.

In addition, there is Judge Lechner in New Jersey, who, after he

had sentenced me to probation, asked me very pointedly, will you

continue your cooperation with the U.S. authorities? My answer

was yes. I have continued it.

Now, I could tell many stories about offshore banking. I could tell

one of my own where I was a successful businessman in the Chicago area. I learned to fly. I did not learn to fly in the Marine

Corps. I learned as a civilian. Over the years, I had three aircraft.

With an aircraft at your disposal, there is always a temptation to

fly almost anyplace, whether it is necessary or not. I had read

about the Cayman Islands, had read about the tax advantages pertaining to the Cayman Islands, and 1 day decided it was time that

I go down there and find out about them.

So I flew my aircraft to the Cayman Islands. En route, over

Cuba, in what is called the Hiron Corridor, I had three MiGs come

up, one on either side of the aircraft and one in front. I was on

course with Havana Center. I asked them what was going on, and

they said, Senor, we are identifying your aircraft. With that, the

MiGs peeled off, and I didn’t see them again. They were so close

11

to my aircraft that I could make out the features of the pilots. I

continued to the Cayman Islands, landed. It was late on a Friday

afternoon, got a phone book, looked up banks, saw the Swiss Bank

Corporation, and thought, well, I’ve heard of them before, I guess

they’re legitimate, and I called them.

I spoke to the managing director, Rodney Bond, and he said they

were closing the bank shortly. I had told him I wanted to start an

account. He said, I’ll wait for you. So I took a cab over there and

opened an account with the Swiss Bank Corporation. That was my

first introduction to offshore banking. I didn’t know anything about

it before that time.

I continued to go down to the Cayman Islands. I enjoyed the

weather. I enjoyed the beach. I enjoyed the people. And over the

years I got tired of the business I was in in the Chicago area and

decided I would go into semi-retirement. I bought a home in the

Cayman Islands, went down there to live. Two weeks after I was

there, two individuals in the financial community, Keith High and

Rex Rankin, who are still active, propositioned me to buy 60 percent of the shares of a bank. I thought it over and thought, well,

it’s a good idea.

I was then told that I would have to go in to see the inspector

of banks of the Cayman Islands. I did this. He informed me I would

have to undergo a check by the FBI and also Scotland Yard. I told

him to go ahead. Two weeks later, I received a phone call I had

been approved as a 60-percent shareholder of a bank in the Cayman Islands.

I worked very hard with the bank, giving it American expertise

in advertising and so forth. And after a 10-year period—or I should

say at the end of the 10-year period, our earnings for the latest

year, before the bank was taken over, were $5 million. I was going

from zero to $5 million. We had applied for an additional bank license in the Bahamas. We were told that bank license would be approved, all they needed was a letter from the Cayman Island financial authorities stating that we were an active business, an active

bank in the Cayman Islands.

That letter was never obtained, and on January 18, the Cayman

Island Government came into Guardian Bank with an order stating

that the bank was not being operated in a manner that was beneficial to the Cayman Islands and that Ernst and Young, the accounting firm, was to take over the bank and run it for a period

of 90 days and then report to the governor and council.

We left the bank realizing that there would be no bank after a

90-day period of a bunch of accountants running it, and contacted

Coopers and Lybrand and put the bank into liquidation.

After a 10-year period, we had $150 million in footings in the

bank. We had about 2,000 clients. I became a member of the Cayman Island Rotary Club. In fact, I was president of the club in

1993. In this club was a nucleus of managing directors and other

employees associated with the financial business in the Cayman Islands. Everything I ever needed to know about banking I learned

from them in our gab fests after the Rotary meetings. All of the

things that Guardian did was learned from other banks. I have

never had an original thought in my life, but I have been able to

take what other people do and sometimes do a better job with it.

12

But Guardian was just a run-of-the-mill bank in the Cayman Islands doing its thing, the same as all of the others.

The one thing I learned very quickly, after having a bank in the

islands, was that clients opening an offshore account were doing so

for tax evasion; otherwise, they never would have paid the fees that

were charged to them for offshore banking. There would be no

point in it.

Also, considering that all of these services that we provided offshore were free from U.S. banks in the United States, it didn’t

make sense.

Now, the Cayman Islands very proudly claims that they have

US$600 billion on deposit, and they have 600 banks registered and

doing business in the Cayman Islands. My thought is: How much

of the $600 billion in the Cayman Islands is there for tax evasion?

I will tell one story and then I will cut this off. I knew Don Stewart of the Royal Bank of Canada reasonably well. He also was a

Rotarian. And he would tell stories about before I came on the island when things were very wide open, about planes coming in

with boxes of $100 bills and how it would take all night to count

the money. Now, he never said where the money came from, but

this was something that continued for days. Also, a Rudy Evans,

who was the equivalent of a chief of police in the Cayman Islands,

tells about the money he earned by guarding all of this money

when it was being counted at the Royal Bank of Canada. This was

a very common practice.

The firm of attorneys that I used to go over the paperwork to go

into the banking business was a firm called Meyers and Alberca.

They, as far as I know, are still in business. When I went in with

the various papers for them to look over, Daryl Meyers brought me

into his office and apparently thinking that, well, now I am a member of the financial community, why cover anything up, he had two

suitcases sitting in his office, open, full with $100 bills. I know a

little something about currency, and I would guess there was at

least US$10 million in those two suitcases. I didn’t say anything.

He didn’t say anything. Apparently, he had just received this

money, and I would assume it was going into one of the banks on

the island.

I believe that is my opening statement.

Senator COLLINS. Thank you, Mr. Mathewson.

Mr. Mathewson, would you please describe what the assets and

client base were of Guardian Bank at its peak?

Mr. MATHEWSON. I heard ‘‘the assets.’’ What was——

Senator COLLINS. The client—how many clients and what were

the assets of the bank at its peak?

Mr. MATHEWSON. Yes, ma’am. The assets of the bank were approximately $150 million, and there were around 2,000 accounts.

Senator COLLINS. And since Guardian was an offshore bank, as

I understand it, that means that none of its depositors were citizens of the Cayman Islands. Is that correct?

Mr. MATHEWSON. That’s correct.

Senator COLLINS. In your testimony, you estimated that approximately 95 percent of Guardian’s clients were, in fact, citizens of the

United States. Is that accurate?

13

Mr. MATHEWSON. That was a guess. However, William Waldie of

the FBI made it a point to check that out, and he verified that it

was 95 percent. So it was a pretty good guess.

Senator COLLINS. And as I understand it, in your judgment, virtually all of Guardian’s clients were engaged in tax evasion. Is that

an accurate statement?

Mr. MATHEWSON. That’s an accurate statement. However, one

thing I might point out, most of its clients were legitimate business

people and professionals in the United States.

Senator COLLINS. Legitimate, but engaging in tax evasion?

Mr. MATHEWSON. Exactly, yes.

Senator COLLINS. Well, some of us would quarrel with the word ‘‘legitimate.’’ Mr. MATHEWSON. All right. I understand.

Senator COLLINS. What leads you to conclude that the clients of

Guardian Bank were overwhelmingly engaged in tax evasion?

Mr. MATHEWSON. Every once in a while I would have a prospective client ask if Guardian Bank sent out 1099’s for earnings.

Senator COLLINS. And did it?

Mr. MATHEWSON. No, it did not. And my reply usually was, well,

if you would like one sent, please advise us.

Senator COLLINS. Did anyone ever take you up on that offer?

Mr. MATHEWSON. No one ever took me up on it.

Senator COLLINS. It is not illegal for an American citizen to

maintain offshore accounts, but obviously any income from that account is supposed to be reported to the IRS. According to one government estimate, at least $70 billion a year in personal income

tax revenue is lost to tax havens such as the Cayman Islands.

In your judgment, are there any legitimate reasons why an

American citizen would use the services of an offshore bank?

Mr. MATHEWSON. Some of the other reasons that an offshore

bank would be used by a U.S. person would be to hide money from

a spouse; in the event of a bankruptcy, to secrete funds offshore out

of the bankruptcy; but this all would be tax evasion, anyway. No,

I don’t think so. I think it is almost ridiculous to think that anyone

would establish an offshore account without the thought of being

able to make money with it by evading taxes.

Senator COLLINS. Mr. Mathewson, without the correspondent

banking accounts in the United States, would Guardian have been

able to conduct its business and provide the services that its clients

wanted?

Mr. MATHEWSON. Senator, you have hit on the Achilles heel of

the entire offshore banking industry. Without correspondent banks

to accept U.S.-dollar checks and wire transfers, the banks would be

out of business in the Cayman Islands.

Senator COLLINS. Did Guardian’s U.S. correspondent banks take

any steps to determine the sources of Guardian’s deposits? Was

there scrutiny given to the accounts or the sources of money?

Mr. MATHEWSON. None that I know of.

Senator COLLINS. And why do you feel that was the case? Why

wasn’t there more scrutiny?

Mr. MATHEWSON. I’m not certain they really cared, as long as

they were receiving substantial funds. And, remember, there were

millions and millions of dollars involved.

14

Senator COLLINS. In fee income to the correspondent banks in

the United States?

Mr. MATHEWSON. Well, for instance, with the Bank of New York,

we kept very substantial accounts there, and they paid interest on

those accounts.

I think they just didn’t really wish to rock the boat, and they

were very happy with the deposits that were going into their bank

and would have liked even more.

Senator COLLINS. Was it expensive for your American clients to

maintain accounts with Guardian?

Mr. MATHEWSON. Yes.

Senator COLLINS. Could you give us some idea of the charges

that were imposed and also explain the idea of corporate accounts

that were used to shield the identities and how much you charged

for those accounts?

Mr. MATHEWSON. Most of our clients did have Cayman Island

corporations. The cost of establishing a corporation for them was

$5,000. In addition to that, there was a $3,000 annual management

fee payable in advance. So the total cost initially was $8,000.

There were other charges. For instance, if they wanted a wire transfer, we charged either $100 or $150. I’ve forgotten the exact

amount. If there was an incoming wire transfer, we charged approximately $100 for that.

Anything that we did, there was a charge. If they called, the cost

of the telephone was put onto their account. It was quite costly,

and considering that all of those services could be provided in the

United States for no charge, it made no sense unless there was tax

evasion as the ultimate goal.

Senator COLLINS. Thank you, Mr. Mathewson.

Senator Levin.

Senator LEVIN. Thank you, Madam Chairman.

If a U.S. citizen came to the bank and wanted to open up an account, what would you have advised them on how to do that? And

tell us about the creation of these corporations as well that you

have made reference to.

Mr. MATHEWSON. All right. Would you repeat the first part?

Senator LEVIN. Yes. If a U.S. citizen came to your bank and said

he wanted to open a bank account, what would you advise?

Mr. MATHEWSON. Normally, when they would come in, they

would come in either as a result of some advertising or our audiovisual presentation at one of the hotels or it was a recommendation. After a number of years in business, 75 percent of our clientele was coming in from recommendations of other clients.

When they would come in, for the most part it had been explained to them what could be done offshore. The Cayman Islands

has a confidentiality law whereby it is a crime to divulge account

information. Therefore, they should be provided with complete anonymity relative to the account that they would establish.

You can take it a step further by having a corporation, and we

provided directors for that corporation so that the individual account-holder never had to sign anything or have his name visible

to anyone. And the only one who was aware that this U.S. citizen,

in most cases, was the beneficial owner of a corporation was in the

Guardian Bank. It was no place else.

15

Senator LEVIN. So by setting up a corporation, there was another

layer of secrecy in effect that would be added to that account. Is

that correct?

Mr. MATHEWSON. Yes, sir.

Senator LEVIN. When you indicated before that somebody was paying $5,000 to set up that corporation and then a $3,000-peryear management fee, that is $8,000 up front and then an ongoing

$3,000 per year. That is what people were paying for additional secrecy? Is that fair to say?

Mr. MATHEWSON. Precisely.

Senator LEVIN. Isn’t that really what this is all about, is that

people are paying here to hide assets from usually the U.S. Government to which they would owe taxes on that money if the government knew about it?

Mr. MATHEWSON. Yes.

Senator LEVIN. Did any of your clients open accounts in their

own names?

Mr. MATHEWSON. We had very few, possibly a handful, that had

accounts in their name only.

Senator LEVIN. In their own name.

Mr. MATHEWSON. Yes. However—— Senator LEVIN. You said in their name only, or in their own

name?

Mr. MATHEWSON. Well, in their name only, which was also in

their name. However, with those few clients that had an individual

account, we referred to it only by the account number. We did not

use the individual’s name in any paperwork pertaining to it.

Senator LEVIN. All right. The purpose of that being, again, to

keep that client’s identity secret. Is that correct?

Mr. MATHEWSON. Yes, sir. By the way, I knew very well a Sir

Vassal Johnson, who is Caymanian, and he was knighted by Queen

Elizabeth on the island for having established the confidentiality

laws and the financial secrecy of the island and being responsible

for the success of the financial community.

Senator LEVIN. That secrecy is one of the things that attracts

people who are trying to evade taxes. Is that fair to say?

Mr. MATHEWSON. Without that secrecy, the Cayman Islands

would be a fishing community again.

Senator LEVIN. Am I correct that the Guardian Bank issued credit cards also to its clients?

Mr. MATHEWSON. Yes, sir.

Senator LEVIN. And isn’t that the way clients frequently got access to those funds, is through that credit card?

Mr. MATHEWSON. It was another means where they could take

funds or earnings out of their account and spend those funds either

in the U.S. or worldwide.

Senator LEVIN. And they also did that through wire transfers?

Mr. MATHEWSON. Well, they could do it through wire transfers.

However, the card probably was the safest way of accomplishing it.

Senator LEVIN. Now, did you send monthly bank statements to

your clients in the United States?

Mr. MATHEWSON. We did not.

Senator LEVIN. Again, that was to keep any records out of the

United States. Is that correct?

16

Mr. MATHEWSON. That’s correct.

Senator LEVIN. How did the clients generally deposit their money

in that bank?

Mr. MATHEWSON. Several ways: Cash occasionally, checks that

they brought in with them when they established the account, and

then ongoing, sending checks by regular U.S. mail to the bank. We

instructed the clients to make those checks out to G.B., which

would stand for Guardian Bank, G.B.&T., Guardian Bank and

Trust, or we gave them options to make them out to Sentinel Limited, Fulcrum Limited, and there was one other, and I don’t recollect that one. It was Tower Limited.

Senator LEVIN. And then how did the checks get into the correspondent account?

Mr. MATHEWSON. We received a number of checks every day.

After we processed them and credited the individual client account,

we batched them, sent them by courier to whoever our correspondent bank was at the time, whether it would be the Bank

of New York, First Union, or any of the others.

Senator LEVIN. Now, you have indicated what some of the services were that the U.S. banks, your correspondent banks, did for

your clients: Clearing checks, receiving and sending wire transfers,

and so forth. And those were services that you performed as well,

and I believe you said that the U.S. banks were critical to each of

those transactions that you performed.

What would have happened if the Guardian Bank had been unable to open a U.S.-dollar correspondent account at a U.S. bank?

Could you have handled U.S. clients unless you were able to open

those correspondent accounts at U.S. banks?

Mr. MATHEWSON. Remember, there’s always a flanking movement, Senator. If we were unable to open a U.S. correspondent

banking relationship, we probably would have gone to another

bank that had a correspondent relationship and pay them a fee for

clearing our checks.

Senator LEVIN. And then would have had an account with them?

Mr. MATHEWSON. Yes, sir.

Senator LEVIN. So that if for any reason you couldn’t have

opened a correspondent account at a U.S. bank, you then would

have done it indirectly through opening an account with a bank

that did have a correspondent account at a U.S. bank. Is that fair

to say?

Mr. MATHEWSON. That’s correct.

Senator LEVIN. But unless you could either open up your own

correspondent account with a U.S. bank or establish an account

with a bank that did have a correspondent account with a U.S.

bank, is it not fair to say that you simply could not have handled

U.S. clients?

Mr. MATHEWSON. That’s exactly right.

Senator LEVIN. You said in your statement and again this morning that small offshore banks are fully dependent upon the more

established banks to give them access to banking services such as

wire transfers, check clearing, credit cards, and investment accounts, and that they couldn’t stay in business without having this

access. My question now then is this: Since these offshore banks

are so totally dependent, as you have just testified, upon having acVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 71166.TXT SAFFAIRS PsN: SAFFAIRS
17

cess to those services through that U.S. bank, either directly by establishing a correspondent account or establishing an account with

another bank that does have a correspondent account, is it fair to

say that U.S. banks can demand any information and cooperation

from a foreign bank that they need in order to decide to open or

maintain an account for that bank? In other words, they are the

ones that are needed. It is our U.S. banks that are performing the

services and that they can demand information that they want or

else simply say we are not going to open the account. They have

that power, do they not?

Mr. MATHEWSON. Yes, they do.

Senator LEVIN. Thank you. My time is up.

Senator COLLINS. Senator Carnahan.

Senator CARNAHAN. Thank you.

Mr. Mathewson, thank you for being here today. Your testimony

is certainly quite eye-opening.

In your former bank, Guardian Bank and Trust Limited, citizens

deposited money into your accounts in an attempt to evade paying

U.S. taxes. In your estimation, how widespread is this activity?

Mr. MATHEWSON. I can only speak from my own experience. We

had many people come to the Cayman Islands, came into Guardian

Bank very interested in finding a way to secrete funds in some

fashion or another. Taking the Cayman Islands’ own publication of $600 billion U.S. dollars on deposit, I have to think it’s rather

widespread.

Senator CARNAHAN. The Subcommittee’s investigation has also

uncovered instances where scam artists convinced average citizens

to invest money in correspondent accounts for high returns. The

banks then refused to return the money to the defrauded investor.

While this situation may not be a part of your direct experiences,

I would like to know if you have any suggestions on how consumers

could protect themselves from these types of scams.

Mr. MATHEWSON. I suppose there will always be con artists out

there peddling something that purportedly is going to make them

a great deal of money for very little effort. And there’s a certain

intrigue pertaining to the offshore industry that people are attracted to.

I don’t know any way to protect the individual who doesn’t detect

the con being perpetrated against himself except that, for instance,

with the publicity that has been and will be emanating from these

hearings, attorneys in the United States and also worldwide are

going to warn their clients to stay away from the offshore accounts.

If someone is affluent and goes into his attorney and says, hey, I

got a million bucks and I’d like to secrete it someplace, the attorney

is probably going to say, well, don’t do anything, the offshore industry is probably over when it comes to secreting money.

But, again, going back to your question, I have no way of suggesting a way to eliminate this fraud perpetrated on people.

Senator CARNAHAN. Thank you very much.

Thank you, Madam Chairman.

Senator COLLINS. Thank you, Senator.

Mr. Mathewson, in your opening statement, you described

Guardian as a run-of-the-mill bank. By that I assume you mean

that the kinds of services provided, the reason that people had deVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 71166.TXT SAFFAIRS PsN: SAFFAIRS
18

posits in Guardian Bank, are similar to those of other banks in the

Cayman Islands. Is that correct? That the kinds of services you

were providing for people who were essentially hiding assets was

commonplace?

Mr. MATHEWSON. Yes.

Senator COLLINS. You also stated that you could think of no legitimate reason why an American citizen would use an offshore account, particularly since the charges were so high compared to

what an American bank would charge. Is that correct as well?

Mr. MATHEWSON. That’s very correct, yes.

Senator COLLINS. And yet there is an estimated $600 billion of

American assets on deposit at these banks in the Cayman Islands?

Mr. MATHEWSON. That’s what the Cayman Island Government

claims.

Senator COLLINS. Given those facts, shouldn’t any correspondent

account request from a Cayman Island bank to an American bank

raise a red flag?

Mr. MATHEWSON. It should certainly set off the alarm bells, yes.

Senator COLLINS. And yet, in your experience, you found it very

easy to open correspondent accounts with American banks, with

virtually no questions asked. Is that correct?

Mr. MATHEWSON. That’s correct. Practically no questions. We

also opened accounts with, for instance, Prudential Bache of New

York and gave them millions of dollars of offshore funds for investment in everything from shares of Microsoft to U.S. Treasury bills.

Senator COLLINS. And yet, in your judgment, every one of your

2,000 clients at the peak of Guardian Bank’s existence, every one

of those individuals was hiding assets. Is that correct?

Mr. MATHEWSON. Yes.

Senator COLLINS. Either from the American Government or from

a bankruptcy court or a divorced spouse or someone else who was

entitled potentially to a share of those assets?

Mr. MATHEWSON. I agree with that.

Senator COLLINS. Thank you.

Senator Levin, do you have any further questions?

Senator LEVIN. Just a few.

In using your correspondent account at American banks, you

didn’t then have to be particularly clever or in any way deceptive— you could just very readily deposit that money, as the Chairman

says, with no questions asked.

Mr. MATHEWSON. Yes. That’s correct. There were no questions.

We sent checks to them. They cleared them and put them into the

Guardian account.

Senator LEVIN. Did they ever press you for information about

your operations? Did you have a ‘‘know your customer’’ person

come to you every year and say, hey, we want to see what is going

on here, whether this money is tax evasion money, whether this is

being hidden from creditors in bankruptcy court? Did you have that

kind of scrutiny on a regular basis from banks?

Mr. MATHEWSON. Senator Levin, I never had any bank officer

from the United States, from a correspondent bank that we were

using, come in to talk to me, nor have I ever met anyone.

Senator LEVIN. I just want to comment on one reference you

made to the legitimacy of people who were depositing money in

19

their accounts in your bank. Tax evasion, as you pointed out, is not

legitimate, but some of the other reasons that you mentioned as

being the reason that legitimate people had for depositing money

are not legitimate either, including trying to hide assets from creditors in bankruptcy court. I won’t get involved in divorce proceedings because you cannot in a divorce proceeding either hide assets from your spouse and deceive a court as to what assets you

have. So with that one qualification relative to your testimony this

morning, I think your testimony has been extraordinarily accurate,

powerful, and right on target. I would just take exception with that

one reference you made relative to the legitimacy of some of the

people who try to evade taxes or try to use your accounts for other

purposes.

I can’t think offhand—now, there may be legitimate reasons, but

I haven’t heard any this morning, for hiding money.

Mr. MATHEWSON. Senator, I hear you loud and clear. When I said

that these people or some of them were quite legitimate, I’m referring to their businesses, they’re paying taxes in the United States.

However, once they crossed the line and started an account offshore, they were then evading taxes for one reason or another.

Senator LEVIN. When the checks came in to you, did you or your

clients put the account numbers on those checks?

Mr. MATHEWSON. We did not. And occasionally we would have a

client who was so used to putting account numbers on things in the

United States, and they would put their Cayman Island account

number on the check. In some instances, we’d send the check back

to them and tell them to rewrite it and leave the account number

off.

Senator LEVIN. And put the account number on a separate piece

of paper?

Mr. MATHEWSON. Correct.

Senator LEVIN. I have a great deal of difficulty with U.S. banks

doing business with shell banks, period. It seems to me that all of

the problems that those banks create that you have outlined here

this morning are such that there should not be that kind of acceptance of an account from a shell bank—at least I can’t see offhand

the reason why we should allow our banks to do business with a

shell bank.

Now, relative to offshore banks, do you think that the same kind

of restriction should apply to offshore banks? Should we allow our

banks to do business with offshore banks with whom they have no

affiliation?

Mr. MATHEWSON. I don’t think you have to prohibit our banks

from doing business with offshore banks, but I think you can make

it so that the individual client who is planning to evade taxes just

isn’t going to take money offshore.

For instance, we’ll say—I’ll pick on the Bank of New York since

they’ve been picked on quite a bit recently, anyway. If the Bank of

New York had an officer who would go over all of the checks received from offshore banks and all of the wire transfers to see if

there was anything in those checks and wire transfers that would

smack of fraud, it would cut way down on the use of offshore accounts by Americans, because this publicity would get out.

20

Senator LEVIN. How about requiring that the account numbers

be on those checks?

Mr. MATHEWSON. Yes, right. Well, something on the check. But

I think, with thinking it through, that it would be possible to cut

down on offshore banking considerably.

Senator LEVIN. The Cayman Islands has strengthened some of

its rules since 1995 when you ended your operation in the Caymans, and I think we just want to make note of this, that apparently they have made a number of improvements in the way that

they regulate offshore banks. Just this week—and I am sure that

these hearings have something to do with it, and our investigation

has a lot to do with it—they have made an announcement that any

bank that is in possession of an offshore license must maintain an

office with a manager and keep its records in the Caymans. That

I think would be an improvement, but the practices that you have

described do flourish in other banks in other jurisdictions, and we

will hope that the Caymans’ tightening up will produce some results in the Cayman Islands themselves. But do you have any comment on that recent action by the Caymans?

Mr. MATHEWSON. I am sure that they are attempting to cover

their flanks and to keep their financial business going. When you’re

dealing with a Third World country—and no matter whether they

like it or not, the Cayman Islands is Third World—you’re always

subject to payoffs and activities that are outside of the law.

For instance, about 6 months before Guardian was taken over,

I had a political figure come in to see me and ask for $250,000 in

cash and a percentage of the bank’s shares. I told him to shove off,

I wasn’t interested. He warned me that I would regret doing this.

Well, hindsight is always great. I would assume it’s possible that

if I had gone along with his wishes that Guardian Bank might very

well still be in existence.

That individual is still a member of the legislative assembly of

the Cayman Islands. He is still one who is trying to wiggle around

U.S. rules, and I just thought I’d point this out, that they are trying to go around any rules or regulations that are made to impede

their financial progress.

Senator LEVIN. Tax evasion is not a crime in the Caymans. But

it is here, and what you just described, I hope, is a crime in the

Caymans. In any event, if you haven’t already reported that to our

FBI so that they can send that information to the Cayman Government, I would ask that you do that.

Thank you.

Senator COLLINS. Thank you, Senator Levin.

Senator Carnahan, do you have any further questions?

Senator CARNAHAN. No further questions.

Senator COLLINS. Thank you.

Mr. Mathewson, I would like to thank you for your testimony

today. It was extraordinarily helpful to the Subcommittee, and I

appreciate your cooperation.

Mr. MATHEWSON. Thank you, Senator Collins. I was asked to

bring in one of the Guardian Bank credit cards by Ms. Bean. Would

you like to see that?

Senator LEVIN. Yes, could you show us the credit card? Would

that be all right, Madam Chair?

21

1See Exhibit No. 46 that appears in the Appendix on page 823.

Senator COLLINS. Sure.

Senator LEVIN. Would you show us that credit card? And do we

have a copy of it? 1

Mr. MATHEWSON. Now, that was my personal credit card.

Senator COLLINS. What is very interesting about this credit card

is it is made out to Guardian Bank. It does not have your name

on it or any client’s name on it. Is that typical of how the credit

card—— Mr. MATHEWSON. It could have been ABC Corporation also,

backed by a U.S. citizen. And if you look on the back of the card,

you’ll see my signature, which is illegible. No one ever questioned

that card, and I made a number of charges on it over a period of

time, as did many of our clients.

Senator COLLINS. We are putting it on the audio-visual system

so that it can be seen.

Senator Levin.

Senator LEVIN. Yes. The fact that your signature is illegible I

don’t think distinguishes this card from any other credit card.

[Laughter.]

Mr. MATHEWSON. No.

Senator LEVIN. In more significant ways, it is very distinctive. It

does not have your name on it.

Mr. MATHEWSON. Right.

Senator LEVIN. And what you are saying is that when your bank

issued these credit cards, frequently they would be issued to a corporation which had been set up in the Caymans to protect the identity of people so that there would be total secrecy, but that a person who had set up that corporation in the Cayman Islands and

who had used your bank to hide their money could walk into a

bank here or to an ATM machine and use that credit card, with

only a corporate name on it, not their own name on it, and have

access to their account at your bank. Is that right?

Mr. MATHEWSON. Exactly, Senator. And if you recollect, early on

I mentioned that I have never had an original thought in my life.

When I introduced the use of credit cards at Guardian Bank, I did

so because I had learned that Barclay’s and some of the other

major banks were also using credit cards, and I thought, why not,

it sounds like a good idea.

Senator LEVIN. It sure makes hiding money and evading taxes

mighty simple, and that is exactly what is going on in these kinds

of offshore banks. You have come forward, which has been very

helpful, and hopefully after these hearings and after we tighten up

the law, it is going to be a lot more difficult to hide money that

should not be hidden and to evade taxes which should be paid, like

other citizens pay their taxes. And hopefully the other kind of

money laundering activities which go on at too many of these respondent banks will be reduced significantly. That will come because of a lot of reasons, but in part because of your coming forward here and making this testimony available to us and to other

agencies of our Federal Government.

Thank you.

Mr. MATHEWSON. Thank you.

22

1The prepared statement of Mr. Christie appears in the Appendix on page 143.

Senator COLLINS. Thank you, Mr. Mathewson. You may be excused.

Mr. Mathewson, we will get your credit card back to you in the

hall.

Mr. MATHEWSON. OK.

Senator COLLINS. Although it looks like any of us could use it

with impunity. Thank you.

I would now like to call forward our second panel of witnesses

this morning. They are representatives of Bank of America and J.P.

Morgan Chase.

I would first like to introduce James Christie, who is Senior Vice

President, Global Treasury Risk Management of Bank of America.

Also testifying this morning is David Weisbrod, the Senior Vice

President of Treasury Services Division of the Chase Manhattan

Bank or J.P. Morgan Chase, I guess it is more properly called now.

Pursuant to Rule VI, all witnesses who testify before the Subcommittee are required to be sworn, so at this time I would ask you

both to please stand and raise your right hands. Do you swear that

the testimony you are about to give to the Subcommittee will be

the truth, the whole truth, and nothing but the truth, so help you,

God?

Mr. CHRISTIE. Yes, I do.

Mr. WEISBROD. Yes, I do.

Senator COLLINS. Mr. Christie, you may proceed.

TESTIMONY OF JAMES C. CHRISTIE,1 SENIOR VICE PRESIDENT, GLOBAL TREASURY RISK MANAGEMENT, BANK OF

AMERICA, OAKLAND, CALIFORNIA

Mr. CHRISTIE. Thank you. Good morning, Chairman Collins, Senator Levin, and members of the Subcommittee. I am Jim Christie,

a senior officer at Bank of America, and I am pleased to appear before the Permanent Subcommittee on Investigations to discuss

Bank of America’s anti-money laundering efforts.

We appreciate the opportunity to meet with you today to discuss

some of the cooperative efforts we have taken in working with the

U.S. Government to detect and deter fraud and money laundering

and also, of course, to answer your questions.

Senator Levin, your staff spent a considerable amount of time

with us to learn about correspondent banking and how it works.

Senator Collins, we were one of the first banks to volunteer to assist your staff and Senator Levin’s staff in this learning process.

And, of course, you know we also submitted a detailed response to

the survey distributed by the Subcommittee staff members last

year.

As we mentioned in our earlier discussions with your staff members and in our response to the survey, correspondent banking is

indeed vital to the financial industry. The notion of correspondent

banking has been in existence since the creation of banking. Without correspondent banking, the global markets could not function.

Correspondent banking is the basis for the settlement of payments

and the movement of funds on a worldwide basis.

23

According to outside sources, each day, through the use of two

major wire transfer systems—that is, Fedwire and CHIPS—trillions of dollars of settlements are made. Bank of America settles

approximately 500 billion on a daily basis. However, the same attributes that make correspondent banking work fast and efficient

for commerce also make it vulnerable to money laundering.

We take very seriously our role in assisting the United States

and other governmental agencies in the fight against money laundering. For many years, law enforcement authorities worldwide

have recognized Bank of America as a cooperative institution in assisting law enforcement in its efforts to combat money laundering.

An example of our willingness to cooperate, our bank agreed to establish undercover accounts for the benefit of U.S. law enforcement

in its Operation Casablanca, a controversial operation that has left

the Bank of America brand exposed to adverse media attention. In

the past, we also received an award from the Internal Revenue

Service recognizing our cooperative efforts with that agency.

We believe that our bank has a solid program in place, including

adequate internal controls and practices, to detect and report suspicious activities related to money laundering. In the United

States, for example, Bank of America is one of the top filers of currency transaction reports—also known as CTRs—and also suspicious activity reports—known as SARs. These reports are useful

to law enforcement in investigating financial crimes and money

laundering activities.

In the year 2000, for example, we filed over 1.5 million CTRs and

nearly 12 percent of all the CTRs filed with the U.S. Government.

In addition, we filed nearly 19,000 of the reported 140,000 SARs

filed in the United States, or 14 percent of the total filings.

Our ability to recognize and file reportable activities does not

come without a sizable investment in technology and human resources. Bank of America has invested heavily in monitoring systems over the years to capture and report cash and other activities

potentially related to money laundering. The bank’s internally built

wire-monitoring systems, for example, have been reviewed and assessed by numerous regulatory and law enforcement authorities.

Several of these agencies, including the U.S. Financial Crimes Enforcement Network—or FinCEN, as it is commonly known—have

given our systems high praise. Still, we have not been complacent

in our monitoring efforts. In fact, we have recently made a further

investment into new technology to enhance our wire monitoring,

and we continue to research other available solutions.

Obviously, at the heart of any monitoring system is the person

who is reviewing the activity and making judgments about what is

suspicious. Here, too, we have increased our staff and upgraded a

number of those positions.

Now, let me speak to the business of correspondent banking and

how it works within Bank of America.

Our correspondent banking function is organized geographically

in four divisions, that is, the United States and Canada Division,

Asia Division, Europe, Middle East, and Africa Division, and Latin

America Division. Each division has the authority to organize its

functional responsibilities in a way they believe best serves our correspondent bank customers while still maintaining the use of our

24

corporate policies and anti-money laundering controls and procedures. Each of the division managers reports up to the head of our

Global Corporate and Investment Banking Group.

As mentioned in our response to your survey, we offer the same

correspondent banking services and products that other banks in

the industry offer, and you’ve already listed and named those in

your opening remarks.

There is a great deal of separation of responsibilities and controls

that assures safety and soundness in how we operate. This functional separation requires a number of staff members to become familiar with our corresponding bank relationships. Overall, we believe this type of organization approach provides outstanding service to our clients and instills proper checks and balances to guard

against fraud. It also fosters an environment that encourages our

associates to truly know our correspondent customers.

Today we maintain approximately 1,900 foreign correspondent

bank deposit accounts in the United States. As a matter of policy

and practice, we do not maintain accounts for foreign shell banks.

Certainly in the United States, we maintain 1,200 relationships

with foreign institutions, including 125 relationships for foreign

banks located in the 15 jurisdictions named by the Financial Action

Task Force on Money Laundering. The relationships are with

branches of institutions that maintain a home base office in one

country and have established a physical presence in the Financial

Action Task Force-listed country or with banks that are licensed by

the local jurisdiction and maintain a physical presence in that

country.

Before Bank of America would open a relationship today with a

foreign bank in a high-risk country, or, for that matter, anywhere

else in the world, a rigorous, risk-based due diligence process would

take place. The level of due diligence would depend upon several

factors, including, but not limited to, whether the bank is a branch

of a reputable bank based somewhere else in the world; whether

the bank already maintains a relationship with Bank of America;

who the principals are and their experiences in operating a bank;

whether a letter of introduction is available from a reputable banking organization; and other such relevant factors.

As part of our correspondent banking policy and standards, an

account would not be established for any institution that does not

maintain a physical presence in the high-risk country in which the

bank is licensed. As mentioned earlier, we do not currently maintain, to the best of our knowledge, any correspondent accounts for

foreign shell banks.

Minimum due diligence that typically would be required to open

a correspondent bank account will include a copy of the bank’s incorporation documents and bylaws, the institution’s latest financial

statements, a copy of the resolution of the board of directors authorizing them to proceed with establishing the relationship, and

dealing with those who are authorized to do so, plus certified copies

of the passports of the principals, a search of the company registry,

or equivalent, or an undertaking from a law firm as to what documents are held on the registry and any other relevant documents.

A visit to the institution’s physical operation and, where applicable, to the primary place of business is also required. We will also

25

want to know what ‘‘know your customer’’ standards the applicant

bank has in place; what type of client base the applicant maintains;

whether the correspondent bank will offer services to other foreign

correspondent banks, including any located in high-risk countries;

whether the bank has monitoring systems in place to detect and

investigate unusual or suspicious activities related to money laundering; and the typical amounts and volumes of activity the bank

anticipates having with us and whether these volumes seem appropriate.

We might also ask for the results of audits and regulatory examinations. However, there is no certainty that this information would

be provided to us.

We will also look to other due diligence information such as

search of publicly available data on the applicant or its principals.

Also, we generally have an understanding of most regulatory environments, especially if Bank of America has a physical presence in

the jurisdiction. If not, we would assess the regulatory environment

as well. In fact, several units within our bank meet on a constant

basis with regulatory authorities. We would also check the applicant and its principals against Office of Foreign Asset Control—i.e.,

the OFAC list—to see if there were any matches.

It should be noted that our wire-monitoring systems are used to

monitor transactions, not the normal or expected activities of the

foreign bank customers themselves. We look at certain types of information contained in the wire transaction fields to determine

whether or not the transaction is suspicious. If we find an issue

with a transaction, we refer the transaction back to the relationship manager and foreign correspondent bank for further resolution

with its own customer. If the transaction were deemed reportable

under U.S. regulations, we would also file the required suspicious

activity report in the United States.

If the transaction involves a foreign bank customer who also

maintains an account with Bank of America in the United States,

the transaction may have already been identified by the monitoring

systems.

We assess several factors in making the decision to close out a

relationship with a high-risk foreign bank. The factors might include a change in our business strategy, a downturn in the foreign

country’s economy, a credit decision, turnover in the correspondent

bank’s management, a loss of confidence in the principals of the

foreign office, or a lack of comfort in the type of customers that the

foreign bank maintains.

As I said before, we send $500 billion through the system each

day; therefore, Bank of America certainly recognizes its corporate

duty to be the leader in trying to fight against money laundering.

In addition to our policies and procedures and the monitoring systems I mentioned earlier, we have undertaken many steps to combat money laundering. This includes especially training of our associates on the importance of recognizing and reporting unusual and

suspicious activity. Bank of America has been favorably recognized

by the law enforcement community, as I mentioned earlier.

Senators Collins and Levin, you have asked us to discuss our relationship with Swiss American Bank and American International

Bank. It is generally not our policy to discuss, particularly in an

26

open forum, our relationship with bank customers or information

about customers. Certainly both of you can appreciate this.

However, under the circumstances, we shall provide you with the

history of the accounts, and I am prepared to discuss these relationships with you today to the best of my ability.

I see the red light. I better hurry up.

Senator COLLINS. Why don’t you take a couple more moments

and finish up?

Mr. CHRISTIE. OK. Thank you.

I think we’ll probably get into the details of American International Bank and Swiss Bank, so I don’t need to refer to those at

the moment. It would be the opening and closing of those accounts.

Regarding the recommendations, you have asked us to comment

on what more can be done beyond our own continued efforts to

combat money laundering. As I noted earlier, we take seriously the

problem of money laundering. One recommendation we have is to

strengthen communication efforts between the government and the

banking industry. Given our discussions with your staff and dealings with regulatory and law enforcement staffs throughout the

world, we are aware that many governments have been able to

identify, through their own investigative efforts, the names of individuals, companies, banks, other organizations, and countries that

continue to facilitate or tolerate other money laundering activities.

In fact, your staff has done a great job—I have to compliment

them—in uncovering a lot of information about our ex-customers,

AIB and Swiss American Bank, including some of their customers

that I am not sure we, in the banking industry, could have uncovered on our own.

It would be extremely beneficial for the U.S. Government and

foreign governments to provide these names to the banking industry, these suspicious names. U.S. banks, including Bank of America, are already required to maintain a system to interdict funds

transfer activity for OFAC. By providing us with the names of the

entities that are engaged in fraud and other related activities, we

could add this information to our monitoring systems and identify

for law enforcement the activities of these entities. This information would in turn potentially allow us to identify the accounts of

or relationships with the named entities.

In the past, the U.S. Government has provided us the names of

countries and high-risk areas for drug trafficking and money laundering, such as the report FinCEN released on Antigua a couple of

years ago. It would be even more beneficial to provide us with the

names of the entities that the U.S. Government ‘‘knows’’ are promoting illegal activities.

In conclusion, I wish to thank the Chairman and Senator Levin

and other Members of the Subcommittee for the opportunity to

voice Bank of America’s position on this topic and assure you that

we will continue our efforts worldwide to assist in the fight against

money laundering. Also, again, I wish to thank the staff members

for their investigative efforts. The resulting report helped to shed

light on the need to change and enhance many of our policies and

procedures at Bank of America.

I personally have learned from this exercise, and as a result, we

have already expanded our wire-monitoring process, established

27

1The prepared statement of Mr. Weisbrod appears in the Appendix on page 156.

more stringent and formal procedures for both opening and closing

accounts, and we have put processes and procedures in place to

better coordinate suspicious information with relationship managers, senior managers, and including my own risk management

staff.

Again, thank you for this time on today’s agenda, and I look forward to answering your questions.

Senator COLLINS. Thank you, Mr. Christie.

Mr. Weisbrod, would you proceed, please?

TESTIMONY OF DAVID A. WEISBROD,1 SENIOR VICE PRESIDENT, TREASURY SERVICES DIVISION, THE CHASE MANHATTAN BANK, NEW YORK, NEW YORK

Mr. WEISBROD. Thank you, Madam Chairwoman. My name is

David Weisbrod, and I am a Senior Vice President of the Chase

Manhattan Bank in our Treasury Services Division. In such capacity, I have oversight responsibility for the division’s credit and operating risk management policies, procedures, and practices attendant to the bank’s relationships with approximately 3,500 correspondents. The Chase Manhattan Bank, headquartered in New

York City, is the largest bank of J.P. Morgan Chase and Company,

a multi-bank holding company with assets in excess of $700 billion.

I appreciate the opportunity to make this statement on the very

important topic before the Subcommittee today, international correspondent banking and money laundering.

Correspondents maintaining accounts with Chase in New York

sometimes have credit relationships with us, but almost always require U.S.-dollar funds transfer clearing services. To place the size,

scope, and importance of the clearing business in perspective, on an

average day Chase processes over 220,000 wire payments with a

value in excess of $1.2 trillion. On January 16 of this year, we experienced a record volume day when 363,000 wire payments for

$1.8 trillion were processed. This translates to $21 million processed nearly every second, with an average transaction size just

under $5 million.

Over 93 percent of these transactions are processed straight

through, which means that the transactions are done entirely by

our automated systems, without any manual intervention. While

we are proud of our funds transfer prowess and its importance to

worldwide commercial interchange and the global capital markets,

we also understand our special responsibility to guard against the

laundering of money and other criminal abuses in the system.

By way of background, our primary focus in the creation of a

global funds transfer system and the resulting processes surrounding correspondent bank risk management has been upon

safety and soundness issues, that is, upon the credit risk and operating problems that might lead to large credit exposures that could

otherwise disrupt the smooth functioning of the payment system.

These are very important public concerns that must remain in the

forefront of an effective risk management program. In the last 2

years, however, we have witnessed revelations as to how the Bank

of New York was used in connection with money laundering

28

schemes orchestrated through several Russian banks. In the wake

of that incident, heightened attention has been given to the need

to expand anti-money laundering programs to protect banks from

being exposed to such illicit funds transfer activities. We, at Chase,

have taken a series of steps to expand our anti-money laundering

initiatives.

First, Chase has significantly enhanced its new account-opening

procedures and ‘‘know your customer’’ due diligence. We are currently conducting, as Senator Levin referred to, a review of our entire correspondent bank base using these enhancements. As part of

that review, all existing and new Chase customers will be documented utilizing a new ‘‘know your customer’’ checklist. The checklist covers such items as the customer’s history of doing business

with Chase, a detailed understanding of the customer’s ownership

structure, whether it is a publicly owned entity or privately held,

understanding of the customer’s cash flows and Chase products to

be used. The checklist also requires responses as to whether the

customer has sustained negative media coverage and the source of

referral for the relationship. In addition, the customer is requested

to provide its most recent audited financial statements, preferably

for the last 3 years. And a first priority for this review has been

placed upon the FATF countries, Antigua and Barbuda, and the

Seychelles. If after this review we are uncomfortable with the continued maintenance of any account, we intend to close it.

Second, all Treasury Services’ customers will be subject to periodic reviews in order to assure that the circumstances have not

changed that would significantly affect the manner in which their

accounts are utilized or in such a way as to present an unacceptable risk of illegal activity. The periodic review cycle will vary

based upon the perceived risk of doing business with a particular

set of clients or jurisdictions.

Third, Chase has enhanced its anti-money laundering transaction monitoring efforts in several ways. Last year, we established

a Funds Transfer Monitoring Committee, co-chaired by myself and

our chief compliance officer, which meets monthly to review questionable funds transfers. As part of this process, we have launched

a Web-based monitoring system designed to review U.S.-dollar

funds transfers on an after-the-fact basis. The system utilizes patterning or watchlist methodologies to flag potentially suspicious

transactions. The transactions are then evaluated by a dedicated

staff set up for this purpose. All of the FATF countries are included

on the watchlist. Chase has had for some time a monitoring committee that meets periodically to review questionable strings of

money orders or traveler’s checks.

Finally, Chase has intensified its effort to provide anti-money

laundering training to even more of its employees, recently introducing a new Web-based training and testing program for employees having desktop Internet access. All 4,400 Treasury Services

employees will be required—mandatory—to take this training and

to pass an online test. Not only do they have to do the training,

but they have to pass a test as well. Chase has always been in the

forefront in providing anti-money laundering training, having

trained, through 1999, over 27,000 employees in domestic locations

and over 16,000 employees in foreign locations.

29

Our Bank Secrecy Act compliance program is specially focused

upon high-risk banks and high-risk products. I have just mentioned

the high-risk countries which have been our focus. In such countries, and elsewhere, it has been our practice not to open accounts

for shell banks. With offshore banks, we intend to maintain a

heightened sense of vigilance, for we now better understand some

of the ways in which offshore banks in high-risk jurisdictions can

be exploited for money laundering or other dubious purposes. While

these risks are recognized in its 1999 Working Paper on Offshore

Banking, the International Monetary Fund has identified offshore

financial centers, or OFCs, as ‘‘an important and growing intermediation channel for emerging economies.’’ Moreover, the IMF has

reported that ‘‘a number of legitimate factors continue to attract financial institutions and investors to OFCs.’’ As the Minority staff’s

February 5th report points out, there are over 4,000 offshore

banks. An important future challenge facing us will be to determine how we can develop procedures which will enhance our ability

to separate the good banks from the bad banks, the vigilant from

the less vigilant.

In addition to high-risk banks, we well understand the risks associated with the high-risk products identified in the Minority

staff’s report, that is, wire transfers, payable through accounts and

pouch/cash letter activity. I have already mentioned our automated

systems for monitoring wire transfer activity and monetary instruments. In the case of payable through accounts, of which we only

have two, we follow judiciously the guidelines of the Federal banking regulators. Moreover, we have a corporate-wide policy which requires that any such account be approved by a senior officer and

notified in writing to the bank’s chief compliance officer.

Combating money laundering and other illegalities within the

international correspondent banking system is no easy task. The

Minority staff’s own report on page 41 recognizes that due diligence

information is often difficult to obtain from foreign jurisdictions,

and that which is obtained may be limited or difficult to evaluate;

that language barriers may impose additional difficulties; that

travel to foreign jurisdictions by U.S. correspondent bankers is

costly and may not produce immediate or accurate information; and

generally that due diligence, both at account opening and continuing after the account is opened, is not easy in international correspondent banking. And we could not agree more.

We recognize that the need to hone our Bank Secrecy Act compliance program is ongoing, but we do not purport to have all the answers. For example, the whole notion of ‘‘nesting,’’ as it is referred

to in the Minority staff’s report, is a very, very difficult problem.

It is typical for small banks to maintain accounts with slightly

larger banks, who maintain accounts with more and larger banks

and so forth and so on. These relationships are necessary and appropriate, in fact, essential to the conduct of global, commercial,

and capital markets activities. Unfortunately, these tiered relationships can also hide and make difficult to detect illicit activities.

We need to bring the expertise and experience of the financial

services industry to address these and other difficult issues, and we

need to do it now. An example of how effective such an effort can

be was demonstrated by the recent Wolfsberg Principles on private

30

banking. In a similar vein, Chase has enthusiastically joined with

its fellow members of the New York Clearing House in creating a

task force to develop best practice principles for correspondent

banking.

We welcome the opportunity to work closely with our State and

Federal banking regulators in areas such as this, although we do

not expect our regulators either to have all the answers. As cited

in the Minority staff’s report, for example, it was not until September of 2000, just a few months ago, that the Comptroller of the

Currency identified international correspondent banking as a highrisk area. Money laundering attendant to international correspondent banking is, in fact, an international problem. We thus

support the efforts of the Financial Action Task Force, the Basel

Committee on Banking Supervision of the Bank for International

Settlements, and other national and international organizations

worldwide which are focused upon this problem. While we believe

it to be impossible to have complete assurance that no bad actors

are slipping through the system, with a renewed vigor on the part

of the private sector, with help from our domestic banking regulators, and with the cooperation of foreign governments and international agencies, we all can do better in the future.

Senator COLLINS. Thank you.

Senator Levin, why don’t you lead off questioning this round?

Senator LEVIN. Thank you very much, Madam Chairman.

First, let me thank our witnesses and the banks that they represent for the cooperation which they have shown in this investigation, and their filling in of the questionnaires. That is very helpful.

We are going to be looking through these questions into some of

the past actions of these banks. But as far as this investigation is

concerned, you have been very cooperative and your willingness to

help us sort through some of these issues is essential.

First, on the question of shell banks, I think that you testified

just a moment ago, Mr. Weisbrod, that you do not open a correspondent account with a shell bank. Is that correct?

Mr. WEISBROD. Yes, sir.

Senator LEVIN. OK. I believe you have also indicated that for the

Bank of America, Mr. Christie?

Mr. CHRISTIE. That’s true.

Senator LEVIN. Is there any reason why we should not just flat

out prohibit U.S. banks from opening correspondent accounts with

shell banks?

Mr. CHRISTIE. Personally, I think it would be just fine, but some

lawyers would tell you that there might be unique situations for legitimate transactions. But I don’t know what they would be.

Senator LEVIN. Mr. Weisbrod.

Mr. WEISBROD. I haven’t thought of the need for legislation in

this area. I think that the banks themselves that are attentive to

the issue will unilaterally make the same decisions that Bank of

America and Chase have.

Senator LEVIN. What about the banks that aren’t attentive to the

issue?

Mr. WEISBROD. That is a good question.

31

Senator LEVIN. Is there any reason, though, that you can see

why we should not either through regulation or through law just

simply prohibit the opening up of an account with a shell bank?

Mr. WEISBROD. I can think of no reason offhand why.

Senator LEVIN. First, Bank of America. You established a correspondent relationship with Swiss American National Bank in

1987, and then in 1990 and 1991, the relationship manager raised

concerns about the management and operations of the bank. In

June 1991, Swiss American National Bank, which was an onshore

domestic Antiguan bank, wrote to the Bank of America, canceled

its account, and instructed the Bank of America to open an account

for its offshore affiliate, Swiss American Bank. The relationship

manager for the Bank of America at that time told our staff that

it looked like the account was opened without anyone at the Bank

of America making a determination if they wanted the Swiss American Bank to open an account—in other words, no vetting, no due

diligence by the Bank of America in that one. The relationship

manager said that the Swiss American National Bank and the

Swiss American Bank were both the same institution.

A similar thing happened with Chase. Swiss American National

Bank had an account with Chase since 1981. In 1995, Swiss American Bank—that is the offshore bank—opened an account. The account-opening documentation contained little more than an annual

report, and here is what the sales representative wrote: ‘‘Given

that there is a demand deposit account already opened in our books

in the name of Swiss American National Bank of Antigua, no further account justification comments are included.’’ But the two banks were different in significant ways. The National Bank was a domestic commercial bank, which was regulated

by the Eastern Caribbean Central Bank; whereas, the Swiss American Bank was an offshore bank, catering to international clients

and regulated by a jurisdiction that had little or no regulation at

the time, and that was Antigua at that time. But the only thing

that the two banks had in common was the management, and

Bank of America had concerns about that.

So I would like to ask both of you: Shouldn’t there have been

more due diligence to explore the primary focus of Swiss American

Bank’s business and the nature of its clientele to better understand

what Swiss American Bank was going to do before accepting its account?

Mr. CHRISTIE. All right. I’d like to answer this way: I think if we

can look back in history a little bit, a long time ago, probably when

I first started with the Bank of America, correspondent banking

was not deemed to be a risky business. In fact, it was sort of a boring business for anybody who wanted to get ahead in a bank. And

so not enough attention was paid to it, and there was no risk, there

were no losses, there was no harm. And this was before we learned

about money laundering related to narcotic drugs and so forth moving through the banks.

So the account officers grew up in an environment that said all

banks are good, and the more banks we can have in our portfolio,

the better, and this is a good business because we already have the

machinery and mechanisms for clearing checks and wire transfers

and so forth. So if you can think of that as the environment and

32

for some of the account officers that grew up in that environment,

it was more of a knife-and-fork kind of business. You went out and

you had lunch or dinner with them, learned what they were doing,

and perhaps played golf and came back and looked at the balances.

Well, obviously, in this case, in 1987, when the account was

opened, that was certainly true with regard to the account officer

at that point in time. That’s when we first started the relationship

with the Swiss American National Bank. In fact, that person happened to be in Antigua and thought he knew everybody in Antigua

and thought he knew the regulations there and thought that he

could do no harm.

But in 1991, the environment was still somewhat the same except by this time we knew that banks could fail, so we had greatly

enhanced and heightened our concerns and awareness about the

credit quality of banks and any kind of credit risk we might take

with a bank.

So if it was going to be a bank or a transaction that was going

to require credit, a different attitude was present, plus more sets

of eyes would have looked at the bank or the transaction. But in

this case, it was not a credit transaction. It was not a credit opportunity. It was simply in the account officer’s mind, this existing

customer of ours who’s been with us for a number of years now,

gee, they’re simply rearranging their banking relationship. I mean,

I saw some of the memos that your staff saw, and, in fact, there’s

one statement in there that says, oh, well, they’re just opening another account. And so you’re right. No one stopped at that point in

time and took a deep breath and said, what is this new bank that

we’re opening the account for?

Had we stopped and done that and had we had the benefit of all

the knowledge we have today, after all of the investigations and reporting that we now see from your staff, obviously we should have

done something different. But the environment didn’t call for it

then.

Also, in that time frame, an account, as long as there was no

credit, could be opened by the authority or the authorization of the

account officer, him- or herself. So I’m afraid that the environment

was different at that point in time, and that’s how the accounts got

opened.

Senator LEVIN. Do you have any comment on that?

Mr. WEISBROD. I would answer your question with one word, and

that is, yes, there should have been more due diligence. And we

have an enhanced program which we’re implementing now to avoid

a repetition.

Senator LEVIN. OK. Mr. Christie, now relative to American International Bank. The Bank of America established an account for

American International Bank in 1993.

Mr. CHRISTIE. Correct.

Senator LEVIN. The relation manager heavily relied on the fact

that he knew the owner of the bank, Mr. Cooper, from when Mr.

Cooper had been affiliated with other Antiguan banks. American

International Bank was a new bank. It had no operational history.

There was little probing by the relationship manager into the nature of the bank or its clientele.

33

The material which was supplied to your bank by the American

International Bank, however, raised some questions. First, it indicated that although the American International Bank was formed

in 1990, it did not hold its first organizational meeting until December 1992 and did not begin operations until mid-1993. Should

that have raised a red flag?

Mr. CHRISTIE. It seemed strange to me when I saw the facts, yes.

Senator LEVIN. All right. Now, we also have portions of a brochure of the American International Bank, which was included in

the account-opening documents. So when they opened the account

with you, this was a brochure which was given to you. It stressed

confidentiality, called it a competitive advantage, stressed that the

host country has criminal penalties against disclosure of client information, except by the order of a court. It notes that there are

no tax treaties or information exchange treaties between Antigua

and foreign countries, other than England. It touts the advantages

of forming an international business corporation in Antigua, and no

reporting requirements on offshore activities. The books of the corporation may be kept in any part of the world. Wherever those

books are, if you can figure out where they are, you can try to get

them, but you will never know where they are because they can be

anywhere. They are allowed to be kept anywhere. They don’t have

to be kept in Antigua.

Shares of the corporation may be issued in bearer share form,

which means that the owner of the company is whoever has physical possession of the shares of the corporation. So you never know

who the ownership of your account is when you have these bearer

shares.

Shouldn’t this brochure emphasizing those ways to keep secret

this money, shouldn’t that have raised some red flags? Shouldn’t

that have set off some alarm bells?

Mr. CHRISTIE. Absolutely. I can’t deny that.

Senator LEVIN. My final question, and my time on this round is

up, I am just curious about this. Do you know whether or not it

is still the law in Antigua that the books of the corporation may

be kept in any part of the world and that share certificates can be

issued and registered in bearer form?

Mr. CHRISTIE. I don’t know.

Senator LEVIN. Do you happen to know, Mr. Weisbrod?

Mr. WEISBROD. I don’t.

Senator LEVIN. Thank you. My time on this round is up. Thank

you.

Senator COLLINS. Thank you, Senator Levin.

I mentioned in my opening statement that one of the aspects of

this investigation that has troubled me is that American banks

seem to do much more due diligence when they are extending credit to correspondent accounts than when they are just providing feebased services. And there are numerous examples of that. I would

like to ask you, Mr. Christie, about one. I realize it goes back many

years ago, but I think it amply demonstrates the difference in due

diligence that is applied when a bank has its own funds on the

34

1See Exhibit No. 14 that appears in the Appendix on page 718.

line, and it is Exhibit 14 1 in the book that I am going to be referring to.

In 1993, 2 years after opening a correspondent account for Swiss

American Bank, the relationship manager sought approval to establish a line of credit on behalf of Swiss American Bank’s private

banking clients. And the request was denied by Bank of America’s

credit manager because, in his opinion, the risk potential was too

great for the bank. And he noted that, ‘‘We know little about the

parentage of this bank’’ and ‘‘its structure appears designed to isolate the real owners and to take advantage of tax and regulatory

havens.’’ He further goes on to say in the exhibit, ‘‘The potential for being

blindsided is quite pronounced, and I’m not in favor of the presentation. If we knew more about the parentage, respectability, and integrity of the bank, I would be willing to consider trade finance,

but I would continue to believe that we should not extend credit

to service their private banking clients.’’ This is a pretty serious indictment of this whole account, isn’t it?

Here the credit manager is saying that we just don’t know enough

about the parentage, respectability, and integrity of the bank. I

don’t understand why that finding by the credit manager didn’t

trigger a review of the entire relationship that Bank of America

had with Swiss American Bank. If those kinds of findings were

made when Bank of America was considering extending credit to

Swiss American Bank’s customers, why didn’t that trigger a review

of whether this correspondent bank account should even exist,

whether you should be providing any services?

Mr. CHRISTIE. Excellent question. Obviously being a credit and

risk manager type person, this fellow did a good job. I would say

that. But the problem then was—and I will tell you it’s not the

same today. But the problem then was that too much of this was

somewhat compartmentalized, and also because we didn’t give

credit to this bank, the full, if you will, control of what we did with

that relationship was left within the hands of that relationship

manager. And so the relationship manager in this case went to the

credit department and said can we have credit, and the credit department said no; he walks away and says, well, it’s not worth

fighting—I believe that’s also in your documentation—but the credit department in those days had no further obligation to report this

up or to report it across the organization. That probably should not

have been that way at that time. You wouldn’t have had this question, and we probably wouldn’t have had the account.

Today, as my friend next to me was saying, today we wouldn’t

open the account without someone on my staff, which is risk management, reviewing the documentation and the due diligence and

making sure we would be comfortable in having this relationship

in our portfolio, and not that we’re necessarily going to give them

credit on day one, but if this sort of request came up, how would

we react to it in the future?

So what you’re citing historically is absolutely correct, and I

think it was not well managed at that time. I think today we’ve

taken steps to correct that.

35

1See Exhibit No. 41 that appears in the Appendix on page 812.

Senator COLLINS. Mr. Weisbrod, I want to give you an example

that is more recent, and that is in some ways more troubling. In

the fall of 1999—and I am going to be referring to Exhibit 41,1 if

you want to follow along. In the fall of 1999, Swiss American Bank

asked Chase to open foreign currency accounts for Swiss American

Bank and Swiss American National Bank in London. Now, presumably because these accounts, again, posed a greater risk to Chase

than those institutions’ existing accounts, Chase’s credit manager

conducted another review of the two banks, and the review included some pretty strong language.

The Chase credit manager wrote, ‘‘My own unscientific grading

of certain geographic locations includes the presumption (biased obviously) that anything from Antigua is probably diseased and contagious and should be avoided like mosquitoes in Queens.’’ He then goes on to say, ‘‘Meanwhile, my head is going back into

the sand on this one,’’ which is a troubling statement.

I find this remarkable in many ways. If, in fact, a credit manager

felt that anything from Antigua should be avoided—and I think

some of the testimony we heard from Mr. Mathewson about tax havens suggests there may be good reason for that—why did—well,

let me ask, first of all, did Chase go on to open the foreign currency

accounts in London in this case?

Mr. WEISBROD. No, Senator Collins, we did not open the multicurrency accounts, and just one minor point of correction. The document that is referenced is really written by a client manager. This

would not be written by a credit officer. But that’s—— Senator COLLINS. Well, it is still an employee of Chase who is

raising concerns about doing business with this bank.

Mr. WEISBROD. Yes.

Senator COLLINS. Is that correct?

Mr. WEISBROD. Yes, which is why I said it’s a minor correction,

because the fundamental point of your question is still germane.

I believe what was referenced in this message is an account

being opened elsewhere in the organization. What the client manager was attempting to say is that this is an area of the world that

is, as Mr. Mathewson described this morning, an emerging market,

one where the standards are not as high—he does put it in very

graphic terms in the message here—not as high as we’re used to

in this country; and that anyone who would be opening accounts

or dealing with businesses in that part of the world should be

mindful of that. He was really referring to another area of the bank

that was going to be opening this particular account and hoping

that they were as mindful of the ‘‘know your customer’’ principle

as he was. And, yes, it’s written in very colorful language.

Senator COLLINS. But, in fact, Chase continued to do business

with Swiss American Bank for some time. Is that correct?

Mr. WEISBROD. Yes.

Senator COLLINS. And it is my understanding that actually

Chase closed its accounts only in October of last year. Is that accurate?

Mr. WEISBROD. Well, we initiated the closing of the account in

April, and the account was finally closed in October of last year.

36

Senator COLLINS. One of the things that troubles me—and our

investigation has documented this—is it seems to take an extraordinarily long time between when information is conveyed to the

bank that there may be suspicious activity, even if that information

comes from a law enforcement official, and when an account is actually closed, and I would like to have you both comment on why

that is. Mr. Christie, we will start with you.

Mr. CHRISTIE. Well, certainly there are good and bad examples,

and, unfortunately, you are seeing a couple bad examples from us.

But part of it is that we are dealing with what we believe is suspicious information and activity about a bank’s customers. And so

if you believe—until someone is proven guilty, our lawyers have

trained us over the years, many, many years, that you have to be

careful in how you handle your relationship with your customer, either when you deny them loans or when you close their accounts.

Because if you in some way damage their business or their reputation, they could come back to you in U.S. courts of law and sue us

for that damage.

Especially with a bank, if you were to put them in a position

where they have to—they are scrambling around looking for other

accounts and the word gets out that, well, gee, Bank of America is

closing them out, I wonder what’s wrong, and all of a sudden it

gets to their customers and the customers could come flooding in

and draining their deposits out of the accounts—I mean, that is ‘‘sky is falling,’’ I understand, but that’s the worry and concern that

we do have on our minds that we don’t do something untoward.

But that doesn’t excuse us for some of the long terms that it takes

while they are trying to find another correspondent bank account.

And, typically, in my humble opinion—it depends on your account

agreement with the customer and what it legally says in the account agreement. It could bind you to 30 days. It could bind you

to 60 days. I’ve seen some that bind you to 90 days after giving notice. Ninety to 120 days should be sufficient. And as I say, in our

new process and procedures, we will be tightening that up, and it

will have oversight by people like my risk management staff,

whereas before, as I said earlier, this was allowed to happen because the relationship manager, with other things on his or her

mind, and the account administration folks with other things on

their mind, once they close down the cash management products,

which they thought was the risk, i.e., the wire transfer services,

cash letter and so forth, letting the account slowly drain down to

nothing was sort of a non-event in their mind, and, yeah, we’ll close

it when it gets down to zero.

Senator COLLINS. Mr. Weisbrod.

Mr. WEISBROD. Senator Collins, there is one remark that you

made which I would like to make sure we are clear about, and that

is that if a—I think you referred to a law enforcement officer. I

don’t believe a law enforcement officer contacted us during the

Swiss American incident, certainly not directly with anything adverse about the bank.

I certainly endorse everything that my colleague to the right has

just expressed, but I would emphasize, very strongly emphasize

that if we do get communication from a law enforcement officer

about suspicious activities regarding a bank customer, then we

37

1See Exhibit No. 40 that appears in the Appendix on page 810.

would take action—in fact, I think that is what happened in the

instance of AIB. We were more forthcoming in terms of closing.

Senator COLLINS. Thank you.

Senator Levin.

Senator LEVIN. I want to go back to the American International

Bank for a moment and ask you, Mr. Weisbrod, about your entering into a relationship with the American International Bank.

First of all, the Chase sales representative talked to the American International Bank and described in a memo what the primary function of that American International Bank was. And the

last line, or second from the last line in that memo—and this is Exhibit 40 1—says, and I am going to paraphrase part of it, basically

that taking in deposits from U.S. nationals is not a transgression.

It becomes a transgression if and when these nationals end up not

reporting the investment. In other words, that is the transgression

of American law; that is the income tax evasion.

But then this is what your sales representative was told, that

that is of no legal concern to the offshore depository institution.

That is of no legal concern to American International. Well, it may

not be of legal concern to them, technically, but it surely ought to

be of concern to you in terms of your knowing your customer—that

you were told or your sales agent was told by this potential customer that is of no concern to them that their depositors are engaged in income tax evasion in the United States.

So while maybe technically the person at American International

is correct, it seems to me that is where ‘‘know your customer’’ should be triggered. That is where you folks should say to yourselves, well, wait a minute, if that is the view that this potential

customer takes, we have got to be very cautious before we accept

that customer as a depositor if he doesn’t care whether that money

is dirty money.

Do you agree with that, looking back at that statement of your

account sales representative?

Mr. WEISBROD. The American International account was opened

about 5 years ago. I don’t think this account would be opened

today, based upon several factors: Our enhanced due diligence policy which we are very proud of and implementing very forcefully,

but, moreover, because this account was opened 3 years before the

FinCEN advisory alert on Antigua, and years before the FATF

alert on troubled countries, as well as before the OCC came up

with its handbook.

So the issue—as I think Mr. Christie pointed out, the sensitivity

regarding this issue was not as great then as it is now. So I would

give assurance to the Subcommittee that such an account would

not be opened today by us. At the time, I would say that our sales

officer had no evidence of tax evasion, although—reading between

the lines, and as Mr. Mathewson testified this morning, you could

infer it.

Senator LEVIN. It is not just that you can infer. It is that when

that depositor says it is of no legal concern to us that this money

is dirty back in 1996—should that not have set an alarm bell about

who that customer is?

38

1See Exhibit No. 4 that appears in the Appendix on page 698.

Mr. WEISBROD. No question, it should——

Senator LEVIN. I am talking about 1996. Shouldn’t that have

triggered an alarm?

Mr. WEISBROD. I don’t think that the bank was saying the money

was dirty. I think they were saying that they had no obligation

under the law of Antigua.

Senator LEVIN. They have no problem accepting dirty money

under Antiguan law, but you have a responsibility as an American

bank to know your customer and not to accept as a customer somebody who does accept dirty money.

Mr. WEISBROD. We have a responsibility to know our customer,

yes, sir.

Senator LEVIN. And to accept as a customer, hopefully, a bank

that accepts legal money. Is that not what ‘‘know your customer’’

is all about? If they don’t care whether the money is illegal or not

and they have no ‘‘know your customer’’ requirements whatsoever

at that potential customer bank of yours, shouldn’t that have been

a concern of your bank at that time, even? I know it is a concern

now, but even then should that not have been a concern?

Mr. Christie is shaking his head ‘‘yes,’’ so maybe you have different answers to that question.

Mr. CHRISTIE. I am sorry. I don’t want to put my colleague on

the spot.

Senator LEVIN. OK.

Mr. WEISBROD. The only confusion that may be here is that there

is no—I think Mr. Mathewson testified this morning that there is

no law preventing Americans from depositing with that bank, and

that the bank in Antigua has no obligation under its law to report

that income.

Senator LEVIN. But you are missing my point, I think, which is

your obligation relative to your customer. I hope that would include

that you not accept as a customer a bank which says we don’t care

whether that money is dirty, we have no obligation under our law

to do anything about it.

Mr. WEISBROD. I accept the point, Senator. As I said at the beginning, this is not an account—I emphasize—not an account we

would open today. I accept the point totally.

Senator LEVIN. I will finish this particular offshore bank, the

American International Bank, questions with just this last question, and thank you for extending my time, Madam Chairman.

Bank of America terminated its relationship in April 1996 with

American International, and this is what a Bank of America relationship manager who had handled that account wrote in July

1996,1 that ‘‘exiting that relationship . . . also seems to have been

prudent, since although no proof is, of course, available, the reputation in the local market is abysmal.’’ Their reputation in the local

market is abysmal. That is what Bank of America said their reputation was.

‘‘Rumors include money laundering, Russian mafia, etc., while

management of that bank also now includes the former manager

of SAB, again not a reassuring situation.’’ So, that is what their

39

folks found in terms of that reputation. They were glad they were

out of it and talked about the reputation and said it was abysmal.

Now, Chase obviously had a different view at that time because

while Bank of America was glad it was out of it because of the local

reputation of that customer, you were opening an account, presumably because you had a different view of that customer or else you

never would have opened it.

How is it possible that two banks on the same customer had such

divergent views of their reputation?

Mr. WEISBROD. We didn’t know that its reputation was abysmal.

Had we known that at the time, we would not have opened the account. We did make some effort to find out. We had, I believe, two

references from reputable banks before we opened the account, and

had made some exploration about the management; I believe even

obtained a copy of its ‘‘know your customer’’ policy and reviewed

that policy with the management. But had we known that the reputation was abysmal, we would not have opened the account at the

time.

Senator LEVIN. Thank you.

Senator COLLINS. Thank you, Senator Levin.

Mr. Christie, you mentioned in your opening statement the number of changes that Bank of America made in order to improve its

safeguards against money laundering, and you said that the new

organizational approach fosters an environment that encourages

our associates to, ‘‘truly know our correspondent bank customers.’’

You also said that your bank has made a decision, which I commend you for, to not open correspondent accounts for shell banks.

Mr. CHRISTIE. Right.

Senator COLLINS. I am trying to reconcile these two statements

because we know that what some shell banks do is open accounts

with other foreign banks, which in turn open accounts with U.S.

banks. As part of your process of opening up new accounts so that

you, ‘‘truly know our correspondent bank customers,’’ do you ask

whether the foreign bank is doing business, or whether you, in effect, will third-hand be doing business with a shell bank?

Mr. CHRISTIE. First of all, again, the investigative staff did a fantastic job of ferreting all this convolution out for us, and we appreciate that very much.

Honestly, until a year ago, should you logically have understood

that that might have happened? Sure, you should have. Did the

correspondent bank account officers think about that at that point

in time? Probably not. In fact, I don’t think so. Again, they thought

‘‘I am doing my due diligence on this bank that I am going to do

business with and, gee, I don’t see them doing anything illegal.

And, gee, I have looked at their ‘know your customer’ policies

which, they could write overnight on the back of a napkin if they

wanted to. So I am OK with this bank.’’

But I don’t think they stopped to think and connect the dots

backwards, as the Senate investigative report has helped us do

now, into this ‘‘nesting’’ concept. So as I said in my opening comments, and I think it is in my testimony, that one of the new procedures that we have adopted, is to drill deeper into what that bank

does, who its customers are, what its customer base is.

40

And one of the questions is, will they be doing business with

other correspondent banks? Who are going to be those correspondent banks? What is the legitimacy of that? So we have

changed all that dramatically now. Did we do it in the past? No.

Senator COLLINS. Is that just going forward or are you taking a

look at the correspondent accounts that you have now, because I

suspect you may well discover you are doing business indirectly

with a shell bank that is in the nesting situation that we have described?

Mr. CHRISTIE. No. You are absolutely right. That is a very good

possibility. And, yes, just like Chase and many other large banks

today, we are doing a thorough review of our correspondent bank

portfolio, and we have a new checklist, just as they do. We have

all these questions we are going to be reviewing with these correspondent banks and hopefully ferreting out those issues.

I can tell you that in the last year or two, I don’t think we have

opened any new correspondent bank accounts, and I can tell you

we have closed a number of them. So, yes, we are on the warpath

to try and get this cleaned up. I assure you of that.

Senator COLLINS. Thank you.

Mr. Weisbrod, in your statement you have an astounding fact.

You say that on an average day, Chase processes over 220,000 wire

payments with a value in excess of $1.2 trillion. The magnitude of

that, multiplied by other banks, is really extraordinary and shows

how much money is being moved around the world every single

second.

Senator LEVIN. We estimated, by the way, $21 million a minute.

Senator COLLINS. That is extraordinary, so if this hearing goes

much longer—— Mr. CHRISTIE. Is that in a workday or is that in a 24-hour day?

[Laughter.]

Senator COLLINS. My point is that the magnitude of money being

wired all around this world makes it so much more important that

your initial procedures for opening accounts be really thorough and

sound, because there is no way, as you have essentially pointed out

by giving us that statistic, that Chase or any other large money

center bank is going to be able to review every single wire transfer

that occurs.

I mean, I am sure you have procedures for triggering a human

review if certain criteria are met, but obviously the magnitude is

incredible. Doesn’t that mean that if you don’t do a good job up

front in verifying who your customers are and being very careful

with whom you do business when it comes to correspondent bank

accounts that inevitably you are going to be inadvertently fostering

an environment where money laundering is expedited by the services you provide?

Mr. WEISBROD. I wish we had this question on videotape because

I would use it in our anti-money laundering training program. I

could not agree more with that statement. It is at the very heart

of the program of anti-money laundering that a bank has to deliver. It is the key.

But I would go further, too, to say not only the opening of the

account needs to be scrutinized and we need to do better than we

have, but then the ongoing review, which is something quite frankVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6633 71166.TXT SAFFAIRS PsN: SAFFAIRS
41

1See Exhibit No. 38 that appears in the Appendix on page 807.

ly we had not been doing in the past but which we are doing as

part of our enhanced policy, needs also to be done.

So I think the statement is accurate. I would love to capture it

and use it in our training programs.

Senator COLLINS. Thank you.

Senator Levin.

Senator LEVIN. I am sure we would be happy to make that available to you.

I want to go back to Swiss American Bank and take a look at

Exhibit 38.1 These are some of the ongoing concerns that, first,

Bank of America had. I want to pull up their comments from their

records.

A privately-owned bank with obvious operating problems. That

was back in August 1990.

Then in May 1995, you decided to ask Swiss American to find another correspondent bank, but since you asked them the month before, they appeared, if anything, to be worse than they were the

month before; poor management; constantly preyed upon by con

artists. Now, that is May 1995.

Then in July 1996, according to your records, ‘‘It has been a year

since we requested Swiss American to find another correspondent.

. . . We agreed to 90 days for them to notify remitters and close

the account. . . .’’ You talked about how they admitted to problems

at audits, including misclassification and hidden loans. Now, that

is July 1996.

In March 1998, the account is still not closed. ‘‘I had long ago required Swiss American to discontinue their clearing and wire

transfer activities with us, as some transactions appeared suspect.

. . . We now have the January 1998 issue of Money Laundering

Alert describing a possible precedent settling civil lawsuit by U.S.

authorities against Swiss American Bank . . . involving the Antiguan Government and accusing collaboration with money

launderers.’’ Then it says that you asked them that day to close

their account. That is March 1998, but it was not until June or

July of a year later that that account was closed.

I would just emphasize that not only must you take much greater precaution in opening up these accounts, but when you have information that is sufficient to close an account and you decide to

close an account, surely it ought to be done decisively at that point.

I mean, I have got a lot of problems with the length of time it takes

banks to decide to close these accounts. But here is a case where

you decided to close the account, and year after year after year that

account stayed open.

Would you agree, looking back, that that is not the way this antimoney laundering effort should be carried out?

Mr. CHRISTIE. I absolutely agree.

Senator LEVIN. Relative to the Chase Bank, if we can put up

their records relative to the same Swiss American Bank.38

Back in June 1997, Chase received a subpoena for account documents. Then in August 1998, records show that Swiss American

had been suspected of money laundering. ‘‘Can you tell me whether

this is an account that Chase will continue to maintain?’’

42

Then in November 1998, ‘‘Inquiry revealed that the captioned

bank has come to official attention as a suspected repository of proceeds of con games.’’ Further on in that comment, it says—and this

is what I want to focus on—‘‘Considering the difficulties in determining actual ownership of the bank, its location, the operating environment of these offshore banks, and the questions raised above,

recommend that we exercise special caution in dealing with this

entity, if a decision is made to continue our relationship at all.’’ Now those are actually the problems with many offshore banks,

are they not?

Mr. WEISBROD. Yes.

Senator LEVIN. It is difficult to determine actual ownership. We

have seen it with Antigua, all the efforts that are made to make

sure no one can determine actual ownership. That is true with

other jurisdictions as well. ‘‘Considering the difficulties in determining actual ownership of

the bank, its location, the operating environment of these offshore

banks, and the questions raised above, recommend that we exercise

special caution.’’ Then a year later, that bank—and this is the last quote on that

exhibit—‘‘Swiss American Bank is getting too much bad press. It

is even used as a case study in our money laundering training.’’ My gosh, you folks were using Swiss American Bank as a case

study in your money laundering training. A case study for what,

for why it ought to stay open or why it ought to be closed?

Mr. WEISBROD. The case study referred to our belief at the time

that this was a conduit, an unwilling, unknowing conduit for

money laundering. In other words, it had been caught in the middle between the two parties, and we were using it—our compliance

area was using it as a case study to show this could happen to us.

That was really the intent of that.

Senator LEVIN. That what could happen to you?

Mr. WEISBROD. That, in other words, we ourselves could be an

unwilling conduit between two parties to a money laundering

transaction.

Senator LEVIN. All right, so that even though in August 1998 you

had some evidence that there was suspicion of money laundering,

in November 1998 you had in your records that they were a suspected repository of the proceeds of con games—considering that

you can’t determine ownership, location, operating environment,

you were required yourselves to exercise special caution. You still

treated them as though they were being just an unwitting victim

of some other folks. Is that it, despite all your own evidence in your

own file that they should have known and perhaps did know what

they were being used for? That is what the case study was?

Mr. WEISBROD. I believe the case study was to show how a bank

could be caught in the middle, yes, but——

Senator LEVIN. You concluded that they were caught in the middle, that they were somehow or other an innocent victim of someone else?

Mr. WEISBROD. Senator, to the best of my knowledge, we had no

knowledge that they were a money laundering institution. They

were not charged, per se, with that. I am not here to debate because I totally agree with the premise that this is not an account

43

that we should have done business with. The reputation issue here

was sufficient to not have this account on our books.

Senator LEVIN. You did not officially terminate that account until

you got a subpoena from this Subcommittee, is that correct, in October of the year 2000?

Mr. WEISBROD. Correct.

Senator LEVIN. Let me just go to the question of offshore banking

because I think this is going to get to the meat of some potential

legislation.

I think it is pretty clear that shell banks should not be able to

open accounts at our banks. I am going to say it is clear to me, and

your two banks do not accept accounts from shell banks.

The question, though, is, for the reason given in your own documents, whether there has got to be a heightened sense of inspection of offshore banks because of the very reasons that are in that

document.

You can’t tell who owns them, you don’t know where they are located, you don’t know what the operating environment is.

You surely, in my judgment, did not exercise special caution in

that case. That is my own conclusion about one case. But whether

that is accurate or not, we surely as an industry—you surely, and

I think we as a government—have got to require that there be special caution if we allow correspondent banking with offshore banks

to continue.

I would like to know whether you agree with that and under

what circumstances should we allow offshore banks. These are

banks that are not allowed to deal with the people in the jurisdiction which licenses them. The jurisdiction says, we are not going

to let that offshore bank deal with our people, but we will inflict

them on the rest of the world.

Under what circumstances is it legitimate for you folks, legitimate banks, to open an account with an offshore bank? And if

there are such circumstances, in your judgment, what should be

the heightened requirements for ‘‘know your customer’’ in the cases

where you do open accounts with an offshore bank?

Mr. Christie, do you want to start?

Mr. CHRISTIE. Sure. There are a few legitimate reasons for an

offshore bank, but in my mind that has to do with an offshore bank

for a large, sophisticated, worldwide bank that has a legitimate

business to have—it doesn’t have a branch there, it doesn’t want

to go through the process of opening a branch, it doesn’t want to

deal with the local regulators that much.

Also, you cast it as if the regulators in that country are saying,

we don’t want you to deal with our customers. In my mind, that

is not the way I interpret that. I mean, in their way of doing business, they have got three ways of doing business in our country,

if you want to. Here is one way, here is a second way, and here

is a third way.

Senator LEVIN. But the first way, if you want to do business, requires very careful regulation to make sure that you follow certain

rules, right?

Mr. CHRISTIE. Right.

Senator LEVIN. And that is to protect their own constituents?

Mr. CHRISTIE. I don’t know that.

44

Senator LEVIN. Isn’t that the purpose of regulation?

Mr. CHRISTIE. I don’t think they think that way.

Senator LEVIN. Well, that is what should be the purpose of regulation.

Mr. CHRISTIE. Sure.

Senator LEVIN. Keep going.

Mr. CHRISTIE. All right, well, Chase is not a good example because they have a presence everyplace. But a good correspondent

bank customer of ours might have a reason to have an offshore

bank in that country, and for them, if we have got a presence or

if they want us to act as their correspondent bank, I would see that

as a legitimate thing to do.

What legitimate businesses might come through that—I know

this is only an example, but, for example, they could have a customer who has a travel business. And, of course, in the Caribbean

a lot of people travel to the Caribbean and there are a lot of dollars

that flow in through traveling. So it could be that there is a need

to clear and exchange either the traveler’s checks or the currency

or whatever may come into that bank.

Senator LEVIN. Why shouldn’t that be done onshore instead of

offshore?

Mr. CHRISTIE. Well, because the business is in that island. So the

physical presence of those documents, either the checks or cash or

whatever, is in that island.

Senator LEVIN. They are offshore?

Mr. CHRISTIE. Yes, offshore.

Senator LEVIN. What percentage of offshore banks would you say

would meet that narrow standard?

Mr. CHRISTIE. I said that is only one example and I don’t have

all the examples.

Senator LEVIN. No, but give me an estimate. Would it be the minority or majority of offshore banks.

Mr. CHRISTIE. Of offshore banks?

Senator LEVIN. Yes.

Mr. CHRISTIE. Oh, it is probably the minority. I know where you

are going and I agree with your point.

Senator LEVIN. Would you agree, then, that the majority of offshore banks—you are guessing, I know, but—the majority of offshore banks now would not meet that standard which you feel

should be met before they are allowed to have correspondent accounts?

Mr. CHRISTIE. I think you are right, yes.

Senator LEVIN. Mr. Weisbrod.

Mr. WEISBROD. I think the issue of the offshore banks is a complex issue. It is one of the areas that is being addressed by the New

York Clearing House in its best practices paper, and we are endorsing that and working with the New York Clearing House.

We recognize special obligations in terms of understanding the

offshore banks, and in evaluating their practices with regard to the

banks that they may be doing business with.

Senator LEVIN. Do you want to outline first what those special

practices should be? What are the additional safeguards which

should be put in place to make sure that offshore banks are not

laundering money? What are those safeguards?

45

1See Exhibit No. 13 that appears in the Appendix on page 710.

Mr. WEISBROD. I would say first that with regard to the FATF

jurisdictions, we are particularly looking at whatever offshore

banking arrangements may exist. As Mr. Christie said, there are

major banks that use offshore centers for funding in capital markets or legitimate regulatory purposes that the Fed and others are

well aware of.

And our practice is only to do business with offshore banks that

are affiliated with such institutions. If there were other offshore

banks that were in other arrangements, we are not going to want

to do business with those. We are taking a very, very hard look at

those, and I don’t want to make a blanket statement because the

business is large, but that is our general approach.

Senator LEVIN. Finally on this subject, do you think, then, that

for banks unlike yours which are willing to do business with those

offshore banks, the ones you are not willing to do business with— should we prohibit them from doing so?

Mr. WEISBROD. I think that the right solution is to work internationally to take their license away because—— Senator LEVIN. If we can’t get that done, should we prohibit it

by regulation or by law?

Mr. WEISBROD. That is a matter for the Congress to decide.

Senator LEVIN. Thank you.

This is just one final area I want to go into, and that has to do

with Internet gambling. It is illegal to place bets over the Internet

in the United States, and the courts have upheld that interpretation. Apparently, one person was convicted of it and others have

worked out plea agreements with the government.

Antigua has been a center for Internet gambling, and at least

until recently the Swiss American Bank serviced the accounts of

Internet gambling companies, including accepting transfers from

and making payments to individuals in the United States. And this

was no secret. Some of the Web sites, which maybe we can put up,

are in Exhibit 13 1 that is before you as well.

Bettors on Internet gambling are instructed to wire transfer

their funds to the Swiss American Bank account at Chase Manhattan. That was Merlin’s Magic Castle. Then the next one is Gold

Nugget. Bettors are instructed to use Swiss American Bank’s correspondent account at Chase. There are literally hundreds of sites

like this, so that Chase became a big vehicle for the flow of these

funds.

If you take a look at a chart, Exhibit 13, of the Swiss American

Bank account at Chase for some months during 1998 and 1999 that

we sampled, we can see that a significant percentage of the deposits for that month were clearly identified as Internet gambling enterprises, and there were a lot of other clear instances of what was

going on.

For instance, in late 1998 the sales representatives were advised

that Swiss American Bank was servicing Internet gambling entities and their bettors, but that they didn’t report it to anybody because they thought it was legal. So your sales reps thought that

what was going on there was legal.

Did they ask for a legal opinion from your law department?

46

Mr. WEISBROD. No, sir.

Senator LEVIN. They just thought it was legal or assumed it was

legal and kept going.

Then your fraud department took a look into payments that were

made through the Swiss American Bank account which identified

Internet gambling activity at the Swiss American Bank in 1999.

Then in 1999, Chase was advised that Swiss American Bank’s

monthly use of checks would expand significantly due to Internet

gambling-related payments.

But the part that I want to focus on occurred in March 1998,

when the U.S. Attorney for the Southern District of New York indicted 21 owners, managers and employees of 11 Internet sports

betting firms for collecting wagers from U.S. citizens over the

Internet. Your records were subpoenaed for the trial of the owners

of one of the firms, and a Chase employee provided testimony at

the trial about check and wire transfer activity at the Swiss American Bank account at Chase that involved that firm.

My question is, since there was a criminal charge against somebody which was based on Internet gambling being illegal in the

United States, at that point was there an opinion requested from

your law department as to whether or not Internet gambling was

legal, and if so, what was that opinion at that time?

Mr. WEISBROD. The date of that, sir, was?

Senator LEVIN. April 1998.

Mr. WEISBROD. No, there was no legal opinion obtained.

Senator LEVIN. Or March 1998.

I am curious about that because now you have an employee testifying in a trial where essential to that charge was an allegation

that there was a criminal activity going on in the United States.

Wouldn’t normally some alarm bells go off at an institution when

that happens to say, hey, wait a minute, if this is illegal and we

have somebody testifying in that case, shouldn’t we stop accepting

clearly identified proceeds of an illegal activity?

Mr. WEISBROD. There is no question but that at the time, in

1998, our employees were not aware of the fact that Internet gambling was illegal. And I think, with some fairness, looking back,

there was some ambiguity, and I think even this Subcommittee’s

report references the ambiguity under the law.

For example, last year I believe there was an Internet Gambling

Prohibition Act that was reviewed in Congress, and in that there

was reference to the fact that there was ambiguity. So the fact is

that at that time the whole area of Internet and e-commerce and

the ways it can be used in money laundering was not well understood, it is an area of growing importance and emerging concern.

Our major focus in the money laundering area had been in cash

coming into the bank, and we clamped down on that pretty well,

and on drugs. The area of Internet gambling did not have the same

sensitivity that it certainly has now as a result of the experience

that we have had here.

Senator LEVIN. I guess my point, though, is not whether or not

there was ambiguity, but whether or not there wasn’t some consideration in your law department as to whether or not you might be

then accepting the proceeds of an illegal operation. Shouldn’t that

47

1See Exhibit No. 6 that appears in the Appendix on page 700.

2See Exhibit No. 3 that appears in the Appendix on page 697.

have been at least assessed or analyzed by your law department at

that point?

Mr. WEISBROD. It was not. It was not referred to the law department at that time.

Senator LEVIN. On Internet gambling, what is your position on

it, or what has it been at the Bank of America?

Mr. CHRISTIE. To be honest with you, until last year, at least in

my mind, it didn’t dawn on me that Internet gambling was truly

illegal. I mean, I thought if it had been——

Senator LEVIN. Distinguished, you mean, from illegal?

Mr. CHRISTIE. Sorry?

Senator LEVIN. That is OK. Go on.

Mr. CHRISTIE. Good one.

Anyway, I didn’t realize it was illegal, and I think many of my

associates around me didn’t really fully understand that it was illegal. I mean, we have had the creation of so many gambling establishments throughout the United States over the last few years,

you would wonder what was legal or illegal.

But having read what I have now on the subject and consulting

with my crack attorneys at the bank, I fully do understand the fact

that it is illegal. And, again, it would be another one of our checkpoints in our due diligence work that we would be doing on banks.

So, yes, it was a revelation to me last year.

Senator LEVIN. I think Exhibit 6 1 has the Bank of America on

those same Web sites, so we can show this as not at all limited to

one bank. But I would hope that all of our banks would promptly

seek some legal guidance from their counsel and close down Web

sites. Even if there was ambiguity about it, you would think that

you would have a legal opinion saying, hey, wait a minute, we have

got to err on the side of caution; if this is reasonably, arguably illegal, we cannot be accepting that kind of money.

Mr. CHRISTIE. Even if it was legal, I wouldn’t want our name associated with them on the Web site.

Senator LEVIN. Good.

Mr. WEISBROD. And I would add, if I could, Senator, that the moment we did become aware that our name was being used on these

Web sites without our permission, we took swift action to issue a

cease and desist to have that stopped. We put it on our OFAC filter, as well, to screen all the payments that were coming in to

make sure there were no illegalities.

Senator LEVIN. Let me get to the question of nesting correspondent banks. Going back now to American International

Bank, American International Bank had an account with your

banks. It also was serving as a correspondent bank for other banks.

Now, Exhibit 3 2 here is an exhibit that lists three of the half

dozen or more banks for which American International Bank

served as a correspondent, and this is really quite a notorious list.

As described in the Minority staff report, these three banks were

all heavily involved with financial fraud.

Two of them, Caribbean American Bank and Hanover Bank,

were shell banks; they didn’t exist anywhere. The Caribbean AmerVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00057 Fmt 6633 Sfmt 6633 71166.TXT SAFFAIRS PsN: SAFFAIRS
48

ican Bank, was nothing but a front for a criminal enterprise. It was

owned by individuals committing a financial fraud, and all of the

accounts at that bank are being investigated for money laundering.

The relationship manager at Bank of America told our staff that

he never knew that American International Bank was serving as

a correspondent for other banks. One of the salespeople at Chase

didn’t know that American International Bank was serving as a

correspondent. The other sales representative knew that American

International Bank was serving as a correspondent and thought

there was no problem with it. But as we can see from this list,

there are some bad actors that are nesting within the American

International Bank and using that bank’s relationship with your

banks to access our U.S. financial system.

Mr. Weisbrod, in your statement you note that the issue of nesting creates some problems because there are legitimate reasons for

small banks to open relationships with larger banks, and I think

you maybe both have made reference to that this morning.

However, in the case that we have here, there is a high-risk bank

from a high-risk jurisdiction—two things, high-risk bank, high-risk

jurisdiction—serving as a correspondent for other higher-risk

banks, two of which were shell banks also from a high-risk jurisdiction.

So I have two questions for both of you. Shouldn’t a correspondent bank at least know if its clients are serving as correspondents for other banks, and if so, who those other banks are?

That is question one.

Do you want to start off?

Mr. CHRISTIE. Yes, I believe we should know that and we should

know who they are.

Senator LEVIN. Mr. Weisbrod.

Mr. WEISBROD. I think in the instance of AIB, we certainly made

a mistake in letting that bank have a relationship with us, and we

did terminate the relationship within about a year.

I think to make a blanket statement that we need to know the

names of all of the correspondent banks of all of our correspondents

does present some problem. For example, if we are dealing with

Deutsche Bank, obviously a reputable bank, and they have correspondent relationships with a series of Landesbanks throughout

Germany, I don’t think that is the sort of thing this Subcommittee

is interested in.

Certainly, in the instance of high-risk jurisdictions or in the instance of offshore banks, we do need to understand whether they

have correspondent relationships, especially if they have them with

shell or offshore banks.

Mr. CHRISTIE. If I could amend what I said, I assumed when you

asked the question you were talking about high-risk countries and

high-risk banks, and in that context, absolutely. But as David has

said, if it was Chase Manhattan, I wouldn’t ask them for their correspondent bank list.

Senator LEVIN. Would you agree with Mr. Christie that when we

talk about high-risk banks in high-risk countries that you should

know the names of any banks that your correspondent bank has

accounts for?

49

Mr. WEISBROD. One of the high-risk countries is Russia. Russia

is a country with 2,000 banks. We do have correspondent relations

with Russian banks. But I am not sure that it would be where you

draw the line. It is something that is being reviewed by the New

York Clearing House. It is a thorny question and it is being reviewed by the Clearing House as part of their best practices paper.

Senator LEVIN. There is an ironic conclusion to this matter of

nested banking that underscores what we are talking about. Both

of your banks terminated their relationship with American International Bank because you felt that you were just no longer comfortable doing business with that bank. We will start with that. We

have gone through that. It may have taken too long, but ultimately

at the end you terminated your relationship with American International Bank.

Based on the information that you have provided us, both of your

banks served as correspondents to another Antiguan bank called

Antigua Overseas Bank. I don’t know if you are aware of that, but

I will lay that out before you anyway. Just assume that.

What I want to let you both know is that a client of Antigua

Overseas Bank was American International Bank. So you finally

terminate your relationship with American International Bank.

You don’t want to do business with them, but you are doing business with them because Antigua Overseas Bank is a correspondent

bank for American International Bank. Therefore, by using the Antigua Overseas Bank account with you, you are serving almost the

same function as you previously did for American International

Bank.

Now, were either of you aware of that?

Mr. CHRISTIE. No, but we will find out more about it tomorrow,

I guarantee you.

Mr. WEISBROD. I am not aware of that, Senator.

Senator LEVIN. All right. Can you check into that? And if it is

true as I have set forth, and we are comfortable that it is, let us

know what the solution to that problem is. I mean, it took you long

enough to terminate a relationship with a bank, but now it ends

up that that bank, because it is indeed a respondent bank with the

Antigua Overseas Bank—you are, in effect, because it is a customer

of your customer, being used in the same way essentially.

Mr. WEISBROD. Let me see if I understand. Are you saying that

the Antigua Overseas Bank is a correspondent of ours?

Senator LEVIN. Right.

Mr. WEISBROD. I have done considerable due diligence before

coming here today and I did not note that that was one of our correspondents currently, but I will certainly——

Senator LEVIN. You were a correspondent bank for them——

Mr. WEISBROD. Oh, I see, sir.

Senator LEVIN [continuing]. After you terminated your relationship with the American International Bank. I don’t know if that relationship still continues or not, but you did have a relationship

with the Antigua Overseas Bank after you terminated your relationship with the American International Bank. And all I am saying is that that relationship continued, just indirectly. Again, I

don’t know that you still have that relationship. The important

50

point is you had that relationship with them after you terminated

the relationship with American International Bank.

That is the end of my questions. Thank you.

Senator COLLINS. Thank you, Senator Levin.

I want to thank our witnesses for appearing today. I do want to

make clear that I believe that both Bank of America and Chase

have undertaken considerable efforts to tighten up their procedures

to guard against doing business with foreign banks that are facilitating money laundering activities, and I do commend you for those

efforts.

I hope you will continue to be diligent, and I believe that the investigation done by Senator Levin and his staff has shown that

there are still many problems and troubling gaps in the oversight

that American banks give in their correspondent banking relationships.

I would like to thank all of our witnesses this morning for their

testimony and cooperation. It has been very helpful and illuminating.

Tomorrow morning, the Subcommittee will hear further testimony from a panel of expert witnesses knowledgeable about international efforts to fight money laundering, and from another bank,

Citibank, which unfortunately has also experienced its share of

problems with questionable correspondent banking customers.

The hearing tomorrow will be in room 106, Dirksen Senate Office

Building. That is a change, so I want to make sure everyone who

is interested in coming tomorrow is aware of the room change.

Our current witnesses are now excused, and the Subcommittee

will stand in recess until tomorrow morning at 9:30.

[Whereupon, at 12:36 p.m., the Subcommittee was adjourned, to

reconvene at 9:30 a.m., Friday, March 2, 2001.]

(51)

ROLE OF U.S. CORRESPONDENT BANKING IN

INTERNATIONAL MONEY LAUNDERING

FRIDAY, MARCH 2, 2001

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS,

Washington, DC.

The Subcommittee met, pursuant to notice, at 9:37 a.m., in room

SD–106, Dirksen Senate Office Building, Hon. Susan M. Collins,

Chairman of the Subcommittee, presiding.

Present: Senators Collins and Levin.

Staff Present: Christopher A. Ford, Chief Counsel and Staff Director; Mary D. Robertson, Chief Clerk; Rena Johnson, Deputy

Chief Counsel; Eileen Fisher, Investigator; Claire Barnard,

Detailee/HHS; Linda Gustitus, Democratic Staff Director and Chief

Counsel; Elise Bean, Democratic Deputy Chief Counsel; Bob Roach,

Democratic Counsel; Laura Stuber, Democratic Counsel; Ken

Saccoccia, Congressional Fellow; Susan Price, Intern; Ann Fisher

and Judy White (Senator Cochran); Marianne Upton (Senator Durbin); Bob Westbrooks (Senator Akaka); and George Schaubhut

(Senator Levin).

OPENING STATEMENT OF SENATOR COLLINS

Senator COLLINS. Good morning. The Subcommittee will come to

order.

This morning, the Subcommittee continues its examination of the

complex world of correspondent banking and the extent to which

correspondent accounts with foreign banks can expose the U.S.

banking system to money laundering.

As we heard yesterday, correspondent banking is the method by

which a bank provides services and products to another bank.

Without a doubt, correspondent banking is an essential component

of the international financial system. The Office of the Comptroller

of the Currency, however, has identified international correspondent banking customers as high-risk accounts requiring

more critical evaluation before the accounts are opened, and requiring continuing monitoring for money laundering activity thereafter.

The Subcommittee thus has focused its attention on the correspondent relationships that some U.S. banks have formed with

high-risk international banking customers, such as shell banks, offshore banks, and banks in jurisdictions with weak anti-money

laundering laws. The investigation found that although increased

due diligence is warranted in dealing with such institutions, U.S.

52

banks have often faltered in this regard, particularly when they are

not extending credit and their own funds are not at stake.

The testimony that the Subcommittee heard yesterday illustrates

the reasons for our concern. We first heard from John Mathewson,

the former President of Guardian Bank and Trust, a now defunct

Cayman Islands offshore bank. Mr. Mathewson, who pleaded guilty

to charges of attempted money laundering and conspiracy to commit international money laundering, provided an insider’s perspective regarding the relative ease with which offshore banks can manipulate the products and services that U.S. banks routinely offer,

such as wire transfers, to move their customers’ funds through the

U.S. financial system in a manner that makes them exceedingly

difficult to trace.

Mr. Mathewson opined that the vast majority of Guardian’s clients were U.S. citizens seeking to avoid paying income taxes or to

hide assets from their creditors or former spouses. His testimony

made clear that Guardian Bank would not have been able to offer

these clients easy access to their funds while maintaining the secrecy of their identities without its correspondent accounts in U.S.

banks. Moreover, and very troubling, he described Guardian Bank

as a ‘‘run of the mill’’ offshore bank.

The Subcommittee heard additional troubling testimony from

representatives of two major U.S. banks, Bank of America and J.P.

Morgan Chase. Their testimony made clear that banks were not

performing adequate due diligence when opening and monitoring

accounts for international correspondent banking customers.

I want to emphasize that both Bank of America and Chase have

acknowledged weaknesses in their correspondent relationships with

international correspondent banking clients. To be sure, it would be

unfair to hold these banks accountable for not knowing, when they

opened and maintained correspondent accounts for shady institutions such as American International Bank and Swiss American

Bank, everything that has subsequently come to light about these

financial institutions.

Nevertheless, both Bank of America and Chase did have some information prior to opening these correspondent accounts that

should have raised red flags. For example, it appears that Chase

decided to accept American International Bank as a correspondent

banking client despite its awareness that AIB may well have been

sheltering the funds of American tax evaders. This is precisely the

type of lax oversight that criminals who wish to launder their dirty

money are quite literally banking on.

Today, we will begin by hearing from three authorities on money

laundering who will discuss the ways in which correspondent accounts can be used to launder the proceeds of crime, the difficulties

that law enforcement officials encounter in tracking down funds

that have passed through multiple jurisdictions, and measures that

U.S. banks might be able to take to reduce the abuse of their correspondent banking systems by money launderers without drowning the banks in unnecessary paperwork or crippling the industry.

We will then hear from Citibank about its own handling of correspondent accounts with three high-risk clients—M.A. Bank, Federal Bank, and European Bank. Given some of the questionable

dealings in which each of these three banks were engaged, I look

53

forward to hearing from our Citibank witnesses regarding their

management of these banks’ accounts.

The controversy engendered by one of the Citibank examples recounted in the Minority’s Report, the Federal Bank case, deserves

further comment. A great deal of attention has been paid to this

Subcommittee investigation in the foreign press, particularly in Argentina.

I want to make clear this morning that the Subcommittee’s investigation has not been an investigation into money laundering in

any foreign government. It is unfortunate that this Subcommittee’s

work has acquired such apparent significance in another country’s

domestic political disputes, because the investigation’s findings are

not aimed at supporting any charges of high-level money laundering by specific foreign officials.

Moreover, the amount of laundered money identified in the Minority Report that relates to Argentina consists of $7.7 million in

drug trafficking proceeds passing through M.A. Bank, and $1 million in bribe money passing through Federal Bank from an IBM

kickback scandal that has been publicly known for some time. Argentine press reports that this Subcommittee has identified billions

of dollars in dirty money involving these banks are simply inaccurate.

At any rate, I look forward to hearing the testimony of our witnesses today. Abuse of the U.S. correspondent banking system by

money launderers and other criminals is a very serious topic and

deserves our full attention.

At this time, I would like to recognize the distinguished Ranking

Minority Member, Senator Levin, who initiated and conducted this

investigation, for his opening comments.

Senator Levin.

OPENING STATEMENT OF SENATOR LEVIN

Senator LEVIN. Madam Chairman, thank you again for scheduling these hearings and for your strong support of this investigation. I also want to thank you for your clarifying statements relative to the purpose of this investigation, that we are looking at

U.S. banks and we are not carrying on an investigation of any domestic activities inside Argentina by specified officials. I think it is

important that we point that out.

Some of the reports that have been printed in Argentina purporting to quote, as a matter of fact, members of my staff are made

out of whole cloth, literally. Some of those reported quotations were

never made or anything close to it. I emphasize ‘‘some’’ because I

don’t want to label the entire media in Argentina in that way, but

I would say clearly that some of the comments attributed to my

staff were just simply never made, or anything close to them made.

At yesterday’s hearing, we heard from a former offshore bank

owner and from two leading U.S. banks regarding how high-risk

foreign banks are able to open correspondent accounts at U.S.

banks and how those accounts can then be used by rogue foreign

banks and their criminal clients to launder the proceeds of illegal

drugs, financial fraud, Internet gambling, tax evasion, and other

criminal conduct.

54

1See Exhibit No. 35 that appears in the Appendix on page 789.

Today, we want to shine the spotlight on the decision by U.S.

banks to open accounts for one particular kind of high-risk foreign

bank, offshore shell banks. Some offshore banks have physical facilities either in the jurisdiction in which they are licensed or some

other country. An offshore shell bank, however, is a bank that has

no fixed physical presence in the country in which it is licensed or

in any other country, and it is not a branch or a subsidiary of a

bank that does have a physical presence somewhere. Those shell

banks, instead, are banks that have no physical office anywhere

where customers could go to conduct banking transactions or where

regulators could go to inspect records and observe bank operations.

The signature features of a shell bank are its inaccessibility and

its secrecy. These banks are generally not examined by regulators,

and virtually no one but the shell bank owner really knows where

the bank is, how it operates, or who its customers are. One shell

bank owner told us that his bank existed wherever he was at the

moment. These banks do not fit the profile of the financial institution that most Americans imagine when they think of a bank. Instead, they exist on the bottom rung of the banking world.

The low status of these banks is on display in the Internet advertisements explaining how and where to buy a shell bank license.

These ads stress how quickly a bank can be purchased, and highlight a jurisdiction’s lax due diligence and regulatory requirements

as key selling points.

One government cited in the advertisements, for instance, is

Nauru, a remote island in the South Pacific. Nauru is said to have

issued 400 licenses for shell banks which, if true, would apparently

constitute the largest number of shell banks established by any one

jurisdiction. Nauru is also one of the 15 countries that has been

identified by the Financial Action Task Force in June 2000 for noncooperation with international anti-money laundering efforts.

Another oft-mentioned government is Vanuatu, another South

Pacific island, which confirmed to us that it has licensed more than

50 offshore shell banks. Caribbean governments are also listed, including Anguilla, which allegedly charges an annual bank licensing

fee of $3,800 for an offshore bank with a physical presence on the

island, and $7,600 for an offshore bank without one.

Let’s take a closer look at Montenegro, in Europe. This is an excerpt here on the screen from Exhibit 35 in our exhibits.1 This is

one of many Internet advertisements for opening an offshore shell

bank in Montenegro. The bank costs—you can buy it for $9,999,

and the advertisement says that it comes with a correspondent

bank account included ‘‘in the package.’’

As we will see on the succeeding pages of this Internet advertisement, that means that you buy access with that bank license to an

already existing correspondent account at a U.S. bank. So for

$10,000, minus a dollar, anyone can buy access to the U.S. banking

system in a way which is secret. And the purposes of those kinds

of bank accounts will again be explored today, as they were yesterday, but substantial sums of money move through these bank accounts.

55

Now, the ad also promises ‘‘no intrusive background checks,’’ a ‘‘European jurisdiction,’’ and ‘‘fast set-up time.’’ The correspondent

account which is advertised is in the name of the Bank of Montenegro, which in turn allows the new bank—which they are selling

the license for—to use the Bank of Montenegro’s existing correspondent network, which includes Citibank, Commerzbank, and

the Union Bank of Switzerland. Those are the representations

which are made. That is what you are buying access to, in a way

which will be kept totally secret.

Exactly how many Montenegro shell banks are operating today

under this arrangement is not known to me.

The bottom line is that hundreds, if not thousands, of offshore

shell banks are in existence at this moment, and all of them need

to get into the international banking system to do business.

Of the four shell banks investigated by the Minority staff, all

four were found to be operating far outside the parameters of normal banking practice, without basic administrative controls, without anti-money laundering safeguards, and in most cases without

paid staff. All four also escaped regulatory oversight. They used

U.S. bank accounts to transact business and to move millions of

dollars in suspect funds associated with drug trafficking, financial

fraud, bribe money, or other misconduct.

Today, we are going to first hear from a panel of experts with

many years of experience in dealing with high-risk foreign banks.

Jack Blum, among other accomplishments, is a U.N. consultant on

offshore banking and has more than once crossed swords with shell

banks.

Anne Vitale was the Managing Director of Republic National

Bank of New York, and spent years designing systems and procedures to help that bank decide which foreign banks ought to be

given U.S. bank accounts.

Robb Evans is a longtime banker and a former head of the California Bankers Association, and in recent years has begun assisting

Federal and State agencies in recovering funds taken from fraud

victims, becoming in the process all too familiar with shell banks.

On the second panel will be officials from Citibank, and they will

focus on Citibank’s decision to open and maintain U.S. correspondent accounts for two shell banks—M.A. Bank which is licensed in the Cayman Islands, and Federal Bank which was licensed in the Bahamas. As the Chairman has indicated, a third

bank is also covered in some detail in our report. Federal Bank, by

the way, had its license revoked by the Bahamas just 2 weeks ago,

presumably in response to this investigation.

Far from using the heightened scrutiny that is recommended by

U.S. bank regulators for offshore banks and is supposed to be required in its own internal policies, Citibank seems to have done

just the opposite. It seems to have relaxed its due diligence and

monitoring requirements for those accounts because of the confidence and the personal regard that Citibank officials said that

they had for the owners of those offshore shell banks.

This relaxed scrutiny continued for one of these banks, M.A.

Bank, even after Citibank was served with a seizure warrant for

$7.7 million in alleged drug proceeds that were deposited into the

M.A. Bank account in New York as part of the Casablanca underVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00065 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
56

cover money laundering sting. Citibank not only apparently failed

for over a year to recognize that the seizure warrant involved illegal drug proceeds, but it also allowed M.A. Bank to move an additional $300 million through that Citibank account.

Citibank also engaged in troubling conduct when it provided the

Central Bank of Argentina with false information about the ownership of Federal Bank. Citibank knew that the owner of Federal

Bank was Grupo Moneta, a large conglomerate of companies in Argentina. Yet, when the Central Bank of Argentina directly asked

Citibank for ‘‘all information’’ that it had regarding Federal Bank, ‘‘especially the identity of its shareholders,’’ the President of

Citibank Argentina, Carlos Fedrigotti, represented to the Central

Bank of Argentina that the records of Citibank Argentina ‘‘contain

no information that would enable us to determine the identity of

the shareholders of the referenced bank.’’ Again, he gave this response even though Citibank Argentina was then in possession of

numerous documents related to Federal Bank, including specific

documents that named Grupo Moneta as the owner of Federal

Bank.

There are reports that Grupo Moneta is denying ownership of

Federal Bank to this day. That denial, on top of Citibank’s misleading response to the Central Bank of Argentina, makes this

matter a very troubling one. It is one of many reasons that this

matter is a very troubling one, and we hope to get to the bottom

of that this morning as well.

The questions that we hope to address today include not only

Citibank’s specific decisions regarding these two shell banks, but

also Citibank’s overall policy on shell banks. In response to our correspondent banking survey, Citibank initially said that its policy

was not to open accounts for shell banks, but that it would make

an exception for ‘‘an existing customer bank’s offshore subsidiaries

or affiliates.’’ When asked how that exception applied to M.A. Bank and Federal Bank, whose parent owners are not banks, Citibank submitted

a modified statement of its policy and broadened the exception,

saying a correspondent account could also be opened for offshore

subsidiaries or affiliates of existing customer ‘‘financial institutions.’’ While Citibank did not define that term, Citibank presumably meant to encompass not only banks within that phrase ‘‘financial institutions,’’ but also security firms like Mercado Abierto, S.A.,

and commercial operations like Grupo Moneta, so that M.A. Bank

and Federal Bank would be considered by Citibank as permissible

accounts. Now, one concern that I have with expanding the permissible affiliation to financial institutions is that financial institutions

are not subject to the same regulatory regime as banks.

Yesterday, we talked about the legal duty of U.S. banks to act

as a gatekeeper and to take reasonable measures to keep out of the

U.S. banking system foreign banks that pose unacceptably high

money laundering risks. Offshore shell banks pose the highest

money laundering risks in the international correspondent banking

industry today.

Both the Bank of America and Chase Manhattan yesterday told

us that it is their policy not to do business with offshore shell

banks, and that was welcome news. If shell banks were unable to

57

1The prepared statement of Mr. Blum appears in the Appendix on page 162.

open correspondent accounts with established banks, shell banks

would have to close. The hearing today, I believe, will show why

these shell banks don’t deserve a place in the U.S. banking system,

and why U.S. banks should not extend the lifeline, which is the

correspondent bank account, that keeps those shell banks in business.

Again, I want to thank you, Madam Chairman, for your support

and your calling of these hearings.

Senator COLLINS. Thank you, Senator Levin.

As Senator Levin mentioned, our first witnesses today are experts in money laundering regulations and laws. Since Senator

Levin has already given the background of the three witnesses, I

am just going to welcome Jack Blum, Anne Vitale, and Robb

Evans, and ask that they stand, since pursuant to Rule VI all witnesses are required to be sworn.

Would you please raise your right hands?

Do you swear that the testimony you are about to give to the

Subcommittee will be the truth, the whole truth and nothing but

the truth, so help you, God?

Mr. BLUM. I do.

Ms. VITALE. I do.

Mr. EVANS. I do.

Senator COLLINS. We will be using a timing system today. Please

be aware that when you see the yellow light come on, you will have

one minute to sum up your remarks. You will be given 10 minutes

and your full statement will be included in the hearing record.

Mr. Blum, I would ask that you begin.

TESTIMONY OF JACK A. BLUM,1 PARTNER, LOBEL, NOVINS

AND LAMONT, WASHINGTON, DC

Mr. BLUM. Thank you, Madam Chairman. Thank you, Senator

Levin, for inviting me here this morning.

I think I should get right to the heart of the matter. Offshore

shell banks have no place at all in the world banking system, unless it is to be used for tax evasion or other criminal activity.

The shell banking business is a business in which the promoters

and crooks offer these banks for sale, frequently at medical conventions and at meetings of professionals, and sell them to the professionals as a vehicle for tax evasion. They say, look, if you have a

shell bank, you can have this marvelous checking account that isn’t

reported to the Federal Government, whose proceeds won’t be

known by anybody but you which is not subject to seizure. And

here, by the way, is an elaborate structure of trusts through which

you can move your money to hide it.

Probably the most notorious of these salesmen is a fellow named

Jerome Schneider, who has been at it for more than 15 or 20 years,

selling shell banks in places ranging from Vanuatu to Montserrat.

Each time he is caught someplace, he moves on to the next place,

but he continues to advertise seminars around the world offering

these banks for sale.

Two years ago, ABC News sent some undercover people to one

of his seminars and they got the full pitch: Hide your money; you

58

will have this checking account, in effect, at a Canadian bank that

would be the correspondent account, and nobody will be able to find

out whose it is. He saw that and was taken aback momentarily,

but in a very short space of time was back advertising in the Wall

Street Journal, with the tag line ‘‘as seen on ABC TV.’’ This is the

kind of thing that is done with shell banks.

Now, there are other uses for shell banks, not just buy the bank

to have a privileged checking account, but have the shell account

so that you can hide the proceeds of criminal money or get the

criminal money in the account. So there are various kinds of

frauds—advanced fee for loan fraud, securities frauds of different

kinds, and prime bank instrument fraud. All of these really rely on

some kind of paper from what looks like a bank saying that we will

guarantee or we will give you some kind of assurance that a bank

is involved; if you send us your money, we will put it in some kind

of high-yield trading program that will give you tremendous returns.

Invariably, what happens is the money goes to this shell bank in

that kind of scheme, the money disappears, and the bank either

evaporates or the bank says, well, we sent the money on for the

further credit of some offshore corporation somewhere else.

The bank is an essential part of the fraud because it is what

gives the investor the confidence that he is sending the money to

someplace that is real. And typically the instructions will be to

send the money to the correspondent account, send it to our correspondent account at the Bank of New York. That kind of thing

builds the confidence of the mark in the legitimacy of the fraud

that is going on. I have been involved in any number of cases

where there has been this kind of transmission of money to an illegitimate institution through a correspondent account of a legitimate institution.

Then there is the problem of how do you stop the money. Under

the banking rules, if there is a correspondent banking account for

a foreign bank, when fraud money or proceeds of crime hit that

bank account and they are commingled, it becomes an incredibly

difficult matter to stop the money. At that point the money is considered the property of the offshore bank, and unless you can prove

the whole thing is a fraud and all the money in the account is proceeds of crime, for all practical purposes the money is outside the

United States and there is not much that can be done.

I ran into that in a case where we were chasing Nigerian con

men and they wanted to have money wired to a bank in Beirut, not

a shell, but an offshore bank in Beirut, for the further credit of

some corporation, but wired to the correspondent account in New

York City. And we were trying to figure out how to get the money

wired to New York, but held there with enough time to arrest the

Nigerian con men, and it just wasn’t possible to organize it. The

money, as soon as it would have hit the correspondent account,

would have for all practical purposes been out of the country.

I have seen enough of the jurisdictions that regulate these banks

to be able to tell you conclusively that there is no way a jurisdiction

like Nauru or Vanuatu or St. Vincent or Grenada can possibly regulate a stable of offshore banks.

59

If you will, just consider the case of a bank in Grenada that was

capitalized with the appraisal of a ruby. Mind you, the Grenadian

bank officials never saw the ruby. They got a document that said

this ruby is worth $30 million. The man who got the bank license,

a Mr. Van Brink, had been traveling under a different name before

he came to Grenada and, after his fraud with the offshore bank

was complete, moved on to Uganda, where he is known by yet another name.

I was in Grenada not long ago and talked to the chief regulator

of the offshore banking sector, and the conversation went something like this: What did you do before you took over as bank regulator? He replaced the prior regulator who had chartered this rubybased bank. He said, I sold real estate. Do you have any experience

in banking? No, but I am trying to learn about banks. And what

do you do to vet people who apply for a bank license? He said, well,

we have something of a problem with that. For a while we thought

about hiring Kroll and Associates, a large private detective firm,

but we called them and they wanted too much money and we

couldn’t really charge the people involving that kind of money for

the investigation.

I said, well, you should bill it to them. If they want to open a

bank, they ought to be able to pay for their own approval process.

He said, well, we thought that that would cut back on the number

of applicants we had. Then I said, how about using the Internet?

How about doing some simple checks on Lexis/Nexis to see if the

applicants have been convicted? He said, well, we have trouble

with our Internet connections.

I submit that this jurisdiction has no business in the offshore

banking business. And anybody who tells you, yes, we are training,

there is no way that all the training in the world is going to get

a jurisdiction like this to the point where its ‘‘banks’’—and I use

that term in quotes—are going to be meaningfully regulated. And

the same story is true in a half dozen other places.

I want to stress to you that some of the people involved in this

are people of enormous goodwill. The woman who regulates the

Cook Islands Financial Center is a wonderful person, a very nice

person, and she is regulating not only the banking sector, the offshore banking sector, but their walking trusts—these are trusts

which disappear if the police come—their various other financial

entities, and she is trying to attend all the difference conferences

and she is trying to learn how bank regulation ought to be conducted. It is not possible, it is flat not possible.

It ought to be obvious to everyone involved, the purpose of these

‘‘financial institutions’’ is to provide a black hole and a window to

the American financial markets through correspondent accounts.

Having said that, I think it is important to add some things to

the discussion as it goes forward. We have been talking about

banks and the vulnerability of correspondent relationships that

come when banks have correspondent accounts, but there are a

wide array of offshore financial businesses, much like the kind that

Senator Levin mentioned in the opening statement, that are not

regulated at all, like trust companies and certain kinds of financial

advisory firms that simply sign on the dotted line and go into business. And these guys are also using various windows into the fiVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00069 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
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1The prepared statement of Ms. Vitale appears in the Appendix on page 168.

nancial system particularly through brokerage accounts to get their

business done.

In the United States, we can crack down on banks and say, look,

you are regulated, here’s the rules, due diligence, know your customer. In the brokerage business, due diligence consists of finding

out whether the investments you propose to sell to a particular customer are suitable for that customer. The due diligence doesn’t always include the same level of due diligence required in the banking industry. And in this world that we are in today, banking and

brokerage are so close to each other, it is really very, very difficult

to distinguish between the two. I think it is essential to look at

these different windows into the U.S. financial system, and essential to cut them off.

I see my time is up. I will be happy to answer questions later.

Senator COLLINS. Thank you, Mr. Blum.

Ms. Vitale.

TESTIMONY OF ANNE VITALE,1 FORMER MANAGING DIRECTOR AND DEPUTY GENERAL COUNSEL, REPUBLIC NATIONAL BANK OF NEW YORK, AND CURRENT SPECIAL LITIGATION COUNSEL, HSBC USA, INC., NEW YORK, NEW YORK

Ms. VITALE. Good morning, Chairman Collins, Ranking Member

Senator Levin. Thank you for inviting me to testify here today.

Having served as an Assistant United States Attorney in the

Southern District of New York, where I prosecuted money laundering, narcotics and organized crime cases for 7 years, and then

having been Managing Director and Deputy General Counsel at

Republic National Bank of New York for 9 years, where I headed

the global anti-money laundering policy and procedures for the

global corporate network, I have seen money laundering issues

from both the government’s perspective and private industry’s perspective.

And in my mind, those two perspectives should not conflict with

each other. No financial institution wants to be in a position where

they have dirty money going through that institution. So, therefore,

I think it is in every financial institution’s interest to cooperate

with law enforcement efforts to prevent money laundering through

U.S. banks.

I would like to commend you both for these hearings, also for the

report that the Minority staff prepared. I found it to be comprehensive, diligent, and fair. I think they were quite on target in identifying the three areas of vulnerability through correspondent banking.

As a preliminary matter, I want to stress what Senator Collins

remarked in her opening statement. Correspondent banking is a legitimate and indispensable component of the global financial network. The report realized this. In my experience, all but a small

fraction of the payments represent legitimate business activity.

However, because a small fraction of the transactions are meaningful in terms of quantity of U.S. dollars, it is incumbent upon banks

to establish anti-money laundering programs specifically in the correspondent banking area.

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This was not always the case, or the realization of this was not

always the case. It wasn’t until late 1997 that wire transfer monitoring through correspondent banking activity first began to be acknowledged as a high-risk area. I don’t think the OCC or any other

Federal regulator had identified this area, so we are in a relatively

recent development.

However, that said, in 1998 and 1999, with the publicity of specifically the Bank of New York case, this has been the area that

banks should be concentrating on, and there is much a bank can

do to prevent money laundering through correspondent banking accounts.

Two basic things: one is at the account-opening process, and the

second is at the monitoring of transactions process. You can’t be

successful if you have one without the other; you need both. At the

account-opening stage, it is important for a correspondent bank to

obtain information from its respondent bank, and the information

should be the location of the bank; the license and the regulator

of the bank that is applying for an account; the number of employees, branches, and their locations.

Why is this important? Why is number of employees, branches

and locations important? Quite frankly, I submit to you that if a

bank doesn’t have many employees, if a bank doesn’t have operations, that bank does not have any wherewithal to monitor transactions and to open accounts. So you need to know the numbers,

or else whatever that bank tells you about its money laundering

policy is not going to be objective reality.

You also need to know the identities of the owners and managers, the asset size and the financial reports, the financial products being sought by the client, other correspondent relationships

that bank has, the nature of the client’s business and customers,

the due diligence the client performs on its customers, whether the

client is acting as a correspondent bank for its clients, the country’s

reputation for anti-money laundering measures, and a statement

from the relationship manager as to why he or she recommends

that the account should be opened.

And I think that statement cannot rely on this bank is generally

well-known or the management is generally well-known. You need

objective reality. You need to know who audits the bank, who audits the sub. You need to know the number of employees, who is

doing the monitoring, and where they are doing it. Those are some

of the factors to consider at an account-opening stage.

As far as monitoring is concerned, you must look at the flow of

funds. Now, you can’t do this in real-time; you can’t look at every

single wire transfer that passes through your institution. So you

have to use a triage system and identify what I think is the most

effective way, which is patterns of activity. Set a threshold level

and identify what transactions you are going to look for.

At Republic National Bank, we had the average threshold level

of $500,000 in 1 month passing through a bank if it was from the

same originator to the same beneficiary, or from the same originator to ten or more beneficiaries, or from ten or more originators

to one beneficiary. There are different parameters that can be utilized. And you need systems for this, but once a system identifies

the transactions that may be suspicious, you need to have a staff

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1The prepared statement of Mr. Evans appears in the Appendix on page 172.

that is trained to look at the transactions and to see if they can

find, as Jack Blum said, from databases or from other public information whether there is any information that will say that these

transactions represent normal business activity. The question is: Is

this legitimate business activity?

Thereafter, if there is no information found or if the information

that is found raises a question, the transactions that have been

identified must be funneled up to a senior officer, not in the business area but in the anti-money laundering area, for that person

to make a decision on what to do with the account, what to do with

the transactions.

If there is a suspicious activity—and suspicious activity means

that there is no legitimate business reason that is obvious in the

transaction—if that can’t be determined, you must file an SAR, a

suspicious activity report. That decision is best made by antimoney laundering or legal, or some combination of both.

Thereafter, the senior officer in anti-money laundering must talk

to a senior business manager as to what to do with the correspondent account. Do you just block transfers of certain originators and beneficiaries from that account, or is the pattern so pervasive through that account that you close the account? These are

some of the things you must consider throughout.

The other factor that I want to stress is the role of training and

the role of audit and the role of the commitment of senior management. I think it is imperative that training be ongoing through all

areas of the bank, but specifically since the area of correspondent

banking is both new in terms of the focus, there has to be ongoing

training for correspondent bankers, as well as for analysts and

those who are monitoring. Correspondent banking and the antimoney laundering program should be evaluated by audit to see

whether the controls are in place.

And finally, and what I think is most important, there has to be

direction from the CEO and the board of directors that sends a

message that anti-money laundering may be as important, if not

more important, than profits. And this is something that I learned

from the former Chairman of Republic.

Thank you.

Senator COLLINS. Thank you very much, Ms. Vitale. Your testimony was extremely helpful.

Mr. Evans, would you proceed?

TESTIMONY OF ROBB EVANS,1 MANAGING PARTNER, ROBB

EVANS AND ASSOCIATES, SUN VALLEY, CALIFORNIA

Mr. EVANS. Thank you. I really do appreciate the invitation to

appear today. I would like to associate myself with the remarks of

my colleagues on the panel, with not quite everything they have

said, but I think they have got almost everything bang on.

I have looked at this issue from a different perspective in recent

years. Up until 10 years ago, I had been a commercial banker on

both sides of the correspondent banking fence, if you will, both

managing correspondent banks and being the correspondent bank

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from an offshore location. My view in the past decade has changed

dramatically.

Ten years ago, I was asked to manage the liquidation of BCCI

in the United States, first by the California Superintendent of

Banks, and later by the Department of Justice. And so I got deeply

involved in that for a number of years, and as a consequence got

involved in a number of other unrelated cases where I was brought

into them by the Securities and Exchange Commission or the Federal Trade Commission or the Department of Justice to recover

funds that had been stolen or the subject of fraud. That was an

eye-opening experience.

In the Minority report, you have talked about one case, European

Bank in Vanuatu. I am the Federal Receiver in that case, and so

that is one I know a great deal about. I learned a good deal more

just reading your report that I did not know before. The case illustrates a number of points.

First of all, the recommendation regarding the offshore banks

that you focused on in your report, that they should be driven out

of the U.S. banking system, is correct. The shell banks issue is an

absolute a no-brainer. The other offshore banks, I believe, also

should either be barred from the U.S. correspondent banking system or, if allowed to remain, only with very stringent requirements.

There is simply no benefit for anyone other than their proprietors,

but they are only one link in a long chain of illegality.

The case that you cite in your report is of a gentleman by the

name of Kenneth Taves, who is now incarcerated and has pled

guilty just in the last few weeks to money laundering, fraud and

other charges, where the flow of the money is quite important in

understanding the fraud. The offshore banks play a critical role in

the movement of stolen funds—they are only a link in the chain.

Breaking that link is very important.

In this case, the Taves-European Bank case, what happened is

this chap was able to open merchant banking accounts for credit

card processing with two small banks in the United States, banks

that specialized in processing credit cards.

Now, the credit card business can be very high volume. By hook

or by crook, this chap was able to get a number of credit card numbers, and over a 24-month period, managed to steal $40 million at

$19.95 at a clip, processing them through these two banks. The

money was transferred regularly, trying to keep it in not massive

amounts, from those two small merchant banks in the United

States, one in California and one in Missouri, to a major U.S. bank

in Nevada, where the funds were concentrated.

From that bank in Nevada, it was transferred to a bank called

Euro Bank in the Cayman Islands. And from that bank, it was

then transferred all around the world, including right back to the

United States, where it bought real estate, had big accounts with

brokerage houses, and so on and so forth. None of this was cash,

by the way; it was all electronic.

In January 1999, the Federal Trade Commission, responding to

a number of consumer complaints, was able to get a freeze order

on the company and I was appointed the receiver of the company.

We walked in unannounced and were able to seize the company.

They put up a vigorous defense. The funds were frozen; they were

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under a Federal court injunction not to move any money and to

turn over all records, wherever located.

There were literally no records on the premises and almost no

records anyplace at all. So my colleagues and I spent a number of

weeks basically dumpster-diving to try and figure out where the

money went. But we were able to trace the money, one way or another, to the Cayman Islands, to Euro Bank.

We went to the Cayman Islands with the documentation of the

theft and the money laundering. The Cayman Islands authorities

promptly closed Euro Bank, which was a major break for us in that

case because by placing Euro Bank into receivership, we were able

to, through court action, get access to the records of the bank. From

there, we were able to find out where the money went from Euro

Bank, which was to many locations, from Liechtenstein to

Vanuatu. And we started the task of tracing it from one location

to another, from one bank to another, item by item.

We were able to perfect our claims to a large amount of money

in the Cayman Islands, and we are confident that the funds will

be returned to us for repayment to victims. It is a slow process because the bank there is in liquidation, and so we have to stand in

line with all the other depositors to get the stolen money back. But

we will get the money back, and we have had good cooperation

there.

But tracing the money onward between the offshore banks was

challenging. Ultimately, what we found happened is that after the

freeze order was imposed by the courts and the crook knew he was

caught, he told the bank in the Cayman Islands to open a new account for him in Vanuatu, which Euro Bank had told him was a

neat place to do business, with secrecy, all the other good stuff.

The bank in the Cayman Islands had a working relationship

with the bank in Vanuatu; they had referred business before. They

faxed European Bank in Vanuatu and told them to open up an account in a corporate name. A trust company affiliated to European

Bank in Vanuatu opened a corporate account by incorporating a

new Vanuatu corporation called Benford Ltd., which is referred to

in your report.

The only information they had to open that account was a name

which they assigned it, the name of an alleged beneficial owner,

which was an acquaintance of the villain, and a copy of a British

passport and a London address. They asked no questions. The business of the company just said ‘‘business,’’ nothing else, nothing beyond that. The bank in the Cayman Islands transferred $100,000

to European Bank’s account in New York to get the ball rolling.

That money was used to open an account with European Bank in

Vanuatu for Benford Ltd. Within in a matter of weeks, over $7 million flowed into that account.

When we found out about these transfers, the bank in the Cayman Islands was in the hands of liquidators. So with their cooperation, we and the liquidators in the Cayman Islands immediately informed European Bank in Vanuatu that this was stolen money and

they were, in fact, holding it in trust for the victims and they

should return it.

Then commenced a war which goes on to this day to try and recover those funds. One must remember in a small country like

65

Vanuatu, $7 million is a very large amount of money. This was far

and away the largest customer of the bank. The victims of this

crime had more money in that bank than the owners of the bank

or any other deposits.

The opportunity for these offshore banks and the incentive for

offshore banks to deal with villains is immense. If you stop to think

about it, if you are going to steal money, who is the best person

to steal it from? Obviously, a thief. If villains open accounts with

offshore banks, which they do with regularity, the offshore banks

hope the bad guys get caught because guess who gets the money

then if it is not properly traced? So it is a tremendous incentive.

In this case, in Vanuatu, I honestly don’t know what was driving

motivations for the offshore bank to try and hang on to this stolen

money. I sent people to Vanuatu without luck. I went there personally, accompanied by the FBI, with all kinds of documentation. The

bottom line is they just wanted to keep that money. In a small

country like Vanuatu, $7 million is a lot of money. If they could

confiscate the money, keep it, if the bank could keep it, even freeze

it, paying no interest on it, it would do tremendous things for both

the country and the bank. But the bottom line is it is other people’s

money.

My point, and I see my time is up, is that I would like to make

a plea to this Subcommittee. First of all, you are on the right track

in terms of banning these accounts. Additionally, in my view, I

think that much better tools can be given to people like myself

whose mission it is to recover stolen funds from offshore banks. We

need better legal standing. That can be achieved, and I would urge

this Subcommittee to consider those issues to help us recover stolen funds from abroad. I discuss this point in greater detail in my

prepared remarks. I urge the Subcommittee’s consideration.

Thank you very much.

Senator COLLINS. Thank you, Mr. Evans.

There appears to be widespread agreement that U.S. banks

should not be opening correspondent accounts for shell banks. I

would like to pursue with each of you in further depth the issue

of whether they should be providing services to offshore banks.

Yesterday, a former owner of an offshore bank in the Cayman

Islands explained to us that at his bank, which he described as a

typical run-of-the-mill Cayman Island bank, 95 percent of the customers were Americans, and he opined that there was no legitimate reason for an American citizen to have an account in an offshore bank, particularly given the very high fees that the bank assessed for its services and products.

I first want to ask whether you would agree with that assessment that there is generally no legitimate reason for an American

citizen to have an account in an offshore bank, and then I want to

ask you about the implications if you do agree.

Mr. Blum.

Mr. BLUM. I would say there is no legitimate reason. If you want

an account offshore and, for example, you have a vacation home or

you are living in another country, you can do business with the

banks of that country. Remember that the offshore bank is an institution that only deals with foreigners.

66

Now, I visited Mr. Mathewson in 1994 in his bank. I had a hidden camera and tape recorder from Public Broadcasting. The show

was on ‘‘Frontline,’’ and he made a very persuasive pitch about how

it was possible to hide my money and all the things he would do

to keep it out of sight for me. His due diligence consisted of ‘‘you

are not a drug dealer, are you?’’ And I said no and the conversation

continued, and that tape is available.

Senator COLLINS. Ms. Vitale.

Ms. VITALE. I am hesitant to say there is no legitimate reason.

I can tell you I don’t know of one, but I am always willing to listen

to see if someone can come up with one. That is for American citizens to have accounts at offshore banks.

I think my answer is different to the second question. There are

legitimate reasons to have offshore banks. I know Republic had

banks in offshore jurisdictions. Offshore jurisdictions may be highrisk jurisdictions, but that doesn’t mean that legitimate activity

can’t be conducted there.

I think when you do have an offshore bank either as a customer

or even as your own—part of a sub or an affiliate of your own

bank, you have to have monitoring procedures in place and use a

belt-and-suspender approach to make sure that those transactions

are legitimate transactions.

Senator COLLINS. Mr. Evans.

Mr. EVANS. Well, as far as offshore banks, I think for these purposes we should define them as not including the offshore subsidiaries of regulated institutions.

Senator COLLINS. Correct. I am talking about offshore banks.

Mr. EVANS. OK. With that clarity, I can say there are lots of good

reasons for people to be operating offshore in the regulated world.

In the unregulated world, I can’t think of a reason that is proper

for an individual American. I can think of reasons for citizens of

other countries, but not for an American.

The problem is that the vast majority of Americans who want to

open offshore accounts are doing so for tax evasion. Tax evasion is

not a crime in many countries. The problem exists that those of us

that are trying to recover money of universally accepted crimes,

such as theft, are put in the same category as those that are trying

to recover tax evasion or divorce settlement or other kind of civil

actions. That is part of the problem.

Senator COLLINS. To me, a bank in a country that does not allow

its own citizens to deal with that bank or to do business with that

bank is inherently suspect, but I want to make sure that as we attempt to go forward and devise solutions to this problem that we

do not overreact and, in fact, inhibit legitimate commerce. I think

it is a difficult balance to strike, but certainly offshore banks appear by their very nature to be questionable when defined as you

and I have discussed.

Ms. Vitale, I want to go back to an issue that you raised in your

statement. You said, and I think it is a critically important point,

that to be effective, anti-money laundering procedures must have

the support and the commitment of a bank’s senior management.

The testimony that we heard yesterday was very interesting on

that point. I think it was Mr. Christie, of Bank of America, who

testified that correspondent banking used to be a part of the bank

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where you knew you weren’t going to get ahead if you were assigned to correspondent banking, that it was considered a very routine part of the business and not a way to advance your career.

That implies to me that it didn’t receive years ago, at least, the

kind of scrutiny and priority that you suggest is needed. I think

that has changed, to be fair. I think it has clearly changed in the

banks that we have talked about, including Citibank that we are

going to be discussing later today.

But do you think that was typical, what Mr. Christie told us,

that it just was not an area of the bank that received much attention from top management, and thus was more vulnerable to

money laundering?

Ms. VITALE. I think it received attention from top management

in terms of profitability in the early 1990’s. But quite frankly, in

the early 1990’s when I first got to Republic, I didn’t pay much attention to correspondent banking, the wire transfers through correspondent banking, and that was because the amount of wire

transfers through correspondent banking is so vast, you can’t monitor every one.

It was only in 1997 when two things happened. One was an account officer came to me, and he was one of the only account officers who reviewed statements of his accounts, and he said, Anne,

take a look at this. And I looked at the activity and I said is this

common? And then we started, by hand, manually, looking at different account statements, and I went to the Chairman, Walter

Weiner, and I said we have got a problem, we can’t have this. And

then he said, design a system, and I got the funds and I worked

with our systems people and we identified high-risk.

At the same time, the OCC came to me and they had received

a tip about a certain Russian bank, and we took a look at the activity in those banks and accelerated our systems development. And

once we developed a system where we could monitor large transactions or high-risk transactions, we were then able to make a dent

in the correspondent banking area. But it has been a gradual process. But I think today it should get the attention of every CEO.

Senator COLLINS. Thank you.

Mr. Evans, you told us a very interesting case study involving

European Bank, in which you had been very involved in investigating, and you recounted that when it opened an account for

Benford, which, I think was incorporated as Benford Ltd., European Bank knew very, very little about its clients. Indeed, the occupation listed was simply ‘‘business.’’ Given the nearly complete lack of information about the beneficial owner of Benford, is the only reason that European Bank

opened this account was that it was profitable? I mean, is it simply

a matter of money being the motivation here?

Mr. EVANS. I can’t imagine what else it could have been, and I

also can’t imagine a reason why a bank sitting in Vanuatu could

think that there would be a legitimate reason for that to happen.

I mean, we have an individual who is supposed to be—lady who is

supposed to be living in London. Why would they open an account

in Vanuatu, other than to hide the money?

And maybe there are legitimate reasons to hide money, at least

legitimate in the laws of that country, from a spouse, from a credVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00077 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
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itor, from whatever. But the mere act of wanting to open an account and providing absolutely no information to a bank who asked

absolutely no questions—there can be no conclusion that I can figure out, other than everybody knew it was crooked money and

there was a good way to make money off of that.

Senator COLLINS. Do you have any recommendations on how we

could encourage countries with lax controls to either tighten their

laws or otherwise cooperate with international efforts to combat

money laundering?

Mr. EVANS. Well, there are some good precedents I have heard

of in the drug control issue where there has been good international cooperation. I would like to see that cooperation extended

into not only money laundering, but the recovery of money laundering. If we have stronger tools to recover money, it will make it

much less profitable for marginal banks to deal with villains.

You have got to keep in mind that the criminal process works

very slowly, and that is never going to change, in my view. You

have procedures, you have processes to go through that make getting criminal convictions a slow and tedious process.

Most recovery of stolen money from abroad is done through a

civil process. It is by actions brought civilly by the Securities and

Exchange Commission or the Federal Trade Commission or another

regulatory agency. We need better tools to move civilly. I believe

those can be negotiated so we have reciprocal rights with other

countries for the return of money to victims that can enhance that

and allow those of us trying to recover funds to move with much

greater speed than we can now. The money moves too fast. In a

heartbeat, the money is gone. We need to be able to move faster.

Senator COLLINS. Mr. Blum.

Mr. BLUM. I would like to chime in on that. I agree that we need

the tools. At the moment, U.S. citizens who try to take a U.S. judgment to a foreign court are in a terrible position because we don’t

sign on to the international conventions about enforceability of

judgments. Our posture in the international law setting is really a

19th century posture and we have got to change that, and change

it quickly.

Senator COLLINS. Ms. Vitale.

Ms. VITALE. I think one of the areas that needs some help is the

ability to freeze certain funds within a correspondent account. And

I am not advocating seizing the entire account, but if you identify

funds within the account that there is probable cause to believe are

the proceeds of a crime, those funds should be susceptible to seizure.

Senator COLLINS. Thank you.

Senator Levin.

Senator LEVIN. Thank you, Madam Chairman.

You have all agreed that you see no legitimate purpose for shell

banks, and I couldn’t agree with you more. In our investigation, we

have been unable to find a legitimate purpose for a shell bank either, but your experience is a lot vaster than ours and that testimony is extremely helpful. I would think if we did nothing else,

and we hope to do a lot more, but ban shell banks, or at least correspondent accounts with shell banks, we would be doing a real

service.

69

We hope to go beyond that, but would you agree if we could just

end the accounts with shell banks that they have with U.S. banks

that we would be performing a service? Do you agree with that?

Mr. BLUM. Absolutely.

Ms. VITALE. Yes, sir.

Mr. EVANS. Oh, yes. If that is all you do, you should be ashamed

of yourself.

Senator LEVIN. I agree with that, too, but it is a good starting

point.

Mr. EVANS. Absolutely.

Senator LEVIN. Now, one of the arguments against it that we are

going to face is that, well, they will just open accounts in other

countries, banks in other countries. What is the answer to that?

Mr. BLUM. The answer is they have to use the U.S. wire transfer

system. They have to have access to U.S. markets. The second answer is we have to work with the other major countries that have

large banks and are in the bank regulatory system. I think right

now the countries of Europe, the OECD countries, would agree.

And this is an issue which our Treasury should be tabling in the

context of the G–7 and say that, look, these are what the rules

have to be.

Ms. VITALE. I think it is harder to find, but you can find it, and

I am talking about nested correspondents and when the foreign

bank has as one of its correspondents a shell bank. You can’t find

that when you open an account for your legitimate correspondent

bank. However, you can see that at least in some occasions when

you do wire transfer monitoring.

I know at Republic I remember quite clearly several instances,

what really is standing out in my mind is where we had a correspondent bank that had a shell bank in Nauru and that was the

originator of many wire transfers. First, we tried to do some due

diligence to find out what this bank and who this bank was. We

found nothing on the bank. We even contacted the bank, our correspondent, who couldn’t tell us very much. And then what we did,

we used the OFAC filter to block all wire transfers from the shell

bank. So we didn’t close the legitimate correspondent bank, but we

blocked all transfers from then on of the offshore bank.

Senator LEVIN. Do any of our banks say that we will not accept

an account from a foreign bank if it accepts deposits from shell

banks? Is there any reason why we couldn’t just tell our banks you

may not allow this kind of nesting in your depositors? Why not do

it that way?

Ms. VITALE. How do you enforce that?

Senator LEVIN. It may be tough to enforce.

Ms. VITALE. OK.

Senator LEVIN. But at least when you are accepting the deposit,

you would be telling the depositor that if they do that, that is the

grounds for ending the account, and indeed money could be seized

if it were illegal money coming through that, just the way you described just a few moments ago, if we allow for the seizure of a portion of an account as you recommend.

But is there any reason why, as part of a reform, we should not

tell U.S. banks you must not accept a deposit from a bank that you

70

have not informed may not, in turn, accept a deposit from a shell

bank?

Mr. BLUM. I think that works.

Mr. EVANS. I think you are on the right track there, Senator. I

think the way to do it is probably have some kind of certification

by the correspondent bank that they, in turn, will not maintain

nested accounts that do not meet the standard. And then they

would be subject during routine bank examination to finding out

whether the certifications were done properly.

Senator LEVIN. Should we not require that U.S. banks that accept correspondent accounts require any bank that wants to open

a correspondent account to provide a list of the banks that they,

in turn, have as correspondents? With computers, it is a fairly

quick thing, I think, to do that. Now, if it is cumbersome and bureaucratic, it may not be doable, but what do you think, Mr. Blum?

Mr. BLUM. I think it is quite feasible and not very difficult to do.

Ms. VITALE. There is a problem with updating the lists, and also

with what do you do when you have this list, then? I mean, do you

just have a list of all the names or do you then have more due diligence that you have to do about all these banks that may be very

small? I think that might be asking too much, unless it appears,

of course, on your monitoring transactions as suspicious activity.

Then you have the obligation to do more.

Senator LEVIN. If it is combined with that required certification

that they do not accept depositors from shell banks, then they

would be worried because they have to disclose who their bank depositors are, in turn, and if they have to certify that they don’t accept any deposits from shell banks, they would be easily caught.

Our U.S. bank would then have the certification from the correspondent bank; we do not accept deposits from shell banks. They

would have the list from the depositor as to what banks they accept deposits from. And I think any depositor would be very worried, then, that those two pieces of paper could be easily put together and see whether or not the certification is accurate or not.

Mr. Evans, do you have a comment on that?

Mr. EVANS. No. I just think that you have got to be so careful

on how that is crafted because we could have unintended consequences if we don’t do it right. The burden should be on the foreign bank. If it is a major foreign bank that is maintaining nested

accounts, the burden should be on them. They are subject to examination. The burden should not be on the U.S. correspondent, other

than to require the certification.

Senator LEVIN. All right. It would be very helpful if you would

give us any further thoughts on that subject for the record so that

we could consider that as I am drafting legislation. I would like to

have all the help we can get.

Now, what about banks that are licensed in jurisdictions that are

known for poor anti-money laundering controls? Should we treat

them differently automatically? Maybe we do already tell our U.S.

banks you may not accept any deposits from banks which are in

the countries that are on that international list. Are our banks allowed to accept deposits from those countries’ banks?

Mr. BLUM. Yes, we do accept those deposits. I think we have to

do business with some banks in these countries. For example, some

71

1See Exhibit No. 21 that appears in the Appendix on page 734.

of the Caribbean Islands and the Pacific Islands legitimately need

banking connections.

But the way I would put it would be this: If you picked a small

town in Michigan or Maine—let’s say South Haven, Michigan, and

suddenly they decided they wanted to be home for 35 banks, you

would probably say wait a minute, there is something wrong here.

And even if the law said we are going to do everything in the world

to stop money laundering, you would know that in a small town

you simply don’t have the resources to monitor and do everything

that needs to be done.

So I would say that any jurisdiction that obviously hasn’t got the

resources to do the job, no matter what laws they pass, should be

put on notice that if they go into any form of offshore banking center business, we are not going to deal with them and make them

toe the mark. And I think there are a variety of things underway

at the moment. The OECD has begun an exercise in looking at

harmful tax practices. The FATF has developed a list which is focused on who is and who is not obeying the ground rules of the

game.

I think we have to really consolidate the way we look at the

problems. We should say, wait a minute, this just isn’t going to

work no matter what rules we put in place. Let’s be realistic and

say we are not going to let you play if this is the business you

choose to be in.

Senator LEVIN. Let me go back to the question again of shell

banks. This was a letter that we got from the legal counsel of

Citibank.1 It says, ‘‘We have been reflecting on the concerns stated

by you and your staff about establishing relationships with offshore

banks that have no physical presence in the offshore jurisdiction.

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

customers of the parent institution.’’ So the affiliates we are not

worried about, but then they go on to say this: ‘‘Their function is

to serve as registries or booking vehicles for transactions arranged

and managed from onshore jurisdictions.’’

Is there a compelling business justification for shell banks, for

example, as registries or booking vehicles?

Mr. BLUM. The whole idea of a booking vehicle leads you to the

heart of this problem. When you go offshore, you are evading some

rule, some tax, or some requirement of a regulatory agent or a government somewhere else. The principle of international law that

has been on the table for many years is one government won’t help

enforce the governmental interests of another government. That

principle evolved in the 19th century, the early 20th century, and

it is a principle which I think needs very careful reexamination as

we integrate the world economy in the 21st century.

This idea of being able to book a transaction outside the reach

of the regulators somewhere else, of the tax authorities somewhere

else, is at the heart of the matter, and it is the thing that we really

have to debate in a coherent way. It is not just the issue of money

72

laundering. When they say book somewhere else, they are talking

about reserve requirements and the cost of money.

In the United States, if you are a bank, you have to keep reserves for liquidity, reserves against various risks. If you move the

money offshore, there are no reserve requirements. You are on a

net/net basis. The cost of money goes down, but they are evading

the basic reserve requirement regulation.

So what we have to do is begin to focus on how this works internationally and where regulation should be permitted to be changed

so that everything is, in fact, onshore and done in a straightforward way.

Senator LEVIN. Ms. Vitale, I think you have testified that having

a physical presence and employees is both meaningful and important.

Ms. VITALE. Yes.

Senator LEVIN. So we have that testimony, I think, in response

already to my question. Is there anything further that you want to

add to that?

Ms. VITALE. I think when you have no physical presence anywhere, you are not a bank. You may be a wire transmitter of some

sort, but you are not a bank.

Mr. BLUM. You are a checking account, is what you are.

Senator LEVIN. Mr. Evans.

Mr. EVANS. Well, Senator, I do have to diverge a little bit here

from my colleagues. I think there are very legitimate reasons to

have these offshore booking and registration centers. Now, maybe

that is the vagaries of international law now, but there is no major

international insurance company that is not operating in that fashion largely through Bermuda. The same way with ship registries.

That is the way the world is.

Now, it shouldn’t be that way, mind you, but it is legal, it is

proper, and if you are going to be in that arena, that is what you

have to do to compete. We shouldn’t mix that up with this, in my

view. That is a very legitimate business under today’s rules of the

game and we shouldn’t screw around with it. I mean, if we want

to screw around with it, that is a different issue than money laundering. Don’t cross the two.

Senator LEVIN. I have further questions, but my time is up.

Senator COLLINS. Why don’t you proceed?

Senator LEVIN. Thank you.

On the question of seizing suspect funds, Ms. Vitale, I believe,

has already addressed that issue and I don’t know if our other two

witnesses have. But the question here is whether or not we should

make it easier for U.S. law enforcement to seize suspect funds

which are deposited in a U.S. correspondent account belonging to

a foreign bank.

Right now, to seize those funds, the U.S. has to show, or our

prosecutors or law enforcement have to show that a foreign bank

was somehow part of the wrongdoing. It is not enough to show that

those assets are there. You have got to show that somehow or other

the bank is part of the wrongdoing, they are a wrongdoer, and that

is not a requirement which applies to seizures from other types of

U.S. bank accounts. So it is just the correspondent account that we

have a very tough standard to meet, and I don’t see that it is a

73

1See Exhibit No. 37 that appears in the Appendix on page 805.

particularly logical way to approach it any more than it would be

with our onshore accounts.

Now, I think we have had the story from you, Mr. Evans, about

the Taves credit card fraud, but let me ask you briefly, all of you,

if you can, would you agree—I guess, Ms. Vitale, you have already

addressed it—that we ought to allow for the seizure of funds in a

correspondent account in the same way we would in a regular bank

account?

Mr. BLUM. I agree. In my prepared statement and in my remarks, I mentioned the case of Nigerian fraud with the money that

we wanted to try to stop in a New York correspondent account before it went off to Beirut and couldn’t do it. I think it is ridiculous

that a correspondent account from a shell bank should have privileged status in the sense that it is in a better position than the account of an ordinary American bank.

Senator LEVIN. Thank you. Do you have anything more to add?

Mr. EVANS. No. I agree with you.

Senator LEVIN. Thank you.

I want you to take a look at a description which was contained

in a Citibank document relative to the purpose of an offshore bank,

and this is Exhibit 37.1 This memo refers to Federal Bank, which

was an offshore bank licensed in the Bahamas with no physical location. Citibank calls it a booking vehicle.

The memo refers to Banco Republica, which is an offshore bank

located in Argentina, and Federal Bank is supposed to be its offshore arm for Banco Republica’s private banking customers. I will

read this to you. I don’t know if you have the exhibits in front of

you. Do you have those exhibits in front of you?

Mr. BLUM. Yes.

Senator LEVIN. Good. Here is what the memo says about the purpose or the function of the Federal Bank: ‘‘The existence of this vehicle is justified in the group’s strategy because of the purpose it

serves . . . to channel the private banking customers of Banco

Republica to which they provide back-to-backs and a vehicle outside Argentina where they can channel their savings, which are

then replaced in Banco Republica by Federal Bank.’’ So what the

memo says is the depositors in Banco Republica send their money

to Federal Bank and then Federal Bank deposits that money back

in Banco Republica.

Can any of you see the purpose of that?

Mr. BLUM. Well, back-to-back transactions are frequently used by

money launderers. A deposit is made in one place. The money then

becomes collateral for a loan and goes back into the hands of the

person who sent the money originally, and that is a great way of

concealing or making it look like the money came legitimately from

a foreign source.

Senator LEVIN. Are there other purposes that might be legitimate purposes for that? Can you offhand see what a legitimate

purpose would be for that? We will give Citibank obviously an opportunity to testify on that. But just looking at it with your experience, would that raise an alarm bell if you saw those kinds of

transfers back and forth?

74

1See Exhibit No. 23 that appears in the Appendix on page 742.

Ms. VITALE. It is probably—if it is legitimate, it is tax evasion.

Mr. EVANS. Yes. I can’t think of a reason. It would have to be

a local Argentine thing in which I have no experience, but that

would be the first question I would ask.

Senator LEVIN. Finally, let’s take a look at Exhibit 23,1 and I

want to just get your reaction to a series of transactions that occurred among three entities with a common owner and a correspondent account in Citibank, in New York.

These three entities now have the same owner, and the movement of money among three Citibank New York correspondent accounts are the three entities owned by Grupo Moneta—Banco

Republica, which is the actual bank located onshore in Argentina,

and then American Exchange which is a Panamanian company apparently operating out of Uruguay, and Federal Bank which is the

offshore bank which is one of the banks that we are looking at, also

owned by that same group, Grupo Moneta.

Now, as you can see, there are numerous same-day transfers of

significant amounts of money from Banco Republica to American

Exchange, to Federal Bank. These are all owned by the same

group. Can you see any particular reason, from your experience,

why money would move like that? Is that movement—same day,

three entities owned by the same group—a normal business practice from your experience?

Ms. VITALE. I can’t answer the question, if it is a normal business practice, but it raises questions. And I think if you see a pattern such as this, you should ask some questions and get answers

that will explain it. But the rule is sort of the mathematical rule,

the shortest distance between two points is a straight line. Here,

you have it going a round-robin sort of transaction, which is an indicia of high-risk activity that may be suspicious. So I would definitely ask some questions about a pattern like this.

Senator LEVIN. Do either of the other witnesses want to respond?

Mr. EVANS. Ask the questions, for sure. I can think of reasons

why that would be quite proper in foreign exchange markets and

the like where you deal in those kind of numbers and you deal with

them on a same-day basis. But the questions deserve to be asked.

Senator LEVIN. Among entities which are owned by the same

group?

Mr. EVANS. It could be.

Senator LEVIN. OK.

Mr. EVANS. I honestly don’t know. I don’t know enough about it,

but the questions—it is a legitimate question.

Senator LEVIN. One other fact. I am informed they are all U.S.

dollar accounts.

Mr. EVANS. I could think of reasons why it could be.

Senator LEVIN. OK, fair enough.

Mr. BLUM. I come to the same conclusion. You have to ask questions, and the question is why. Always, where offshore banking is

involved, there is the question of why have you gone to this added

extra expense. Why are you going through multiple transfers when

you can do it straightforwardly and simply?

Senator LEVIN. Thank you all. You have been a great help.

75

1The prepared statement of Mr. Bermudez with attachments appears in the Appendix on page

180.

Senator COLLINS. Ms. Vitale, just one final question for you,

since you have helped banks set up anti-money laundering procedures. You said in looking at the transfers that Senator Levin just

brought to your attention that you can’t conclude anything without

asking questions, but that, in fact, they raise questions.

Would the kinds of money laundering systems that you would

advise a bank to have in place trigger a review of a pattern that

is similar to this?

Ms. VITALE. Yes.

Senator COLLINS. Thank you. I want to thank all of you for your

testimony today. It was extremely helpful, and we look forward to

continuing to work with you. Thank you.

Mr. BLUM. Thank you.

Mr. EVANS. Thank you.

Senator COLLINS. Our second panel of witnesses this morning

consists of three individuals representing Citibank: Jorge

Bermudez, Executive Vice President and Head of e-Business for

Citibank; Carlos Fedrigotti—you can see my Spanish is not very

good here—President and Country Corporate Officer for Citibank

Argentina and Latin American South Region Executive; and Martin Lopez, who was formerly with Citibank Argentina and is currently a Vice President and Corporate Bank Head for Citibank in

South Africa.

I appreciate all of these witnesses being here today. At least I

hope they are here. I am a little concerned that they haven’t appeared at the table. I would ask the Chief Clerk to locate the witnesses and bring them forward.

[Pause.]

Senator COLLINS. Gentlemen, would you remain standing so that

I can swear you in?

Would you please raise your right hand? Do you swear that the

testimony you are about to give to the Subcommittee will be the

truth, the whole truth, and nothing but the truth, so help you,

God?

Mr. BERMUDEZ. I do.

Mr. FEDRIGOTTI. I do.

Mr. LOPEZ. I do.

Senator COLLINS. First, I want to express my appreciation for our

witnesses being here today. I know two of you have traveled a considerable distance to be here.

We will be using a timing system today. You will be given 10

minutes to make your opening statements, but your complete written statements will be included in the hearing record.

We are going to start with Mr. Bermudez. Please move the mike

close to you so that we can hear you well. Thank you.

TESTIMONY OF JORGE A. BERMUDEZ,1 EXECUTIVE VICE

PRESIDENT AND HEAD OF E-BUSINESS, CITIBANK, N.A., NEW

YORK, NEW YORK

Mr. BERMUDEZ. Good morning, Madam Chairman and Senator

Levin and Members of the Permanent Subcommittee on InvestigaVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00085 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
76

tions. My name is Jorge Bermudez. I am an Executive Vice President of Citibank and Head of e-Business, a business unit of

Citigroup’s Global Corporate Investment Bank. E-Business is the

organization responsible for delivering Internet-based solutions to

the corporate marketplace and for providing cash management and

trade services to our global, regional and local customers.

I am pleased to testify before you this morning and share with

you what Citibank is doing to fight the risk of money laundering

in the markets in which we operate, including our correspondent

banking funds transfer services which are so crucial to the international payment systems. This is an extremely important topic.

Citibank is a truly global institution providing a broad range of

products and services to corporate and financial institution customers in more than 100 countries around the world. We are keenly aware, however, that with this global presence comes the tremendous responsibility of setting and following high standards to

fight money laundering in each of the countries in which we operate.

As a leader in the financial services industry, we have taken, and

will continue to take, a prominent role in the fight against money

laundering. That fight is far from over. While we are constantly

working to improve our anti-money laundering controls, the reality

is that it is difficult for the industry, as well as law enforcement,

to keep up with the latest schemes employed by money launderers.

Citibank welcomes the effort of this Subcommittee to assist the

financial services industry in identifying areas of vulnerability and

developing strategies to avoid the unwitting facilitation of money

laundering. Thanks, in part, to the Subcommittee’s work, the financial services industry has been able to identify areas of risk that

had not been fully appreciated, which has in turn provoked an industry-wide reassessment of the adequacy of anti-money laundering controls for correspondent banking.

As you know, the New York Clearing House Association, of which

Citibank is a member, is undertaking to develop a code of best

practices that will help the industry respond to the weaknesses

identified by your staff. The Federal Reserve has acknowledged the

challenges involved in balancing the importance of anti-money

laundering controls with the importance of maintaining an effective

and efficient international payment system. The Federal Reserve

has indicated its willingness to consult with the Clearing House in

its effort to develop a code of best practices.

In addition, the Wolfsberg Group, of which Citigroup is also a

participating member, is taking up the issue of money laundering

in correspondent banking. Like the Wolfsberg Anti-Money Laundering Guidelines for Private Banking issued last year, the Group

intends to develop another set of guidelines that reflect the Group’s

recognition that money laundering in international banking cannot

be solved by one institution or by any one country.

In a 1995 report, the Office of Technology Assessment found that

hundreds of thousands of wire transfers move trillions of dollars on

a daily basis. Citibank, for example, executes approximately 145,00

wire transfers that permit customers and third parties to make

$700 billion in payments everyday. Any monitoring program would

have to be carefully designed to avoid impairing the smooth funcVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00086 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
77

tioning of the national and global economy, particularly in view of

the fact that less than one-tenth of 1 percent of the total volume

of wire transfers is estimated to involve money laundering.

Citibank’s response to this complicated problem has been to

strive continuously to improve an anti-money laundering program

that couples thorough and ongoing due diligence on its own financial institution customers with the latest technologies for monitoring transactions between financial intermediaries.

Citibank has always conducted due diligence on its financial institution customers. Recently, however, we have implemented an

enhanced ‘‘know your customer’’ due diligence procedure applicable

to relationships with financial institutions in the emerging markets. Once an account is opened for a financial institution, the activity in the account is monitored in several ways which I have described in my written statement.

In addition, the investigative analysts in our Tampa Anti-Money

Laundering Unit employ various methods to monitor U.S. dollar

fund transfers for suspicious activity on an ongoing basis, and we

have established a specialized compliance unit to coordinate and

improve communication between the Tampa Anti-Money Laundering Unit, the country compliance officers, and the business relationship managers.

As criminals have become increasingly more sophisticated at

laundering money, and as the volume of fund transfers has continued to grow, we have made efforts to improve our monitoring techniques. Over the past year, we have also significantly increased the

amount of training resources dedicated to anti-money laundering

education.

Furthermore, we work with local governments and banking leaders to raise compliance standards and protect against money laundering risks. To that end, we have led almost monthly anti-money

laundering seminars for foreign bankers and banking regulators.

Although the pattern monitoring that our Tampa Anti-Money

Laundering Unit undertakes is important to identify unusual patterns of activity, it is only a limited line of defense. As the Chief

of FinCEN’s Systems Development Division has said, sifting

through the volume of wire transfers for suspicious activity is like

looking for a needle in a stack of other needles.

In our experience, the most effective monitoring comes from the

use of law enforcement tips, press reports, or other specific information that identifies names of institutions or possible customers

of financial institutions that have come under suspicion of money

laundering. Citibank is developing a formalized system to gather

such information. We feel it would be particularly useful if U.S.

Government agencies could devise methods of sharing with the

banking industry and foreign regulatory agencies information

about institutions that have been suspected of money laundering.

We also have implemented a centralized system for tracking all

subpoenas and seizure orders Citibank receives on financial institution accounts. If a subpoena or seizure order relates to money

laundering or similar issues, the matter is referred to our Tampa

analysts for follow-up.

The Minority staff has suggested a number of measures to assist

banks that offer correspondent banking services in guarding

78

1The prepared statement of Mr. Fedrigotti appears in the Appendix on page 223.

against money laundering, including the identification of certain

types of relationships that warrant greater care when deciding

whether to accept a financial institution as a correspondent banking customer. Citibank has been studying these recommendations

with great care, and we will be working with the New York Clearing House Association in the coming months to formulate an industry code of best practices to respond to the issues involved.

As one of the world’s largest global institutions, Citibank knows

that it plays a unique and important role in the fight against

money laundering. We are dedicated to the fight against money

laundering and to using our global presence to increase international awareness of the problem. Thanks, in part, to the Subcommittee’s important work, U.S. financial institutions are now

more aware than ever of the vulnerabilities they face when they establish correspondent relationships with smaller, less well-known

financial institutions that want to participate in the global economy.

Thank you for the opportunity to testify before you today. I am

pleased to answer any questions you have.

Senator COLLINS. Thank you.

Mr. Fedrigotti.

TESTIMONY OF CARLOS FEDRIGOTTI,1 PRESIDENT AND COUNTRY CORPORATE OFFICER, CITIBANK ARGENTINA, BUENOS

AIRES, ARGENTINA

Mr. FEDRIGOTTI. Good morning, Madam Chairman. I have submitted a written statement for the record that I would like to summarize here.

Madam Chairman, Senator Levin, and Members of the Permanent Subcommittee on Investigations, my name is Carlos

Fedrigotti. I am the President of Citibank Argentina. I have held

that position since April 1996. I have been an employee of Citibank

since I graduated from Columbia University in 1977. As the President and Country Corporate Officer for Citibank Argentina, I am

the institutional representative for Citibank in the country. I am

responsible for Citibank’s corporate banking operations in Argentina.

Since 1914, Citibank has been an active and important member

of the Argentine business community. In 1999, the U.S. State Department commended the branch for its outstanding corporate citizenship, its innovation, and its exemplary international business

practices. Last year, the Argentine Minister of the Economy

praised the constructive role that the branch played in connection

with the passage of anti-money laundering legislation in Argentina.

Citibank has had a long and distinguished history in Argentina. I

am proud to lead this institution.

Citibank Argentina has long been aware of the need to scrutinize

closely the financial institutions with which it does business. First,

in terms of credit risk, Citibank must have a complete picture of

the financial soundness and stability of its financial institutions

customers. Second, the branch must perform thorough due diligence to ensure that its customers have the utmost integrity, and

79

that these customers fully appreciate their responsibility to prevent

and detect money laundering and other illegal activity.

Citibank has strived to limit its target market to the most reputable and financially robust institutions. For this reason, Citibank

avoids doing business with offshore banks that are not affiliated

with well-established onshore parent financial institutions.

In January of last year, Citibank Argentina further limited its

target market. We closed correspondent accounts that we had

maintained for offshore institutions that, although affiliated with

Argentine onshore parents, were not reported to the Central Bank

on the parent institutions’ consolidated financial statements. None

of the accounts for these non-consolidated offshore affiliates was

closed because suspicious activity was detected.

Among the accounts that were closed was a correspondent account for Federal Bank, which the Minority Staff’s Report has criticized Citibank for opening and which would not have been opened

under the redefined target market criteria.

In 1992, Citibank Argentina’s Financial Institutions Unit, or the

FI Unit, as we call it internally, requested that a correspondent account be opened in New York for Federal Bank Ltd. It was the understanding of the FI Unit that the Moneta Group—a group of financial institutions and investment companies owned by Raul

Moneta, his uncle Jaime Lucini, and their families, owned Federal

Bank—and that Federal Bank was the offshore affiliate of the

Group’s flagship bank in Argentina, Banco Republica.

The members of the FI Unit in Argentina who requested the

opening of a correspondent account for Federal Bank felt comfortable doing so because the branch in Argentina had had a long

banking relationship with its sister institution, Banco Republica,

and its owners which dated to the late 1970’s.

In addition to this banking relationship, Citibank and the

Moneta Group were also co-investors in an investment holding

company called CEI, created in the early 1990’s to hold equity in

Argentine companies acquired through the Argentine Government’s

debt-for-equity swap program.

Although the Buenos Aires branch had no legal documentation in

its files proving as a matter of law that Federal Bank was owned

by the Moneta Group, the FI Unit considered it to be an affiliate

of Banco Republica and treated it as such. As you have seen from

the FI Unit’s records, members of the FI Unit regularly discussed

Federal Bank with Banco Republica’s management and analyzed

Federal Bank as part of their overall credit analysis of Banco

Republica and its affiliates.

In April 1999, I received a letter from the Central Bank of Argentina requesting information regarding Federal Bank, particularly information about the identity of Federal Bank’s shareholders. The Central Bank’s request was based on the fact that

Federal Bank maintained a New York account with Citibank. I

passed the request on to my deputy and asked him to prepare a

response in consultation with the bank’s general counsel.

Because the files in Buenos Aires contained no records from

which Federal Bank’s ownership could be determined as a matter

of law, my deputy and my general counsel prepared a letter for my

signature informing the Central Bank that such information was

80

1The prepared statement of Mr. Lopez appears in the Appendix on page 233.

not available in the files in Buenos Aires. The letter also directed

the Central Bank to New York, where documentation for Federal

Bank’s New York-based account would be maintained, and offered

the branch’s assistance in helping the Central Bank to obtain information in New York.

I later revisited the branch’s response to the Central Bank’s inquiry regarding Federal Bank when the Subcommittee subpoenaed

information regarding Banco Republica. In July 2000, when I was

made fully aware that the working materials in the branch’s files

for Banco Republica contained informal, internally-generated information about Federal Bank, I determined that the Buenos Aires

branch should offer that information to the Central Bank of Argentina. On July 27, I sent a letter to the Central Bank making this

offer, and in September, at the request of the Central Bank, the

branch provided this material.

While the branch’s initial response to the Central Bank was legally correct under Argentine law, Citigroup’s policy is to do more

than comply with the legal requirements of the jurisdictions in

which we operate. It is Citigroup’s policy to cooperate fully with

regulators in all circumstances, which means going beyond our

basic legal obligations. Although the branch’s initial response to

the Central Bank was correct under Argentine law, we should have

done more and supplied the additional information which, in fact,

we did last year.

This matter has been taken very seriously by me and Citigroup’s

management, and I have in turn reemphasized to the employees

under my supervision that full cooperation with regulators is mandatory in all circumstances, and that full cooperation may require

them to go beyond what is strictly or legally sufficient to fulfill

their obligations.

I can personally assure you that as the senior executive in the

country, I have reinforced the awareness of Citibank Argentina regarding the policy of having a fully collaborative relationship with

the Central Bank in all respects.

Thank you for the opportunity to testify today. I would be

pleased to answer any questions you might have.

Senator COLLINS. Thank you.

Mr. Lopez.

TESTIMONY OF MARTIN LOPEZ,1 VICE PRESIDENT AND

CITIBANK CORPORATE BANK HEAD FOR CITIBANK, REPUBLIC OF SOUTH AFRICA

Mr. LOPEZ. Chairman Collins, Senators Levin, and Members of

the Permanent Subcommittee, good morning. My name is Martin

Lopez and I have worked for Citibank since 1985. In 1985, I became a Relationship Manager in the Financial Institutions Unit in

Buenos Aires, and in 1997 I became the Head of the Unit. I left

Buenos Aires in June 2000, and after a brief assignment in Malaysia, I have been in charge of the Citibank Corporate Bank in South

Africa since November of last year.

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As an employee of Citibank, I want to assure you that I am committed to doing whatever I can to help Citibank make its correspondent banking services less vulnerable to money laundering.

Among the ten cases the Minority staff has examined over the

past year, two cases center on correspondent relationships with offshore banks that are affiliated with Argentine financial institutions. I would like to say a few words about each.

Citibank’s decision to open correspondent banking accounts for

Mercado Abierto and its affiliates was based primarily on our experience with the parent institution, Mercado Abierto. Although I was

never the relationship manager responsible for this relationship, I

can tell you that Mercado Abierto was one of the largest and most

important brokers on the Buenos Aires Stock Exchange.

The Minority staff has focused most of its attention on M.A.

Bank. M.A. Bank is the Mercado Abierto Group’s offshore affiliate.

M.A. Bank provides sophisticated Argentine investors with access

to international financial markets.

The Minority Staff Report refers to M.A. Bank as a shell bank,

but M.A. Bank was affiliated with the Mercado Abierto Group,

which maintained a physical presence in Argentina and was regulated by the Comision Nacional de Valores, the Argentine version

of the Securities and Exchange Commission in the United States.

In 1999, I learned that the U.S. Customs Service had launched

an undercover investigation that implicated Mr. Ducler, one of the

owners of Mercado Abierto, and two of Mercado Abierto’s vehicles,

M.A. Bank and M.A. Casa de Cambio, in the laundering of narcotics proceeds.

After I learned of the grounds of the seizure, Citibank blocked

these accounts in December 1999 and formally ended its relationship with the entire Mercado Abierto Group in February 2000. I

have since learned that the U.S. Customs Service settled its claim

against Mercado Abierto, and that neither Mercado Abierto nor its

principals has been found guilty of any wrongdoing.

The Minority Staff Report concludes that Citibank should have

more promptly realized that the seizure warrant it received for the

Mercado Abierto accounts was related to money laundering. Unfortunately, this is a well-deserved criticism. Citibank now has procedures in place to ensure that warrants like the one Citibank received for Mercado Abierto are properly handled.

The Minority Staff Report asserts that Citibank permitted M.A.

Bank to engage in highly suspicious activities for more than 11⁄2

years after assets in its account were seized for illegal activity.

That is simply not true. What the Minority staff observed was a

significant level of activity among the various Mercado Abierto vehicles which is, in fact, consistent with the various securities markets in which the Mercado Abierto Group traded and the Group’s

purchase and sale of securities within and outside Argentina.

I would now like to say a few words about Citibank’s relationship

with Banco Republica and Federal Bank. Citibank’s relationship

with Banco Republica dates back to 1978, when its owners, Raul

Moneta and his uncle Benito Lucini, established a financial company that later became Banco Republica, a wholesale bank located

in Buenos Aires. I understand that in 1992, Mr. Moneta and Mr.

Lucini incorporated Federal Bank, an offshore affiliate of Banco

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Republica. That same year, Citibank established a New York-based

correspondent banking account for Federal Bank.

The relationship between Banco Republica and Federal Bank

was, I believe, well known in the Argentine financial community,

particularly among those banks that loaned money to Republica

Holdings, the Moneta family’s offshore holding company. The Subcommittee has noted that $4.5 billion moved through

Federal Bank’s correspondent account at Citibank. In my experi- ence, $4.5 billion in credits, which averages to approximately $50

million per month, or $2.5 million per day, over 71⁄2 years, is consistent with Federal Bank’s purposes and would not be unusual for

a bank of this size.

Much of the interest in Banco Republica and Federal Bank appears to stem from confidential and secret examination reports for

Banco Republica by the Central Bank of Argentina. When the Minority staff made these reports available to me, I found two things

that concerned me.

First, the reports pointed out that Banco Republica did not have

written anti-money laundering procedures, as required by the Argentine Central Bank. Given the length of Banco Republica’s relationship with Citibank, the relationship managers, myself included,

relied on oral assurances that Banco Republica maintained written

anti-money laundering procedures as required by the Argentine

Central Bank.

I was therefore surprised to learn that Banco Republica failed to

comply with this requirement. But under Citibank’s enhanced due

diligence procedures for U.S. accounts, relationship managers will

be required to assess the anti-money laundering controls that

Citibank’s clients have in place. I understand that Citibank Argentina is now reviewing the anti-money laundering practices of all of

its financial institution customers.

Second, I was surprised to learn that Pablo Lucini denied that

Federal Bank was affiliated with Banco Republica. As you can see

from our files, although we cannot legally prove that Federal Bank

was affiliated with Banco Republica, we certainly believe that it

was.

In April 1999, the Central Bank of Argentina sent a letter requesting information about Federal Bank, particularly about its

owners, to the Buenos Aires branch of Citibank. Because I believed

that Federal Bank’s affiliation with Banco Republica was known in

the Argentine financial community and I knew that the Central

Bank’s examiners had a great deal of expertise in this market, I

thought that they already had grounds to believe that these entities were affiliated.

I therefore concluded that the Central Bank must have been

looking for legal proof, undeniable evidence that the Moneta Group

owned Federal Bank. And while our files contained a lot of internally-generated documents that reflected our understanding of the

relationship, we did not have the legal proof that I thought the

Central Bank was looking for.

I was also concerned when I reviewed the Central Bank’s letter

that we were being drawn into the middle of a matter between the

Central Bank and one of our customers. When I was interviewed

by the Minority staff, I used an imprecise expression to describe

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this situation. When I said that I believed the Central Bank was

playing ‘‘some kind of game,’’ I merely meant to express my concern that we were being put in this uncomfortable position. I did

not intend in any way to suggest disrespect to the Central Bank,

which has done an excellent job supervising the Argentine financial

system, and I fully appreciate that it is Citibank’s policy to cooperate fully with requests from regulators.

I thank you for the attention that you are giving to correspondent banking and its vulnerability to money laundering, and

for giving me the opportunity to testify before you, and I am willing

to respond to any questions that you have.

Senator COLLINS. Thank you, Mr. Lopez.

Senator Levin, would you like to lead off the questions?

Senator LEVIN. Madam Chairman, thank you.

We are going to focus today on two shell offshore banks that

Citibank New York has had a correspondent relationship with, and

those are the M.A. Bank and the Federal Bank. Both of those offshore shell banks were licensed in the Caribbean, but their customers were in Argentina. They didn’t have offices in the Caribbean countries; all they had was a registered agent.

They were licensed as offshore banks, so they were not allowed

to do business with anyone residing in the jurisdictions in which

they were licensed. Both of these banks were affiliated with larger

commercial entities known to Citibank. In the case of M.A. Bank,

it was owned by Mercado Abierto, a large securities company in Argentina, and in the case of Federal Bank, it was owned by Grupo

Moneta, which is a large conglomerate or holding company in Argentina.

As far as we can determine, neither of those banks had a physical location in any country, no brick-and-mortar location that a

customer of those banks could go to to make deposits or withdrawals. Neither of those banks were licensed to do business in Argentina. That means that the bank isn’t supposed to take deposits

or allow for withdrawals. But for the association with larger commercial entities, those banks were offshore shell banks.

Now, both of those banks kept all of their money exclusively, as

far as we can determine, in correspondent accounts; in other words,

accounts in other banks. So, basically, these accounts are nothing

more than their correspondent accounts at Citibank New York. I

believe it is a fact—and, Mr. Fedrigotti, you can correct me if I am

wrong—that these banks have never been examined by an independent bank examiner. And if that is not correct, to your knowledge, you can just interrupt me at any time.

If those two banks were affiliated with a bank in Argentina and

if the Central Bank of Argentina were well aware of that fact, the

Central Bank would bring the affiliate bank within their purview

and examination. So if these two banks were affiliated with a bank

in Argentina and if your Central Bank, your regulatory body, were

aware of that fact, then the Central Bank would bring the affiliate

bank within their purview and examination.

First, is that true, Mr. Fedrigotti, and, second, it didn’t happen

in this case, did it?

Mr. FEDRIGOTTI. Senator, at some point in time, during the last

few years, the Central Bank requested all Argentine banks which

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had affiliated entities to consolidate them in their reporting, and

thus the consolidated entity would fall under the regulatory environment in Argentina. Neither of these affiliated entities were ever

consolidated in that sense, and therefore they did not fall within

the regulatory environment of Argentina.

Senator LEVIN. If the Central Bank of Argentina knew when you

wrote them the letter saying you had nothing in your files relating

to the Federal Bank what they knew later, would they have then

brought that bank within their purview?

Mr. FEDRIGOTTI. What happened when the regulations changed

was that Argentine banks proceeded to start the process of consolidation, and whenever there was awareness that these entities were

still not being consolidated, there was an action plan as to by

when, by a certain time, this would have taken place.

In the case of Banco Republica, like with many others, I take it

that there was a plan, an action plan, in place and there were

interactions between people in Banco Republica and members of

the FI Unit staff that addressed that concern and were working

jointly towards that goal. It is also my understanding that at some

point Banco Republica or one of its entities approached the Central

Bank in connection with this procedure. That is what I have gathered from reading notes in the files. So at the end of the day, that

consolidation never took place.

Senator LEVIN. Did the Central Bank of Argentina know at the

time that we are discussing that the Federal Bank was connected

through common ownership to Banco Republica?

Mr. FEDRIGOTTI. It would have taken steps to——

Senator LEVIN. No. Did it know?

Mr. FEDRIGOTTI. I don’t know, Senator.

Senator LEVIN. Well, it asked you, didn’t it?

Mr. FEDRIGOTTI. It asked Citibank for evidence of ownership, correct.

Senator LEVIN. And you told them that you had none in your

files?

Mr. FEDRIGOTTI. We told them that we did not have evidence of

ownership in our files.

Senator LEVIN. And so presumably they didn’t know or wanted

to know when they wrote you that letter. But, in fact, Federal

Bank did share common ownership with Banco Republica because

they had common ownership, is that not correct?

Mr. FEDRIGOTTI. Senator, we had our own internal understanding of the relationship between the principals and the relationship between these entities. When that first letter was sent, we

should have done more and we should have supplied the additional

information that we had in our files reflecting that understanding

that we had of that relationship.

Then we noticed that while the letter was legally correct and accurate, it was incomplete from an internal policy standpoint, and

that we should have supplied that information originally. When I

became aware of that when I revisited the issue and I was made

aware of the type of information and the nature of the working papers that we were dealing with, I made the decision to then supply

that information.

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1See page 2 of Exhibit No. 32 that appears in the Appendix on page 760.

2See page 4 of Exhibit No. 32 that appears in the Appendix on page 760.

Senator LEVIN. You say that your letter was accurate but not

complete, and I want to look at that request to you and your response to it. The request is Exhibit 32b.1 This is the way it reads,

and this is from the Central Bank, which is the regulatory body.

‘‘This is in reference to a proceeding to determine if there is any

sort of economic link between financial entities subject to the control of this Superintendence and Federal Bank Limited, a company

established on March 1992, under the laws of the Commonwealth

of the Bahamas. . . .’’

‘‘By means of transfers from and to Federal Bank Limited, the

Argentine financial entities receive and pay deposits of residents

abroad. The transfers are made with debits and credits to the account of Federal Bank Limited in Citibank New York. . . .’’

‘‘In light of the importance of the aforementioned transfers,’’ they

are requesting ‘‘all information that Branch may have about Federal Bank Limited, especially the identity of its shareholders.’’ The

superintending bank there is requesting all information that you

may have about Federal Bank Limited, especially the identity of its

shareholders. ‘‘Likewise, we also request your intercession with the

house in New York so your headquarters will provide the requested

information.’’ Your response to them, which you said was accurate—and that

is Exhibit 32d.2—says that, ‘‘Pursuant to the request in your letter

of April 20, 1999, this is to advise that our records contain no information that would enable us to determine the identity of the shareholders of the referenced bank.’’

Now, in fact, your records contained a lot of information showing

common ownership, did it not?

Mr. FEDRIGOTTI. Yes, they did, sir.

Senator LEVIN. So how can you say it is accurate to tell your regulatory body that your records contain ‘‘no information’’ that would

enable you to determine the identity when you had so much information in your files very clearly showing the identity of the owners

and showing that the identity was exactly the same as Banco

Republica? How can you say that is accurate?

Mr. FEDRIGOTTI. Senator, the whole information in the files

should have been provided at the original request. As I have been

able to reconstruct events and discuss with the people who participated in the preparation of that response, they focused on the fact

that we could not legally prove ownership, and therefore that was

the nature of the response that was prepared.

And in addition to that, they were then directing the Central

Bank to New York where the account was, in fact, domiciled. The

information for an account domiciled in New York would rest in the

files pertaining to that account, so the Central Bank was directed

to that location.

Nevertheless, while that was the interpretation of those who

worked in preparing that response, upon the second instance when

I was fully involved and understood the nature, then looked back

at the original request, understood the nature of the informal internal information, it was my decision that that information should be

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provided to the Central Bank in that form so that then they could

themselves reach their own conclusions as to the relationship between these entities.

Senator LEVIN. Now, the money laundering case that we were

looking at related to a deposit of bribe money in Federal Bank,

which is an offshore bank which is licensed by one of the Caribbean

islands, is that correct?

Mr. FEDRIGOTTI. Senator——

Senator LEVIN. Have you read our report?

Mr. FEDRIGOTTI. Yes, I have.

Senator LEVIN. OK, and you are aware of the fact, then, that the

specific money laundering issue that we were looking at relative to

the offshore bank called Federal Bank, which was owned by the

same folks that owned Banco Republica, was some money which we

believe was identified indeed as bribe money that was deposited in

Federal Bank. Is that correct?

Mr. FEDRIGOTTI. I am aware of that.

Senator LEVIN. All right.

Mr. FEDRIGOTTI. Senator, you did say that that money was identified as bribe money. I am not aware of that, but I am aware of

the concern or the investigation surrounding that.

Senator LEVIN. All right, and the allegation——

Mr. FEDRIGOTTI. Exactly.

Senator LEVIN [continuing]. Which I believe was acknowledged,

as a matter of fact, at some point. But without getting into that,

nonetheless you were aware of the fact that that, at least in your

eyes, was suspected?

Mr. FEDRIGOTTI. There is controversy around that, correct.

Senator LEVIN. OK. Now, I just want to go back again to see if

I can understand really what the motivation is here now because

your bank is a partner, is it not, with the same people who own

Banco Republica and Federal Bank? Is that correct?

Mr. FEDRIGOTTI. Senator, the way we work internally in the

bank is that in the branch, in Citibank Argentina, we manage the

relationship with Banco Republica and the bank affiliates. There is

a separate unit in the bank that manages the relationship with the

Grupo Moneta in connection with the investment in CEI, where indeed the Grupo Moneta is co-investors with Citibank in that group.

Senator LEVIN. My question is that Citibank in Argentina is a

partner with Grupo Moneta in another entity, is that correct?

Mr. FEDRIGOTTI. In CEI.

Senator LEVIN. In CEI?

Mr. FEDRIGOTTI. Correct.

Senator LEVIN. And that partner of yours, Grupo Moneta, owns

both Banco Republica and Federal Bank, is that correct?

Mr. FEDRIGOTTI. They are part of the same economic group.

Senator LEVIN. And that information was in your files when it

was requested by your regulatory body that there was common

ownership of Banco Republica and Federal Bank by Grupo Moneta.

Is that correct?

Mr. FEDRIGOTTI. They asked for evidence of ownership between

these entities.

Senator LEVIN. And you had it in your file?

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1See page 2 of Exhibit No. 25 that appears in the Appendix on page 749.

Mr. FEDRIGOTTI. I already described the nature of the information.

Senator LEVIN. Let me show you the exhibits which were in your

file so that we just cut right to the chase. If we could look at Exhibit 25 1 which was in your file at the time, if you look at the owner’s name, it says ‘‘owner’’—literally, in your file you have a document that says ‘‘owner name.’’ Raul Moneta, 33 percent; Benito

Lucini, 33 percent; Monfina, 33 percent; and another gentleman, 1

percent. In your file that is the way it is described, and then it

shows that Grupo Republica, which is the same as Grupo Moneta,

owns Banco Republica and Federal Bank.

If you look at the furthest box on the left—it is the box under

Grupo Republica or Grupo Moneta—it says ‘‘Federal Bank Offshore.’’ So in your file, you have a document showing the owners

and showing that they, in fact, own what amounts to Grupo

Moneta, renamed, and that that group owns common ownership of

Banco Republica and Federal Bank Offshore.

Now, I am trying to figure out why, when asked—and maybe we

can find out from one of the other gentlemen here—why, when

asked by your regulator—now, this is our bank; this is a U.S. bank.

I want everyone to be real clear about this. We are looking at a

U.S. bank.

Why a U.S. bank, when asked by a regulator if there is anything

in their file which might be information relative to the owners of

a group, because they are looking to see—and you know it—whether or not there are any links between Banco Republica and Federal

Bank—you then write a letter which is false. Your bank wrote a

letter which is false.

You can say here that it was accurate. It is not accurate. There

is no way that any fair reading of your letter, which says ‘‘This is

to advise that our records contain no information that would enable

us to determine the identity of the shareholders of the referenced

bank’’—there is no way that that can be described as anything

other than false. The word ‘‘owner’’ is right in your files, ‘‘owner

name.’’

I am trying to determine—and I think maybe we will have to

just let this go for the moment—but as to why an American bank

would write a regulator a letter like that, and as to whether or not

it has any relationship to the fact that our bank, our U.S. bank,

was a partner with Grupo Moneta in that CEI holding company.

Now, I don’t understand why that would provide a motivation,

but I am trying to figure out how it is possible that anybody could

actually look at that document and say to themselves that is not

legal proof. They didn’t ask for legal proof. They said is there anything in your file, anything which shows economic links, and they

tell you they are interested. It is a proceeding to determine if there

is any sort of economic link between financial entities. They are

looking for that link.

This superintendent, your regulator, requests ‘‘all information’’

that you may have—all information; it doesn’t say legally provable

beyond a reasonable doubt. It says all information that you may

have about that entity and about its owners. And you consciously

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reach a conclusion—you look at those documents, apparently, and

decide that that didn’t constitute legal proof. Somebody actually

looked at those documents, then, and said that is not legal proof,

that is not what they are after.

I can’t buy it. I don’t buy it. I am sorry. I don’t know what the

motive is. I don’t know that yet. We may never know it. Maybe

down in Argentina it could be determined, but I just can’t buy it.

I don’t know if you are aware of the fact that Mr. Moneta to this

day denies ownership of Federal Bank, to this day, at least according to press reports.

Now, why would he be denying? Do you have any idea why

would Mr. Moneta be denying ownership of that bank? Can you

help us on that? And I will give you a chance to respond to my

comments, also, and then my turn is up here for the time being.

Mr. FEDRIGOTTI. Senator, I do not know why Mr. Moneta would

be denying that ownership. I have no way. In connection with your

comments and, yes, the nature of the documents that you are

pointing out which are working papers which reflect the work that

was being done in analyzing the group as a whole as part of the

routine work that is done in the bank, it was the interpretation of

general counsel who prepared that letter that that was the appropriate response and that it is legally correct and it did not violate

Argentine laws or regulations, but—— Senator LEVIN. Excuse me for interrupting. The question here is

whether or not our U.S. bank responded the way we expect our

banks to respond, which is honestly, to a request of a regulator.

Now, this isn’t a legal question. This is a question of whether our

bank has responded honestly to a regulator, and there is no way

that I think I can figure out any interpretation which would say

that that is an honest response to a regulatory body.

So I interrupted you, but keep going.

Mr. FEDRIGOTTI. Senator, we should have done more. We should

have provided that information in the first instance. When I reviewed this matter when I became involved, when I realized that

there was an inconsistency with our policy of full openness and cooperation with the regulatory body, I took the decision to provide

this information to the Central Bank.

Senator LEVIN. Let me ask you and Mr. Lopez a final question

on this element, if I can ask the indulgence of our Chair.

Mr. Lopez, do you know, or, Mr. Fedrigotti, do you know whether

or not there was any contact between Mr. Moneta and Citibank relative to the response, or Grupo Moneta or their agents, with

Citibank relative to how that letter would be responded to? Can

you tell us?

Mr. LOPEZ. Not to me.

Senator LEVIN. You don’t know of any contact with Grupo

Moneta?

Mr. LOPEZ. No.

Senator LEVIN. Mr. Fedrigotti?

Mr. FEDRIGOTTI. I was never contacted by anyone in this respect.

Senator LEVIN. Thank you.

Senator COLLINS. Mr. Bermudez, you mentioned in your testimony the importance of banks and law enforcement officials working together to prevent money laundering. You also said that you

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welcomed leads from not only the media but law enforcement officials about any suspicious activity.

In view of that statement, I want to talk to you about seizure warrants which Citibank received in May 1998 for $7.7 million in

M.A. Bank’s correspondent account and $3.9 million in another

M.A. account. These seizure warrants made very clear references

to the United States anti-money laundering laws, and so it seems

to me that was a clear lead from law enforcement that there was

suspicious activity involving M.A. Bank.

Could you explain to the Subcommittee why Citibank waited a

year-and-a-half after receiving these seizure warrants before

launching a full-scale investigation of Citibank’s relationship with

M.A. Bank?

Mr. BERMUDEZ. Senator Collins, one of the issues that we have

with this particular example is that there was a breakdown in our

communications internally. It is an embarrassment, it is something

that we have since corrected. But the reality is that when the warrant came into the bank, it was reviewed, it was analyzed. We took

the action of submitting the funds to the U.S. Customs, as I was

directed.

But, unfortunately, there was a breakdown in the communication

between our New York unit that received the warrant and our

business unit in Argentina which should have taken further action

at the time. We have since, however, corrected our internal processes so that this kind of situation does not occur again.

We have created a centralized unit in New York that receives all

seizure warrants, all subpoenas that come in, so that they can be

logged into a centralized database. Those that are of a suspicious

nature are then sent to our Anti-Money Laundering Unit in Tampa

for further processing. It is that Unit’s responsibility then to submit those to the compliance officers, anti-money laundering compliance officers that we have in-country, and the relationship manager or business manager in that country for further action.

We feel that given what happened to us and the lesson that we

have learned out of that particular situation, we have now created

a process that is extremely robust and should allow us to not have

a repeat of that embarrassing situation, but it was an embarrassment.

Senator COLLINS. So you would certainly agree that those seizure

warrants should have triggered a full review of Citibank’s relationship with M.A. Bank, and you have now changed your procedures

so that kind of review would automatically be triggered. Is that

fair?

Mr. BERMUDEZ. That is correct. That is exactly what has happened at this point.

Senator COLLINS. Mr. Lopez, I am puzzled how M.A. Bank came

to be a correspondent customer of Citibank. Could you please describe for us the ‘‘know your customer’’ efforts that you made before

you recommended opening M.A. Bank’s correspondent accounts?

Mr. LOPEZ. Well, this account was opened many years ago, and

at that time Mercado Abierto was, and thereafter was, a very important security and brokerage house in Argentina. So the people

that took the decision to open that account—I never managed that

account personally—measured that account against our target marVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00099 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
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1See Exhibit No. 19 that appears in the Appendix on page 731.

ket and measured that relationship against our target market to

try to operate with the top people in the country.

They also made a review of who are the owners. The owners are

people who have a reputation in Argentina. And they didn’t open

the account with M.A. Bank immediately. This account was—or

this relationship started years ago and they opened the correspondent banking account when the customer was dealing with

other products in the bank and knew very well the customers. It

was not the first day that the customer arrived to the bank.

Senator COLLINS. Let me ask you a very specific question.

Mr. LOPEZ. Yes.

Senator COLLINS. Did you yourself, or did you direct another

Citibank employee to review M.A. Bank’s written anti-money laundering procedures before opening the account?

Mr. LOPEZ. The account was opened in the early 1990’s, and I

think at that time we were not so strict in looking for that. Thereafter we looked at those procedures and it seems to be in line

with—— Senator COLLINS. But at the time, did anyone from Citibank review M.A. Bank’s anti—— Mr. LOPEZ. I was not there. I was not the one opening it, so I

cannot—but during my management of the unit, yes, they reviewed

it.

Senator COLLINS. I am sorry. Would you repeat the last—— Mr. LOPEZ. During my management of the unit that started in

1987, I think that, yes, they reviewed all the policies. They talked

about the policy with the customer, and it seems to be correct.

Senator COLLINS. That was many years after the account was

opened?

Mr. LOPEZ. Yes. I don’t have information before my—— Senator COLLINS. Mr. Fedrigotti, could I have you turn your attention to Exhibit 19? 1 I want you to take a look at this. It appears

to be a withdrawal form that is used by M.A. Bank. Have you

found it in the exhibit book?

Mr. FEDRIGOTTI. I am looking at it.

Senator COLLINS. I have to say this isn’t like any withdrawal

form that I have ever seen—or actually I think it is a deposit form

because it says that ‘‘We have received today.’’ There is no letterhead stating the name and the address of the bank.

You have been in banking for a very long time, for some 24

years. Does this appear to be the kind of form that a bank should

be using for deposits?

Mr. FEDRIGOTTI. Is this a deposit form? [Laughter.]

Senator COLLINS. It is. I think your question answers my question. Does it trouble you that one of Citibank’s correspondent banks

was using a form that had this little information on it?

Mr. FEDRIGOTTI. Senator, if this is all there is—I don’t know

what other information they would gather. On the basis of simply

this form, I have to agree with your inference.

Senator COLLINS. When you stepped in as President of Citibank

Argentina, did you conduct a review or see that a review was conducted of existing correspondent accounts to make sure that you

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1See Exhibit No. 20 that appears in the Appendix on page 732.

were dealing with banks and clients that Citibank would want to

be dealing with?

Mr. FEDRIGOTTI. Yes, Senator. This area of activity has always

been the focus of attention both from a credit standpoint as well

as from the fact that there might be risks related to money laundering that we would not be willing to accept or to take.

So the unit constantly focused on trimming down, narrowing the

target market, and working only with those people who the unit

deemed to be of impeccable track record and a good reputation.

That is the essence of understanding who you are dealing with and

feeling comfortable with the fact that they have policies and procedures that enable them to manage their own bank the way we

manage ours.

Senator COLLINS. Mr. Bermudez, Citibank has maintained that

it now has corrected a lot of the problems that clearly have been

embarrassing for the bank and have been difficult for the bank to

deal with. I want to show you an E-mail that is from Citibank Argentina’s relationship manager for M.A. Bank, and it is Exhibit

20 1 and it is the latter part of that exhibit.

What troubles me about this E-mail is that it was sent just a little over a year ago. In this E-mail, Citibank Argentina’s relationship manager for M.A. Bank inquired about how Citibank’s antimoney laundering procedures were being implemented, and in part

she says, ‘‘What procedures does Citibank New York have for control of AML? Are these controls being implemented? Is the AML

Unit in Tampa in charge of doing it, or each division in New York?’’ I am troubled by this because if Citibank is doing a good job on

training its employees to be sensitive to money laundering,

shouldn’t the relationship manager for M.A. Bank have known the

answers to these questions?

Mr. BERMUDEZ. I would agree with you, Senator Collins, that the

relationship manager at the time should been aware of what that

Anti-Money Laundering Unit in Tampa does and performs. It is a

unit that was in place at the time and it is a unit that is staffed

with over 50 people, 14 of which are just assigned to the volume

through our funds transfer networks. And they have the analysts

necessary to conduct the type of reviews of the flows that should

highlight any kind of suspicious or incorrect type of volumes that

go through it.

There was a confusion here. The relationship manager should

have understood that that took place in Tampa because at that

time we already did have the unit operating. I don’t know the exact

situation; I don’t know the individual who sent this. We do spend

an incredible amount of time and effort in educating all of our business managers, all of our relationship managers, in the anti-money

laundering process. This is an ongoing review that we have, ongoing seminars that we have at local, regional, and on a global basis.

And why this particular individual might have been confused, I

don’t know the reason, but I can assure you that the education that

we bring to our relationship managers is very real and it is constant. It is not just a one time introduction when they enter the

bank; it is actually refreshed on an annual basis in every country.

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1See Exhibit No. 23 that appears in the Appendix on page 742.

Senator COLLINS. I have no doubt that Citibank has made a genuine effort to beef up its compliance units, as well as its training

and education. But that E-mail from a key person suggests to me

that there is still considerable work to be done because it is so recent; it is the end of 1999.

Mr. BERMUDEZ. If I may—and this is a conjecture in some ways,

but what may have happened here is a confusion that we do have

and did have at the time a servicing unit for correspondent banking in New York. And there may have been confusion whether that

service unit in New York was also conducting AML practices as

part of the services that they did. They do not. They refer everything to Tampa, and I am just assuming, reading this, that that

may have been the confusion that this relationship manager may

have had.

Senator COLLINS. Let me ask you one final question, and I want

to refer to Exhibit 23.1 This is an exhibit that Senator Levin referred to with our previous panel and it is a pattern of wire transfers. Each of the experts on our previous panel said that while you

couldn’t conclude necessarily that these wire transfers were indicative of money laundering that they certainly were suspicious, that

the pattern is such that it would warrant a thorough review.

Under the current procedures that Citibank has in place, would

this pattern of wire transfers trigger an in-depth review?

Mr. BERMUDEZ. Looking at this, I would say that—and given the

type of bank and the size of bank that Banco Republica was, this

would not necessarily trigger a review for suspicious action. And

the reason for that is that, again, many institutions, many banks,

I believe, in Argentina and other locations use offshores as a means

of managing their liquidity, and this could be very valid liquidity

management between a treasurer of a bank onshore with its offshore vehicle, transferring liquidity back and forth. And that

doesn’t necessarily trigger a suspicious action, but the one thing

that——

Senator COLLINS. But you don’t know that.

Mr. BERMUDEZ. No, I know that, but the one thing——

Senator COLLINS. So why wouldn’t it trigger you to ask questions? There may be a legitimate explanation, but there is also a

very real possibility that this suggests money laundering. So I am

troubled by your answer.

Mr. BERMUDEZ. Absolutely, and the one thing that I was going

to mention that causes me in reviewing this to maybe alert us that

we should look into it is the fact that they are going through an

intermediary here.

Senator COLLINS. Exactly. They are not directly transferring the

funds.

Mr. BERMUDEZ. Exactly, which is why it may very well trigger

that, but I was trying to highlight to you that the flows are not the

ones that may necessarily trigger the analysis of this, but it is the

fact that it does appear to go through an intermediary which would

be the one that would highlight some action on this.

I haven’t been clear?

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Senator COLLINS. Well, the problem is that your first answer

was, no, that it wouldn’t trigger a review, and then after we—— Mr. BERMUDEZ. Based on simply the flows.

Senator COLLINS. But I have shown you very specific wire transfers that are large amounts of money over a 6-week period where

in each case the bank is going through an intermediary rather than

transferring the money directly, and it seems to me that should be

a red flag. There may be a reasonable, legitimate explanation, but

if this isn’t an automatic red flag, I don’t know what is.

Mr. BERMUDEZ. I am sorry. In my response, I was referring initially to the flows and I then added on that the one thing that

would raise a flag here is the fact that it is going through an intermediary. If these are credits that are going through this particular

intermediary, then that should be a reason for review.

Senator COLLINS. Senator Levin.

Senator LEVIN. Just on that last point, you said three different

things—‘‘not necessarily,’’ ‘‘maybe’’’ and ‘‘would’’ because of the

intermediary. And we are talking here about triggering a review or

not. I just want to ask you a simple question, which I hope is a

simple question.

Shouldn’t it trigger a review, given the intermediary?

Mr. BERMUDEZ. Given the intermediary, yes.

Senator LEVIN. Does your mechanism at your bank trigger a review?

Mr. BERMUDEZ. It should.

Senator LEVIN. Does it?

Mr. BERMUDEZ. I would hope so. I mean, you are asking me a

question that I would like—— Senator LEVIN. You are familiar with your bank mechanisms,

aren’t you?

Mr. BERMUDEZ. Absolutely.

Senator LEVIN. Does it or doesn’t it trigger a review? If you don’t

know, you can just say you don’t know.

Mr. BERMUDEZ. I have to assume that it does, but it would be

up to the analysts looking at this particular situation.

Senator LEVIN. They wouldn’t even see it, would they, unless it

was triggered automatically?

Mr. BERMUDEZ. Oh, no. They would see this.

Senator LEVIN. So it would be pulled out?

Mr. BERMUDEZ. Yes, it would.

Senator LEVIN. All right, so at least you know that this flow

would trigger an analysis by somebody under your methodology, is

that correct?

Mr. BERMUDEZ. It should, yes.

Senator LEVIN. Did it?

Mr. BERMUDEZ. Not at this time.

Senator LEVIN. All right.

Mr. BERMUDEZ. This is back in, as I see here, 1996.

Senator LEVIN. Correct.

Back to the Federal Bank. Mr. Lopez, I want to ask you one

question about that. You told our staff that when you heard about

the request from the Central Bank for information on the ownership of the Federal Bank, you thought that the Central Bank of Argentina was ‘‘playing games.’’ What did you mean by that? Why

94

1See Exhibit No. 37 that appears in the Appendix on page 805.

would the Central Bank, the regulatory body down there, be playing games?

Mr. LOPEZ. Senator Levin, in my opening statement I wanted to

clarify that that was a bad expression that I—— Senator LEVIN. That was a what?

Mr. LOPEZ. It was a bad expression. It was not an expression

that I should have used in that interview. What I meant there was

that in my understanding there were a lot of—Banco Republica

had an action plan to change Federal Bank and to open a new vehicle, called Republica Bank in the Caymans, and also that the

people that were working with Banco Republica were people that

have experience in the market. So my understanding was that the

Central Bank had the knowledge of the relationship, and what they

were looking for was legal proof.

Senator LEVIN. Let me ask you a question, Mr. Fedrigotti, that

follows on the request that I made of you about whether there was

any conversation between Citibank and Grupo Moneta relative to

the response to the request from the Central Bank for information

in your files, and you said that there was no conversation.

Was there any conversation between you or your bank with anyone at Citibank New York about that response?

Mr. FEDRIGOTTI. Senator, not that I can recall, but could you be

precise as to the point in time you are asking, between the

time—— Senator LEVIN. Before you responded.

Mr. FEDRIGOTTI. No conversations with New York on this subject, not personally.

Senator LEVIN. Can we agree, Mr. Lopez, that, in fact, the Federal Bank and Banco Republica had no anti-money laundering program that you said in your records that they did have?

Mr. LOPEZ. We checked with them and they said they were complying with the rules of Central Bank in that respect. What happened there is that then I realized when I saw the confidential report from the Central Bank during the interview with your staff

that that was not true.

Senator LEVIN. You agree that they lied to you?

Mr. LOPEZ. Yes.

Senator LEVIN. If we could put Exhibit 37 1 up there, this is a

memo, Mr. Lopez, where you describe the purpose of Federal Bank

and you say here that the purpose is to channel the private banking customers of Banco Republica, to which they provide back-tobacks and the vehicle outside Argentina, where they can channel

their savings which are then re-placed in Banco Republica by the

Federal Bank, which then constitutes one of the bank’s most stable

sources of funding.

Now, wasn’t Banco Republica at that time under a restriction by

your Central Bank as to both what it could own and what it could

lend to certain groups?

Mr. LOPEZ. I was not aware of that restriction.

Senator LEVIN. All right. The purpose, then, according to your

memo here is to say that liquid assets that Banco Republica wanted went from Banco Republica to Federal Bank offshore and then

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1See page 3 of Exhibit No. 21 that appears in the Appendix on page 734.

came right back to Banco Republica. And I don’t understand what

the legitimate business rationale is for that movement of money.

Can you explain that to us?

Mr. LOPEZ. The customers of Federal Bank deposit their money

in Federal Bank, and the risk of that customer is in Federal Bank’s

balance sheet and there is no Argentine risk because Federal Bank

is outside the borders of Argentina. Then what Federal Bank does

with the money, they deposit in Banco Republica, is nothing that

the customer decides to do in that. It is Federal Bank that is deciding, and Federal Bank must respond with their own net worth to

the customer in that case.

Senator LEVIN. I am trying to figure out what legitimate business purpose there would be for Banco Republica to take its deposits, send them to Federal Bank and then have them immediately

come right back to Banco Republica.

You say in your analysis of the bank that that is one of its purposes. ‘‘The existence of this vehicle is justified in the group’s strategy because of the purpose it serves.’’ Can you give me a legitimate

business purpose for that strategy?

Mr. LOPEZ. Yes. The explanation is that some customers of Banco

Republica want to have their deposits outside Argentina.

Senator LEVIN. But it comes right back to Banco Republica.

Mr. LOPEZ. OK, but Federal Bank deposits the money, not the

customers, and even if—— Senator LEVIN. It is their money.

Mr. LOPEZ. OK, but—— Senator LEVIN. You don’t say it is Federal Bank. The depositor

in Banco Republica—that money immediately goes to Federal Bank

and immediately comes right back to Banco Republica. What is the

legitimate purpose in that?

Mr. LOPEZ. I am talking about Federal Bank depositing their

own money.

Senator LEVIN. No. I am talking about your words, ‘‘to channel

the private banking customers of Banco Republica, to which they

provide back-to-backs and a vehicle outside Argentina where they

can channel their savings’’—that is the depositors—‘‘which are then

re-placed in Banco Republica.’’ So the depositors’ money ends up in

Banco Republica. It goes outside and then comes back in almost instantaneously.

Can you give us the legitimate business purpose for that?

Mr. LOPEZ. I am saying that Federal Bank placed money in

Banco Republica. Then even if some of the depositors have a diversified portfolio of investment in Federal Bank and want to place

some of this in Banco Republica, I see nothing strange in that.

Senator LEVIN. I do, but let me go to Mr. Bermudez quickly on

a letter that we received from your counsel, Jane Sherburne, who

describes the benefits and operations of offshore shell banks, and

this is Exhibit 21.1 ‘‘Offshore entities that are primarily booking

entities requiring minimal personnel or physical operations often

are managed from a location that is closer to the jurisdiction of the

parent institution than the offshore jurisdiction. Your staff have indicated skepticism about the legitimacy of such ‘back offices’ and

96

1See page 1 of Exhibit No. 22 that appears in the Appendix on page 740.

inquired about the kinds of activity in which one might expect

them to engage. Indeed, there seems to be some sense that a test

of legitimacy might be whether a back office has the capacity to

print and mail statements. The need to print and mail statements

will depend on the customer base of the off-shore and the nature

of the business, and may defeat the purposes of offshore banking— confidentiality and tax planning.’’ And this is the line I am intrigued by: ‘‘Mailing statements for

activity in the private bank account of a customer, for example,

risks breaches in the confidentiality as well as triggering a taxable

event.’’ Now, I am really surprised by that sentence, that mailing

a statement would trigger a taxable event.

Mr. Bermudez, this is to you. How does the presence or absence

of a bank statement trigger a taxable event? Don’t you owe the tax

even though you conceal it?

Mr. BERMUDEZ. I think that would depend on where the source

of the revenue, the income was coming from for that particular investment and the tax laws of a given country.

Senator LEVIN. So that you might not owe the tax, and having

a statement about an account might subject you to a tax you don’t

owe?

Mr. BERMUDEZ. The statement itself should not trigger a taxable

event.

Senator LEVIN. That is just what I said. It is the opposite of what

your counsel says. Your counsel writes this Subcommittee that the

statement may trigger a taxable event.

Mr. FEDRIGOTTI. Senator, may I give it my own try, attempt, at

interpreting this. I believe that if someone were to provide a service such as mailing statements, that would be a business activity

that would generate—should generate revenues and thus a taxable

event. That is my interpretation of this line.

Senator LEVIN. We are going to have to ask the counsel to explain that statement because other counsel that we have talked to

says there is absolutely no basis for that statement whatsoever. So

we will give her an opportunity—she is not here, I don’t believe— to respond to that.

On the M.A. Bank issue—and this goes to the seizure of the account at Citibank, and the Chairman has referred to this—in your

testimony, Mr. Lopez, you stated to us that the Minority staff report asserts that Citibank permitted M.A. Bank to engage in highly

suspicious activity for more than a year-and-a-half after assets in

its account were seized for illegal activity, and that is simply not

true. This morning, you have modified that, is that correct?

Mr. LOPEZ. Yes.

Senator LEVIN. You agree that that should have triggered——

Mr. LOPEZ. It should trigger, yes.

Senator LEVIN. Now, these are some of the other things that happened. In addition to the seizure of that asset that should have

triggered an investigation by Citibank, these are some of the other

events that occurred that didn’t trigger anything.

Exhibit 22a.1 This is a memo from an investigator at Citibank’s

Anti-Money Laundering Unit in Tampa. ‘‘According to an article

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taken from the Miami Herald dated March 1, 2000, Alejandro

Ducler, a former vice minister of finance for Argentina, allegedly

transferred $1.8 million in drug cartel proceeds. Ducler is one of

the owners of the Argentine financial holding group known as

Mercado Abierto, which owns M.A. Casa de Cambio. . . . All four

held accounts with Citibank. The FTN Team of the AML Unit has

reviewed the transfers. . . . After reviewing the funds transfer activity . . . from April 1997 through March 2000, a total of $84 million were transferred to the entities mentioned below. The consecutive whole dollar amounts transferred and the nature of the business contributed to the rise in suspicion and ongoing monitoring.’’ So you got that memo. They had identified, the anti-money laun- dering unit, $84 million in suspicious transactions that moved

through the accounts of the four M.A.-related entities. When we

looked at the records associated with that investigation, over $22

million of those suspicious funds involved transactions that went

through the M.A. Bank, and they occurred in 1999, after the seizure warrant had been issued.

We also have learned that Citibank did file a suspicious activity report on the entire $84 million worth of transactions. Is that correct? Anyone can answer.

Mr. BERMUDEZ. That is correct. But, Senator, if I may just add

something, the Tampa investigator has told the staff that this figure was not correct.

Senator LEVIN. The $22 million?

Mr. BERMUDEZ. The $84 million.

Senator LEVIN. All right, but it is correct that $22 million came

after the seizure of those assets. Is that correct?

Mr. BERMUDEZ. Could you—— Senator LEVIN. That the $22 million came after the seizure of the

assets.

Mr. BERMUDEZ. I am not aware. I am sorry.

Senator LEVIN. All right.

Mr. BERMUDEZ. That information I don’t have.

Senator LEVIN. By the way, would you ask your Tampa investigator to, for the record, let this Subcommittee know why it is incorrect, if it is, because he or she never told us that it was incorrect?

Mr. BERMUDEZ. Yes.

Senator LEVIN. A lot of signals, and I want to go into those signals, after the seizure, between May 1998 and March 1999, which

should have revealed the fact that the seizure was related to

money laundering and drug trafficking. As you have acknowledged

to our Chairman, that should have been known just by the seizure

warrent itself. It cited a number of statutes that the assets were

being seized under, and two of those statutes were money laundering statutes.

Here are some additional red flags: The press gave widespread

attention to the indictments and warrants that were served on numerous U.S. and foreign banks as a result of Operation Casablanca, which was the drug laundering undercover effort. Citibank

was identified as a recipient of some warrants, so Citibank didn’t

follow up on that.

In June 1998, M.A. Bank wrote to Citibank and asked that

Citibank ‘‘furnish us a report on the origin, cause, and authority

98

acting on the attachment order received.’’ So you got from your customer a request, what is the authority for that attachment order,

and asked you to provide them with a copy of documentary evidence attesting to the existence of such judicial order and of the

transfers or other actions taken by you as a consequence.

You can find no communication that even responded to M.A.

Bank’s inquiry. The preparation of a response to that bank would

likely have informed Citibank that the seizure warrant was related

to money laundering. Nothing there, silence, blank.

The Customs Service subpoenaed records of another M.A. account for the same drug money laundering matter, and Citibank

prepared a chronology of the incident that shows that Citibank officials in Argentina met with or communicated with M.A. Bank officials at least six times about this matter between May 1998 and

March 1999. M.A. Bank told you they were hiring a lawyer in the

United States. They told you Customs would likely subpoena the

records of the M.A. Bank account. They told you they were going

to meet with the Customs Service in Argentina.

You instructed, according to the conversation with our staff, that

your relationship manager should find out from M.A. Bank what

the situation was about, but M.A. Bank never told her what was

going on. Another red flag. M.A. Bank did not tell your own relationship manager. So then it became clear that the Customs Service was investigating the matter, and still no request or demand to

your client to tell you what this was all about.

So we have all of these red flags, in addition to the seizure of

the funds, and it seems to me that this is a lot more negligent, at

best, than just simply failing to respond to a seizure order. I mean,

you have public notices, you have meetings with your client demanding explanations, you have conversations with Customs officials. There are all kinds of bells going off in the public press and

with your staff, and yet nothing in terms of your anti-money laundering efforts with this client.

So I would hope as you go through your anti-money laundering

efforts and procedures that you would not only look at the failure

to respond, to even know what is in a seizure order that is served

upon you, but that you instruct or require your staff folks who have

all this information to transmit it to your anti-money laundering

efforts. I mean, this is one failure after another. It is just not a failure; it is one failure after another relative to those funds of M.A.

Bank.

So I will leave it at that. I know we have reached a time when

the hearing is supposed to end. I do have a short closing statement

that I would like to make, if that is all right, Madam Chairman.

Senator COLLINS. Why don’t you proceed with your closing statement, Senator Levin? We do need to adjourn very shortly, however.

Senator LEVIN. These 2 days of hearings have confirmed what

the Subcommittee’s investigation revealed, that U.S. correspondent

banking provides a significant gateway for rogue foreign banks and

their criminal clients to carry on money laundering and other

criminal activity in the United States and to benefit from the protections afforded by the safety and soundness of the U.S. banking

industry.

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This investigation’s findings have been confirmed in these hearings that shell banks, offshore banks, and banks in jurisdictions

with weak anti-money laundering controls carry high money laundering risks, and they use their correspondent banking accounts to

conduct their banking operations.

Next, U.S. banks have routinely established correspondent relationships with these high-risk foreign banks because many U.S.

banks don’t have adequate anti-money laundering safeguards in

place to screen and monitor such banks. This problem is longstanding, widespread and ongoing.

Next, U.S. banks are often unaware of legal actions related to

money laundering, fraud, and drug trafficking that involve their

current or prospective respondent banks.

Next, U.S. banks have particularly inadequate anti-money laundering safeguards when a correspondent relationship does not involve credit-related services.

Next, high-risk foreign banks that may be denied their own correspondent accounts at U.S. banks can obtain the same access to

the U.S. financial system by opening correspondent accounts at foreign banks that already have a U.S. bank account. U.S. banks have

largely ignored or failed to address the money laundering risks associated with nested correspondent banking.

In the last 2 years some banks in the U.S. have begun to show

concern about the vulnerability of their correspondent banking to

money laundering and are taking steps to reduce the money laundering risks. But the steps are slow, incomplete, and they are not

industry-wide.

If U.S. correspondent banks were to close their doors to rogue

foreign banks and to adequately screen and monitor high-risk foreign banks, the United States would reap significant benefits. By

eliminating a major money laundering mechanism which frustrates

ongoing efforts to look into criminal activity, we would reduce illicit

income that fuels offshore banking and we would deny criminals

the ability to deposit illicit proceeds in U.S. banks with impunity

and profit from the safety, soundness and investments that are

made possible and available to them in the U.S. banking and financial system.

Next Tuesday, we are going to discuss with the Department of

Justice and the Department of the Treasury ways to close the door

to these money laundering opportunities.

I again want to thank our Chairman for having these hearings.

I think they have been extremely helpful. I want to thank our witnesses today, and look forward to their supplying us with additional information, as they have committed to do.

Senator COLLINS. Thank you, Senator Levin.

Our current witnesses are now excused. I want to thank all of

our witnesses for their participation today.

The Subcommittee stands in recess until Tuesday, March 6, at

9:30 a.m., when we will reconvene in room 342 of the Dirksen Senate Office Building.

[Whereupon, at 12:38 p.m., the Subcommittee was adjourned.]

(101)

ROLE OF U.S CORRESPONDENT BANKING IN

INTERNATIONAL MONEY LAUNDERING

TUESDAY, MARCH 6, 2001

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS,

Washington, DC.

The Subcommittee met, pursuant to notice, at 10:04 a.m., in

Room SD–342, Dirksen Senate Office Building, Hon. Susan M. Collins, Chairman of the Subcommittee, presiding.

Present: Senators Collins and Levin.

Staff Present: Christopher A. Ford, Chief Counsel and Staff Director; Mary D. Robertson, Chief Clerk; Rena Johnson, Deputy

Chief Counsel; Eileen Fisher, Investigator; Claire Barnard,

Detailee/HHS; Elise Bean, Democratic Deputy Chief Counsel; Bob

Roach, Democratic Counsel; Laura Stuber, Democratic Counsel;

Jamie Burnett (Senator Gregg); and Bob Westbrooks (Senator

Akaka).

OPENING STATEMENT OF SENATOR COLLINS

Senator COLLINS. The Subcommittee will come to order.

This morning, the Subcommittee concludes its examination of the

vulnerabilities of correspondent banking to international money

laundering activities. As we have seen, correspondent accounts

allow banks to have a presence in jurisdictions in which they do

not have a branch or other physical presence, as well as to offer

services that they themselves may have too few resources to provide. For these reasons, foreign banks that have correspondent accounts with U.S. banks possess a powerful means of attracting customers.

Last week, the Subcommittee heard troubling testimony from a

convicted criminal who has seen the role of correspondent banking

in money laundering ‘‘from the inside.’’ He testified about the crucial importance of correspondent banking relationships to shady

offshore money laundering institutions, such as the one he ran for

a number of years in the Cayman Islands.

We also heard testimony from three U.S. banks whose correspondent accounts appear to have been used at various points by

unscrupulous individuals to launder the proceeds of questionable,

and sometimes outright criminal, activity. Their testimony showed

that lapses in due diligence on the part of some U.S. banks may

have unwittingly helped criminals launder their ill-gotten gains by

passing them largely undetected through correspondent accounts.

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To make matters worse, jurisdictions in which several of the foreign banks were located not only made due diligence efforts more

difficult for the U.S. banks, but also actually hampered efforts by

law enforcement and regulators to track down the crooks and to

find and recover their illicit funds.

Additionally, the Subcommittee received testimony from three

witnesses who have extensive knowledge of the complexity of

money laundering. They helped outline the scope of the international money laundering problem, as well as the types of steps

that correspondent banks might be able to take in order to better

vet prospective clients and to monitor and detect suspicious activity

by respondent banks after relationships have begun.

One expert also described the difficulties of tracking down—and

recovering for victims—the proceeds of fraudulent schemes that are

laundered through correspondent accounts in U.S. banks. These experts’ testimony also highlighted how important it is for the United

States to help lead international efforts to detect and facilitate the

recovery of stolen and laundered funds.

Today, in our final day of hearings on correspondent banking, the

Subcommittee will hear testimony from Arthur Jacques, who will

describe the operations of British Trade and Commerce Bank, an

offshore bank licensed in Dominica through which the Minority

staff’s investigation indicated that millions of dollars in fraud proceeds have been funneled. Given BTCB’s lack of cooperation with

authorities in making restitution to the victims of these frauds, I

was interested to read in the Miami Herald not long ago that the

Government of Dominica has finally revoked BTCB’s license.

To finish up our hearings on money laundering and correspondent banking, we will also hear testimony from representatives of the U.S. Department of Justice and the Department of the

Treasury. They will discuss the Bush Administration’s commitment

to fighting international money laundering and outline the efforts

that have been made by their respective agencies to combat foreign

banks’ use of U.S. correspondent accounts to aid and abet money

launderers.

I look forward to hearing the testimony of all of our witnesses

this morning, and at this time I would like to recognize the Subcommittee’s distinguished Ranking Minority Member, Senator

Levin, who led and initiated this investigation, for his opening

statement.

Senator Levin.

OPENING STATEMENT OF SENATOR LEVIN

Senator LEVIN. Thank you very much, Madam Chairman. As you

have pointed out, through the Minority staff’s year-long investigation, and its 450-page report, that report’s very close look at 10

high-risk foreign banks, its survey of 20 major U.S. correspondent

banks, and through this Subcommittee’s hearings last week with

experts and correspondent banking participants, we are getting a

good understanding of the role of U.S. correspondent banking in

money laundering.

Drug traffickers, defrauders, bribe-takers, and other perpetrators

of crimes can do indirectly through a foreign bank’s correspondent

account with a U.S. bank what they can’t readily do directly, which

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is to have access to a U.S. bank account. The stability of the U.S.

dollar, the services our banks perform, and the safety and soundness of our banking system make access to a U.S. bank account an

extremely attractive objective for money launderers. It is up to us— the Congress, the regulators, the banks—to try to stop money

launderers from reaping the benefits of the prestigious banking

system and stable economy that we have worked so hard to

achieve.

It boils down to the quality of the regulatory scheme under which

a foreign bank operates. To achieve entree into the U.S. banking

system, a foreign bank should be subject to the same quality of regulation and periodic examination as U.S. banks. Whether banks

are subject to such regulation seems to be a defining factor in

whether their due diligence and anti-money laundering controls are

adequate.

I know that you, Madam Chairman, have been a leader in food

safety issues. The situation with correspondent banking has some

similarities to the problem this country faces in importing food.

The United States has developed a highly effective food safety system, and as our Chairman has effectively argued, we don’t want

contaminated food from abroad slipping into our food supply. So,

for example, when it comes to meat, we accept only that meat from

countries which have inspection systems that meet our standards,

and that is how we protect ourselves. Why not apply a similar

standard to foreign banks? We don’t want contaminated food and

we shouldn’t accept contaminated banks.

That is why all the experts that we have heard and several officers of our Nation’s largest banks have said that shell banks

should be banned from U.S. correspondent accounts, period. Shell

banks are banks with no physical presence, oftentimes no staff and

no real regulation. If such a prohibition were in place, all 400 of

Nauru’s shell banks would lose their access to U.S. dollar accounts.

So would the more than 50 Vanuatu shell banks, so would the

many shell banks licensed in the Caribbean and operating in Latin

America, so would the Montenegro shell banks using the Bank of

Montenegro’s correspondent accounts, so would all the shell banks

being sold on the Internet. That alone would be a significant accomplishment.

Offshore banks and banks in jurisdictions that don’t cooperate

with anti-money laundering efforts are two more categories of

banks that raise contamination concerns. The hearings showed

that these types of high-risk foreign banks were able to open correspondent accounts at major U.S. banks, including Bank of America, Chase Manhattan Bank, and Citibank.

Each of these U.S. banks opened and kept open accounts for

these foreign banks, despite high money laundering risks and even

after being confronted with disturbing evidence of misconduct or

suspicious transactions. They also acknowledged that they should

have done a better job in screening and monitoring the correspondent accounts that they opened for high-risk foreign banks.

When we looked at Citibank’s relationship with Federal Bank

and M.A. Bank last week, we heard Citibank say that they knew

the parent entities of those banks extremely well. In fact, with respect to Federal Bank, Citibank was a major business partner with

104

its parent in a holding company called CEI. Yet, in both of those

cases, the offshore banks were not subject to examination and each

bank had serious problems with anti-money laundering controls.

Citibank said it was surprised when it heard that one of the

banks, Federal Bank, had no anti-money laundering controls. The

relationship manager for Citibank said that Federal Bank lied to

him. Citibank had claimed, in their words, ‘‘profound knowledge’’

of how the offshore bank operated. But the absence of a strong regulatory hand with regular or periodic examination of Federal Bank

puts everything in doubt.

Today, I will explore with witnesses whether we should ban or

much more strictly control correspondent accounts of offshore

banks not affiliated with U.S. banks and of offshore banks not subject to examination in the jurisdiction in which they are licensed.

Another matter that merits legislative attention is the ability of

injured parties and governments to seize illicit funds in correspondent accounts. Unlike a regular bank account where law enforcement authorities and plaintiffs in civil suits can freeze or seize

the funds at issue, in a correspondent account, because the owner

of the account is the respondent bank and not the clients of the respondent bank, persons trying to seize or freeze funds unlawfully

obtained by a client of the respondent bank are required to chase

the bank abroad. That is not only a tough job, that can be an impossible job.

Showing that the illegal funds are in a correspondent bank account is not enough. The consequence of this situation is that the

depositors in foreign banks with accounts in U.S. banks have greater protection than U.S. depositors in U.S. banks. And where U.S.

citizens are victims of illegal activity, they may be denied recovery

even though the money sits in a U.S. bank. That anomaly should

be fixed.

These issues are not an academic concern that only banking circles need to examine. Money laundering finances crime. It provides

the funds needed to conduct illegal drug operations, financial

scams, and Internet gambling. It provides the means for corrupt

public officials to enjoy their ill-gotten gains. It safeguards the profits that reward criminals and organized crime.

Stopping money laundering takes the profit out of crime. It helps

in the fights against criminal enterprise, corrupt politicians, and

the local con man who steals a person’s savings. Shell banks, offshore banks, and banks in non-cooperative jurisdictions are major

money laundering mechanisms, and there is much that can and

should be done to dismantle them.

Today, we will hear from a representative of one group that has

not yet spoken at these hearings and that is the victims of the

money laundering that goes on through correspondent accounts.

Sometimes the victim is a specific individual taken in by a financial fraud, someone whose savings have disappeared into an offshore bank never to be recovered. Sometimes the victim is a class

of individuals subject to the same wrongdoing, such as the 700,000

credit card holders who collectively got socked with $40 million in

illegal credit card charges by a criminal who sent the stolen funds

to offshore banks with U.S. correspondent accounts.

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1The prepared statement of Mr. Jacques with attachments appears in the Appendix on page

241.

Today, we will also discuss with the Treasury Department and

the Department of Justice their experience with the various problems involved in correspondent banking, their reaction to our proposed reforms, and any proposed fixes that they may have in mind.

The prior administration placed a high priority on stopping money

laundering and it made some progress. Hopefully, the current administration will maintain that priority and continue the battle.

I look forward to the testimony and again want to thank our

Chairman for her efforts in this matter, for calling today’s hearings

and last week’s hearings, and for supporting this investigation.

Thank you.

Senator COLLINS. Thank you, Senator Levin.

I am pleased to welcome our first witness this morning. He is Arthur Jacques, of Jacques Little in Toronto, Canada. Mr. Jacques

went to great difficulty to get here to these hearings. His flights

were canceled yesterday and he has interrupted a very busy schedule to be here, so we very much appreciate his efforts. He will discuss the case of British Trade and Commerce Bank, yet another

case study of how correspondent accounts in legitimate banks can

be used by questionable financial institutions and their customers

to launder the proceeds of fraudulent activities.

Pursuant to Rule VI, all witnesses are required to be sworn, so

I would ask, Mr. Jacques, that you stand so I can swear you in.

Do you swear that the testimony that you are about to give to

the Subcommittee will be the truth, the whole truth, and nothing

but the truth, so help you, God?

Mr. JACQUES. I so swear.

Senator COLLINS. Thank you.

Mr. Jacques, we are going to be using a timing system today.

You will see in front of you a device with three lights. You will

have 10 minutes to give your oral presentation. Your complete

written statement will be included in its entirety in the record.

When you see the yellow light come on, you have about a minute

to wrap up your comments.

So if you would please proceed.

TESTIMONY OF ARTHUR O. JACQUES, ESQUIRE,1 JACQUES

LITTLE BARRISTERS AND SOLICITORS, TORONTO, ONTARIO,

CANADA

Mr. JACQUES. Thank you, Madam Chairman. I will try to be as

brief and non-technical as possible to assist you in your deliberations.

By way of background, I would like to emphasize that the client

that I represent or the group of clients that I represent was an unwilling victim in terms of issues that they had no control over, and

at all material times until the actual event occurred they were

completely unaware of British Trade and Commerce Bank being

the asset protection bank domiciled in Dominica, as well as any

role that First Union National Bank, its correspondent bank in

Florida, portrayed.

106

By way of background—and I will be very, very brief in terms

of the structure—my clients in Canada attempted to borrow significant funds based in U.S. dollar denominations, and they tried to

borrow $15 to $25 million to exploit a certain kind of technology.

It was a very high-risk technology and Canadian banks had no enthusiasm for this form of venture capital.

Through an intermediary in Toronto, Canada, our client was introduced to a party by the name of Chatterpaul, who is referred to

in the Minority report, who indicated that he could provide the

funding. Letters of intent were executed. A contract was executed

in the fall of 1999 to borrow US$15 million, and my client as a condition precedent of that borrowing agreement put forward a deposit

of $3 million.

The $3 million was then placed in a segregated trust account, in

a lawyer’s trust account in a Canadian bank. A condition of the

loan—i.e., the draw-down of the $15 million—was the deposit

would remain—the $3 million would remain in the attorney’s segregated account until the full loan was advanced. The loan was

never advanced. The request was made for the return of the

money. It is at this point that I am introduced to the problem.

A demand is made on the attorney for the return of the $3 million and it is not forthcoming. Legal proceedings are implemented

in Ontario. The law firm is placed into a very restricted kind of receivership. Other parties are added, and then we find out the existence of British Trade and Commerce Bank being this asset protection bank in Dominica.

And we find out that the flow of funds went from Toronto, $3

million, into a correspondent bank in South Florida, being First

Union National Bank. We find that because of American bank secrecy laws and Dominican bank secrecy laws that when we make

demands on the respective entities, we are told ‘‘we can’t speak to

you.’’

We are compelled at this point—we have implemented receivership and we have all kinds of technical restraining orders in Canada, and we are then compelled to retain attorneys in Florida. We

retain a reputable law firm, Steel, Hector and Davis, and letters of

request are issued by the Ontario court to the Floridian court. And

we then find out that this $3 million goes from Toronto to Florida,

and then on the advice of British Trade and Commerce Bank, who

is the named account in Florida, the funds are then transferred all

over the world.

I provided a few days ago a chart to your secretariat and I don’t

know if you have that chart available to you. The long and the

short of that chart is simply that the funds flow from Florida into

Idaho, into China, into India, possibly into the United Kingdom,

into Oklahoma, back to Dominica.

We attempt upon issuing subpoenas in Florida through our attorneys, and there are stumbling blocks on a procedural and a substantive basis in finding the answers, but as we sit here today my

client is out approximately $6.5 million. Consequential damages

are growing on a daily basis and we estimate at a point in time

that our damages will be approximately $10 million-plus.

107

1See Exhibit No. 47 that appears in the Appendix on page 824.

Senator COLLINS. Mr. Jacques, excuse me for interrupting, but

could you take a little extra time and take us through the chart

that you have referred to?

Mr. JACQUES. Do you want me to address the chart from here?

Senator COLLINS. Yes.

Senator LEVIN. If I could just interrupt for a second, this is our

staff’s redo of your chart to, we thought, make it a little simpler,

but I am not sure we have. We took your 5 pages and tried to put

it on one page, is what we did.1

Mr. JACQUES. The flow of funds is really from the law firm to the

Bank of Montreal in Toronto, which is simply the domiciled account

for the law firm, a segregated trust account. A $3 million wire

transfer then goes to First Union National Bank and stops, and

then within a period of ‘‘x’’ number of days goes to Idaho, back into

Ontario; New Delhi, India; Florida; Abu Dhabi; Dominica; Hong

Kong; Switzerland; Colorado, Nassau, Nevis, California, and it goes

all over.

We attempted—and I want to emphasize one thing that my client is of commercial means but doesn’t have unlimited means, and

every time we are making an application in a foreign jurisdiction

to compel—emphasis added—to compel the penetration of bank se- crecy laws, it costs us US$25,000 to $40,000 to do it. At a point in

time, financial resources are completely exhausted, and you make

an assessment—you will pardon the metaphor—is the game worth

the candle. How far do you get involved in litigation which is defensive, mechanical?

We concentrated our efforts in Florida for a whole host of reasons

and we were relatively successful, with high degrees of information

coming back in terms of the routing of the funds. As we now speak,

as of this day, I can tell you the following in terms of the status

of the return of the monies.

Aggressive litigation has been commenced in Ontario and the

trial started on Monday. It is adjourned today and it resumes when

I return tomorrow. As a result of your February 5 report, I believe

an inordinate amount of pressure, productive pressure, positive

pressure was exerted on British Trade and Commerce Bank by the

regulatory agency in that island.

The Ministry of Finance of Dominica purported to cancel the license of British Trade and Commerce Bank, and as we speak the

bank there—and I use ‘‘bank’’ in parens—finds itself in a form of

receivership. That receivership is being appealed. There is a receiver in sort of a quasi-stay in terms of its status, and the receiver, if its status is maintained by the appellate jurisdiction, will

then proceed to attempt to discover assets wherever it may find

them, either in Dominica or elsewhere in the world. It is conjecture

whether there will be any return for anyone with respect to British

Trade and Commerce Bank.

And that is the story.

Senator COLLINS. Thank you very much, Mr. Jacques.

Senator Levin.

Senator LEVIN. Originally, we were going to call as a witness this

morning two individuals who were associated with the offshore

108

2See Exhibit No. 45 that appears in the Appendix on page 816.

bank that you have referred to, British Trade and Commerce Bank,

and that bank, as you have pointed out, is described in detail in

our Minority staff’s report.2

The report describes numerous instances of money laundering and suspicious activity associated with the bank, including $4 million that a self-confessed money launderer, Bill Koop, admitted

moving through the bank in connection with financial frauds, another $4 million associated with Ben Cook, who is currently being

prosecuted in Arizona for fraud and money laundering, as well as

millions of dollars associated with illegal Internet gambling and

other questionable activities. Two weeks ago, on February 15, the

Dominican Government finally revoked the bank’s license and

seized its records.

The Subcommittee issued two subpoenas to obtain documents

and sworn testimony from two persons involved with this bank.

The first subpoena was to Rodolfo Requena, the long-time president

and part owner of BTCB. We sent the subpoena to the U.S. Marshal Service in Miami to serve on Mr. Requena, a Venezuelan citizen who lives in a suburb of Miami, owns a house there, and has

a Florida driver’s license. Mr. Requena took steps to avoid service

of the Subcommittee’s subpoena rather than answer questions

about this bank.

The second subpoena was served by the U.S. Marshal in Oklahoma on John Long, who helped form the bank and we believe was

its majority shareholder. Mr. Long did accept service, but at his

deposition in response to questions about his involvement with

BTCB, Mr. Long invoked his Fifth Amendment privilege 15 times

and declined to answer the questions posed to him about the bank.

Based upon his statement that he would invoke his Fifth Amendment privilege at this hearing, we decided it was pointless to call

him as a witness this morning.

From the evidence we were able to gather, BTCB appeared to be

a bank that was owned by an American, run by Americans, and

used to launder money associated with frauds committed against

Americans and others. It was highly dependent upon U.S. banks to

conduct its business, and its business was replete with examples of

suspicious transactions.

So in place of those two people, we have asked you to come this

morning, Mr. Jacques, and we very much appreciate your being

here representing a victim, one of the many of this bank. This was

a victim, as we understand your testimony, of a classic advance fee

for loan fraud who had the $3 million you referred to disappear

into the jaws of this offshore bank, and who has so far, despite

your best efforts, not been able to pry that money loose, despite

over a year of legal action.

Now, after you took over the representation of your client, I assume you contacted BTCB first and got no assistance from them.

Did you then contact the Government of Dominica, and what was

their response? Were they helpful?

Mr. JACQUES. No. They were indifferent. We attempted to communicate with them.

Senator LEVIN. They were indifferent?

109

Mr. JACQUES. Right. We attempted to communicate by telephone.

For a whole host of reasons, we never put our requests in writing.

We were moving very, very quickly. We had a great deal of difficulty with the levels of sophistication there. It is a tiny island,

and I don’t mean in the pejorative sense. It is a banana republic.

It is primarily agricultural and its mean income is relatively low.

We got the sense from a whole host of indirect sources that

BTCB was a very effective lobby in Dominica. It had exerted commercial relationships, professional relationships, and people were

extremely reserved in attempting to talk to us when we tried to

make inquiries about them. And when we indicated that we had

difficulties there, they said, well, why don’t you solve your difficulties in Canada? I said, well, we will probably do that.

The only communication that I have had directly with BTCB is

when we first got involved. Because of immediate access in terms

of telephone and Internet, we communicated with BTCB and I personally on at least three occasions have spoken with George Betts.

Mr. Betts is a defendant—emphasis added—a defendant in a Canadian action as a codefendant with BTCB.

We sued BTCB and Mr. Betts. I am modestly pleased to tell you

that yesterday we obtained judgment in Canada against BTCB and

Mr. Betts. Now, it is simply conjecture whether that judgment will

have any value. Mr. Betts, by his own admission in terms of the

BTCB Website, is a member of the accounting community, a former

member of an international accounting firm, and he seems to, by

the way he operates, to be very sophisticated in certain issues in

terms of regulatory aspects of banking, both domestic and international.

Senator LEVIN. Did you try to find out from Dominica who owned

BTCB?

Mr. JACQUES. No. We made inquiries there, but the quality of the

recordkeeping in terms of intermediaries who had access to it did

not respond in any positive sense. We sensed—and I want to emphasize one thing that in a very simplistic fashion an ordinate

amount of information which may in the first instance sound as

though it is hearsay was gleaned from the Internet, the Internet

sites of BTCB.

We used a variety of search engines and we found an inordinate

amount of information about BTCB and associated and affiliated

entities, one being First Equity Corporation of Florida. And

through the various search devices we used, we pieced together

what we thought was a matrix of shareholdings, and we had a

sense, albeit inaccurate, that possibly Mr. Long was a shareholder

either directly or indirectly in terms of either a beneficial interest

or a legal interest. I personally have never spoken to Mr. Long,

though.

Senator LEVIN. Is Dominica a bank secrecy jurisdiction, do you

know?

Mr. JACQUES. Yes, it is.

Senator LEVIN. And that means that they do not disclose bank

ownership, is that correct?

Mr. JACQUES. That is correct, and Mr. Requena in his testimony

exhibited some kind of card with respect to Dominican bank secrecy laws and refused to disclose the kind of information that we

110

1See page 3 of Exhibit 34 that appears in the Appendix on page 784.

wanted. And we always had the sense he was using that as a

shield, a complete shield.

Senator LEVIN. Dominica itself will not, as I understand it, disclose the ownership of banks because of its own laws, so that if you

wrote Dominica asking for the owners of that bank, it is my understanding, and correct me if I am wrong, that you could not receive

a list.

Mr. JACQUES. That is correct, and we had informal advice from

local barristers in Dominica that if we were to attempt to bring

proceedings in Dominica, it would be a complete waste of time.

Senator LEVIN. And that is a major problem because here you

are trying to find out the owners of a bank, presumably so you can

bring suit against them if they commit a wrongdoing.

Mr. JACQUES. That is correct.

Senator LEVIN. But you can’t find out from the licensing jurisdiction who those owners are. Is that correct?

Mr. JACQUES. That is correct.

Senator LEVIN. We are going to put Exhibit 34c.1 on the screen,

and I think those exhibits are in front of you in a book. This is a

purported list of shareholders of BTCB. Now, we were able to obtain this from the U.S. bank where they opened their account. That

is where we obtained this as part of our investigation.

This exhibit says, on BTCB stationery, that the beneficial interest of 15,000 shares, which is half of the authorized shares, are

held by Mr. John Long, and 3,000 by Mr. Rodolfo Requena.

Did you ever see a document like that? Were you ever able to get

possession of this kind of a document?

Mr. JACQUES. No, sir. I know this information. We have pieced

it together, but I have never been given this from British Trade

and Commerce Bank. I would— Senator LEVIN. Now, as I indicated—go on. I interrupted you.

Mr. JACQUES. I would have to ask my friend and colleague, Mr.

Lindsay, when he deposed Mr. Requena whether he had this information given to him.

Senator LEVIN. All right.

Mr. JACQUES. There are outstanding stipulations of the Florida

court with respect to information obtained on depositions, but I

know this information.

Senator LEVIN. Now, assuming then that one way or another you

identified a Mr. John Long as being an owner or alleged owner of

the bank, my last question—my time is up for this round—is did

you bring suit against him, and if not why not?

Mr. JACQUES. To date, we haven’t brought suit against him, for

the very simplistic reason that how long is a piece of string? I

mean, we can commence litigation on an indefinite basis, and quite

candidly my client doesn’t have infinite resources to do that.

We were shocked when we found out in terms of the flow of

funds that it appeared when we obtained information from First

Union National Bank, we saw information indicating that some of

our funds went to Mr. Long for his own—he received it. What he

did with it I don’t know.

Senator LEVIN. Thank you. My time is up.

111

Senator COLLINS. Mr. Jacques, I want to go back to some of the

basic facts of this case just to make sure that they are on the

record.

It is my understanding that your clients wished to borrow and

agreed to borrow money from TriGlobe International Funding, Inc.,

is that correct?

Mr. JACQUES. That is correct.

Senator COLLINS. And was the amount that they intended to bor- row about $12 million?

Mr. JACQUES. Ultimately, it was reduced to $12 million.

Senator COLLINS. And as part of the agreement for borrowing this $12 million, it is my understanding that your clients had to

post 25 percent of the loan amount as a cash collateral account. Is

that correct?

Mr. JACQUES. That is correct.

Senator COLLINS. So that is where the $3 million that we are

talking about comes from?

Mr. JACQUES. That is right, that is correct.

Senator COLLINS. Your clients later learned that the $3 million

had been wired to the BTCB account at First Union Bank, is that

correct?

Mr. JACQUES. That is correct. We discovered that in April of

2000.

Senator COLLINS. Did your clients ever directly engage in business with BTCB?

Mr. JACQUES. Up until the receipt of information that the money

had gone to the BTCB account in Florida, my client did not know

of the existence of BTCB, other than when we became extremely

aggressive in terms of our demands. We were told that the money

went to an offshore bank in the Caribbean.

Senator COLLINS. It is my understanding that in September of

last year, BTCB’s president filed an affidavit with the Canadian

court in which he admitted that BTCB had possession of your client’s $3 million. Is that accurate?

Mr. JACQUES. That is relatively accurate. The allegations asserted by BTCB was that the money, however received by them,

went into a managed account.

Senator COLLINS. And this was an investment that was scheduled to mature in December of last year. Is that accurate?

Mr. JACQUES. That is correct, and just as a footnote to your question, when we became aggressive in terms of our litigation, in October, at the end of October, in Ontario, British Trade and Commerce

Bank deposited its own letter of credit for US$3 million to the credit of our action with a maturity date of December 15, 2000. On December 15, 2000, we sat anxiously in court to be notified that the

funds had cleared. The funds did not clear and the bank defaulted

on its own letter of credit.

Senator COLLINS. So BTCB defaulted on the letter of credit, and

I assume that your client still has not received any money. Is that

accurate?

Mr. JACQUES. That is correct.

Senator COLLINS. And it is my understanding that BTCB now claims not to have the $3 million. Have you been able to ascertain

where the money is now?

112

1See page 5 of Exhibit 34 that appears in the Appendix on page 784.

Mr. JACQUES. I can only speculate that—and I am not being facetious—it is someplace in the world, but I don’t think it is recoverable.

Senator COLLINS. And it has most likely been divided up and

wired all over the world, based on the Minority’s exhibit?

Mr. JACQUES. Well, if I refer to the chart there, $3 million was

disbursed to multiple payees and, in essence, this is a Ponzi

scheme.

Senator COLLINS. And it greatly complicates your ability to recover the money for your clients?

Mr. JACQUES. Almost impossible.

Senator COLLINS. Your clients obviously were in need of borrowing funds. They still have ongoing obligations. Do you know

how much additional money they have lost just as a result of the

monthly interest charges while the dispute continues?

Mr. JACQUES. This is part of the court record in Ontario. Interest

accrues—the $3 million that was given to BTCB was borrowed

from the Toronto Dominion Bank in Toronto at a prime plus 1 percent over commercial rate. Interest accrues floating on a basis of,

say, $35,000 to $40,000 a month, so in excess of $500,000, plus, has

accrued on that U.S.-dollar loan. There are administrative charges,

there are obvious legal fees, there are disbursements.

We have maintained litigation in three jurisdictions—Ontario,

Florida, and Idaho. We had the same difficulty in Idaho in terms

of when we attempted to—I think it was a major American bank

resisted, and we issued letters of request and we then got involved

in mechanistic delays and adjournments. And simply, we ran out

of gas and, we are not going to spend more money chasing our tail.

Senator COLLINS. Thank you.

Senator Levin.

Senator LEVIN. Thank you.

The letter of credit that you made reference to and the Chairman

made reference to is Exhibit 34e,1 I believe. Could you just take a

look at that in your exhibit book?

Mr. JACQUES. I know it all by heart, Mr. Senator.

Senator LEVIN. It is etched.

This, I take it, is a letter of credit that this rogue bank wrote on

itself. Is that basically it?

Mr. JACQUES. That is correct, and we took no position when they

offered the letter of credit because, quite candidly, it was a joke.

And the letter of credit is in standard international banking terms.

There is nothing unusual about this document. It is used hundreds

of times a day in international banking.

Basically, it is a clean letter of credit issued under international

documentary terms, nothing untoward about it. When you examine

the letter of credit, however, though, you ascertain a couple of

things. One, it is not confirmed by a bank other than BTCB. They

issued their own letter of credit. So, in essence, this is a promissory

note; ‘‘I will pay on demand on December 15th.’’ When this letter of credit was tendered to us, I was obviously

jaundiced with respect to its ultimate success in terms of cashing.

But I went through the ritual of attempting to have a Canadian

113

1See Exhibit 33 that appears in the Appendix on page 782.

2See page 4 of Exhibit 34 that appears in the Appendix on page 784.

bank either confirm it or discount it, and I was asked if I was a

fool.

Senator LEVIN. You were asked what?

Mr. JACQUES. If I was a fool.

Senator LEVIN. In other words, they were familiar with what was

going on here?

Mr. JACQUES. That is correct.

Senator LEVIN. The legitimate banks?

Mr. JACQUES. That is correct.

Senator LEVIN. So we have got a rogue bank issuing a letter of

credit on itself which is worthless.

Then in Exhibit 33,1 let’s take a look at some of the other things

that this bank did, British Trade and Commerce Bank. This is an

advertisement for certificate of deposit investments. The return

rates are from 16 percent for $25,000, all the way up to a 79-percent return rate if you will give them $3,500,000. That is an annual

return rate of 79 percent.

Mr. JACQUES. Well, these are urban tales, Senator.

Senator LEVIN. These are what?

Mr. JACQUES. Urban tales. These are fictions. These return rates

are impossible, in a realistic banking community, in a legitimate

banking community, to obtain.

Senator LEVIN. Of course.

Mr. JACQUES. No one has these rates.

Senator LEVIN. But this is the tout, this is the come-on, this is

the promise that a rogue bank makes. You give us money, you will

get this kind of return. But apparently some people must have

been taken in. There are a lot of other victims here beside your client, but anyway this is the representation of this bank, up to a 79-

percent return rate for a $3.5 million certificate of deposit.

Mr. JACQUES. That is correct. In this kind of marketing or enticement, there are victims both in the United States and Canada and

the United Kingdom. There are institutions, charitable institutions;

the Boy Scouts of the United States was defrauded. There was a

charitable institution in Chicago many years ago. And these comeons are basically an enticement to go into a high-yield investment

program, and these high-yield investment programs are myths.

They do not exist in the legitimate investment and/or banking communities worldwide.

Senator LEVIN. Then if we could turn to Exhibit 34d.2 This is a

letter which apparently the president of the bank issued to creditors and it was reprinted in an offshore business newsletter.

Have you ever seen this letter before?

Mr. JACQUES. Yes, Senator, I have.

Senator LEVIN. Okay. This is one of the things that this letter

says that, ‘‘The bank is unable to meet its obligations with its depositors and creditors. As President of the bank, it is my responsibility to bring this matter to your attention and outline to you the

causes and the measures that management is implementing to recapitalize the bank, rebuild its liquidity, and meet its obligations

with its depositors and creditors.’’

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And then point 1 states: ‘‘In May of this year, the major shareholder of the bank retired from the organization due to severe

health problems. The retirement resulted in a large withdrawal of

deposits from the bank due to the close relationship of the depositor with the shareholder,’’ the close relationship presumably being

the same person. Is that the way you would read that?

Mr. JACQUES. That is correct.

Senator LEVIN. That is a fairly close relationship indeed.

Mr. JACQUES. And I believe the inference there ultimately is that

is Mr. Long.

Senator LEVIN. That is Mr. Long, so that they are actually stating here—this is a hint as to where these monies went. If, in fact,

it is Mr. Long, what they are actually saying is a large withdrawal

of deposits went to Long.

Mr. JACQUES. That is correct.

Senator LEVIN. Yet, you are still dubious that he is a potential

source of recovery?

Mr. JACQUES. All I can say is that in terms of the kind of strategies that are underway, we recognize he has been there, but we

just haven’t dealt with that issue.

Senator LEVIN. Do you think it is possible the word ‘‘depositor’’ there, is a shell company owned by Mr. Long rather than he himself? Would that be at least a possibility there?

Mr. JACQUES. I have no specific knowledge, but if I were speculating, I would agree with you.

But it is paragraph 2 which I found in that letter of November

9th to be the most disturbing when Requena indicates that, referring to our action in Ontario, and he states, ‘‘The bank was never

involved in or aware of those actions. . . . The lawyers for the

plaintiffs’’—that is my client—‘‘convinced the Canadian Court that

BTCB was part of the action.’’ That is correct. ‘‘The lawyers for the plaintiffs spread all kinds of erroneous information and allegations against the bank.’’ That is incorrect.

They circulated private and confidential information—for example,

you can buy this letter on the Internet for $10. This is within the

public domain.

The irony of this letter, which is dated November 9th, is that at

the end of October they came to the Ontario court and deposited

their letter of credit.

Senator LEVIN. Their worthless letter of credit?

Mr. JACQUES. That is correct. Nine days later, they issue this

statement here which is basically a declaration that they are incapable of paying their liabilities as they normally fall due.

Senator LEVIN. So that it is lie followed by lie, followed by misrepresentation, followed by another tout for certificates of deposit,

followed by more lies, and it just goes on and on, basically. Is that

a fair summary of this bank?

Mr. JACQUES. You are being very polite, sir.

Senator LEVIN. Unintentionally.

The goal of Congress and of our regulators has got to be that our

legitimate banks, our U.S. banks, not in any way, directly or indirectly, aid and abet this kind of an enterprise. And in order to do

that, we are going to have to have tighter money laundering laws

to look at these accounts that come from these banks, these foreign

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banks, so that our banks are not misused as part of either a fraudulent bank or by a money launderer. That is our goal, and your testimony is very helpful in our achieving that goal here today.

I just would close by asking whether you have any advice for people who are potential victims or who are the actual victims of this

bank. You have now been through it. You have seen your client

lose money both in the original deposit with that law firm and then

also in trying to seek recovery.

What advice would you have both for current victims seeking to

recover money and for potential victims of this kind of a bank?

Mr. JACQUES. Well, I think if I may dissect your question into a

couple of components, the historical victims of the frauds fit into

at least two categories: Those that are totally innocent and who are

simply being aggressive with respect to the return or the promised

return, and these people come forward time and time again.

One of the goals of an asset protection bank—and I am talking

generically as opposed to a specific bank, i.e. BTCB, but one of its

mandates is an attempt on an offshore jurisdiction to shelter assets, to make those assets judgment-proof in the home jurisdiction.

If I have a judgment against Mr. Brown, I can’t get his assets in

the United States. He has basically placed all his assets beyond the

reach of the United States; he has placed them offshore. And there

are certain functional advantages in terms of asset protection

banks.

The other component of an asset protection bank is simply a return is being made and it is being sheltered, and it is probably not

being disclosed in any jurisdiction in terms of income. That kind

of situation I am now talking to. There are hundreds and hundreds

of victims throughout North America, probably thousands, and it

goes throughout the rest of the world.

For example, there is an agency in the United Kingdom called

the International Chamber of Commerce which I believe you are familiar with. They have a tracking system where they are tracking

this on a worldwide basis, and they have hundreds of instances

that are occurring on a daily basis.

Does education work? Probably not. Does notoriety work? Probably, yes. Do lawsuits work? Yes, but they are highly individualistic. I would believe that probably the best attempt—and emphasis on the word ‘‘attempt’’—would be to have effective legislation whereby these entities can’t operate effectively but for the

media of correspondent banking. If they don’t have a transportation

system under which to move the funds into any jurisdiction, they

are shut down. Look at the example of your report on February 5

and then 10 days later an inordinate amount of pressure is obviously exerted domestically in Dominica and the license is canceled.

That is very effective.

Senator LEVIN. I do have one additional question, and that is are

you familiar with the Canadian banking laws and regulations relative to correspondent accounts in your legitimate banks? Are you

more strict than our banks? Are you familiar with that area of law

and regulation?

Mr. JACQUES. I am more than a student, but I am not an expert.

I can only tell you—and I took the liberty of bringing down a statute which I will give to your Subcommittee, which is an attempt

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by the Canadian Government. It is called the Proceeds of Crime

Money Laundering Act, and this statute came into effect in October

of 2000.

We have the same problem. Obviously, our economy is a tenth

the size of the United States, so you use that factor. But I would

assume that, yes, money laundering does take place in Canada. I

know that. I shouldn’t say ‘‘assume’’; I know it takes place. Are we

any better than you are? Probably not in terms of how we effectively police it.

Toronto would probably be a magnet for it by virtue of its position in the Canadian economy in terms of what goes on there. But

banks in Canada are very, very vigilant. I have a commercial practice, a commercial corporate practice, and occasionally I am asked

by clients to transfer funds directly or indirectly to other jurisdictions. I can say to you that on a number of occasions when these

funds are leaving my firm’s trust account, I am confronted by a

bank officer asking us the personality of the funds. Then I get into

these issues of solicitor-client relationships and I have that issue

with the bank. But I can tell you the banks in my country are observant, vigilant, and they are attempting to enforce it.

Senator LEVIN. Thank you. Thank you, Madam Chairman.

Senator COLLINS. Thank you very much, Mr. Jacques. I very

much appreciate your assisting the Subcommittee with this important investigation.

Mr. JACQUES. Thank you.

Senator COLLINS. I wish you a good and safe and easier trip back

home.

Our next panel of witnesses for this hearing will be representatives of the Departments of Treasury and Justice. At this time, I

would like to ask Joseph Myers from the Treasury Department and

Mary Lee Warren from the Criminal Division of the Department of

Justice to come forward.

These two civil servants will highlight for the Subcommittee the

current status of U.S. anti-money laundering efforts with regard to

correspondent banking, and will describe for us the two Departments’ commitment to protecting the American banking system

from abuse by money launderers and other criminals.

I would note that I had the opportunity yesterday morning to

discuss these hearings with Secretary O’Neill and I was very impressed with his knowledge of our hearings and his commitment to

helping stem the tide of money laundering that these hearings

have disclosed.

I am going to ask both witnesses to stand, since pursuant to Rule

VI all witnesses who testify are required to be sworn.

Do you swear that the testimony you are about to give to the

Subcommittee will be the truth, the whole truth, and nothing but

the truth, so help you, God?

Mr. MYERS. I do.

Ms. WARREN. I do.

Senator COLLINS. Mr. Myers, we are going to start with you, if

you will proceed, please.

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1The prepared statement of Mr. Myers appears in the Appendix on page 250.

TESTIMONY OF JOSEPH M. MYERS,1 ACTING DEPUTY ASSISTANT SECRETARY (ENFORCEMENT POLICY), U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC

Mr. MYERS. Madam Chairperson, Senator Levin, I am pleased to

appear before you today to discuss the issues raised in your Minority staff’s February 5 report ‘‘Correspondent Banking: A Gateway

to Money Laundering.’’

I would like to submit my full written testimony for the record

and highlight a few points, if I may, orally.

Senator COLLINS. Both of your written statements will be included in the record in their entirety.

Mr. MYERS. Thank you.

I would like to begin by congratulating the Subcommittee and

the Minority staff for its impressive work on this report and in

gathering a factual record for this hearing. In our view, the report

and the hearing raise serious issues. We are studying them very

closely. It is a complex area and a difficult one.

I think the work that you have done here has already had real

consequences, and I congratulate you for that. We have seen rogue

banks closed. We have seen changed policies in the Bahamas and

the Cayman Islands with respect to shell banks, and I think you

have done an impressive job of drawing the attention of the domestic banks and the public to this important area.

As you know, the Treasury and Justice Departments have jointly

issued two national money laundering strategies to meet our obligations under the Money Laundering and Financial Crimes Strategy Act of 1998. In last year’s National Money Laundering Strategy, we acknowledged that correspondent banking accounts and

other international financial mechanisms, such as payable through

accounts, private banking, and wire transfers, all are important

features of the international banking system, and yet they are potential vehicles for money laundering. The strategy thus recognized

the need for further examination of these mechanisms and to find

ways of addressing potential abuses without disrupting legitimate

economic activity.

The interagency community has substantially accomplished the

goals articulated in last year’s strategy in this area. In September

2000, the Office of the Comptroller of the Currency of the Treasury

Department issued the Bank Secrecy Act Anti-Money Laundering

Examination Handbook. This handbook identifies high-risk products and services, including international correspondent banking

relationships, special use accounts, and private banking, and establishes examination procedures to address these subjects, including

specialized procedures for foreign correspondent banking.

In addition, the OCC has initiated a program to identify banks

that may be vulnerable to money laundering and examined those

banks using agency experts and specialized procedures. Some of

those examinations have already focused on foreign correspondent

banking.

We have also made a great deal of progress in addressing the

risks involved in international correspondent banking through our

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active support of the Financial Action Task Force’s project to identify non-cooperative countries and territories.

Of the eight foreign jurisdictions involved in the case studies

highlighted in the Minority staff’s report, six of them are on the

FATF list of 15 non-cooperative countries and territories, and seven

of them are the subject of formal advisories from the Treasury’s Financial Crimes Enforcement Network, or FinCEN. The FinCEN

advisories alert U.S. financial institutions of specific deficiencies

identified by the FATF review and confirmed by our own analysis,

and they encourage our institutions to apply enhanced scrutiny to

transactions involving those jurisdictions. Twenty-three of the 29

FATF member countries have issued similar warnings to their domestic financial institutions.

As a result of the FinCEN advisories, the OCC implemented a

program to review the anti-money laundering programs in all

banks with significant exposure to one or more of the non-cooperative countries and territories. The OCC is currently in the process

of evaluating these banks to determine whether their systems and

processes are adequate to control the anti-money laundering risks

associated with the non-cooperative countries and territories.

We have also been working with our allies and with officials from

these jurisdictions to correct deficiencies in law, regulation, and

practice that aggravate the risk associated with international correspondent banking business.

In response to these efforts, 7 of the 15 countries listed—the Bahamas, the Cayman Islands, the Cook Islands, Israel, Liechtenstein, and Panama—have already enacted most, if not all, of the

legislative or regulatory changes necessary to bring their systems

into line with international standards. These jurisdictions are now

developing and discussing with the FATF and with the U.S. bilaterally specific plans to implement these changes, and we are working on a timetable that will allow those that take appropriate remedial measures to be de-listed at the earliest possible time.

I want to highlight that not only has the list and the FinCEN

advisories prompted movement within these jurisdictions; they

have also increased the quantity and quality of suspicious activity

reports filed by U.S. financial institutions.

The Financial Crimes Enforcement Network has begun to analyze the SAR filings related to the 15 NCCTs. The findings from

their work will be incorporated fully into the second review of SAR

filings that the interagency community expects to publish jointly

with the American Bankers’ Association in April. This report will

show, among other things, that since the issuance of the advisories

last July through November 2000, U.S. financial institutions, including foreign banks operating in the U.S., roughly doubled the

rate of filings of suspicious activity reports for most non-cooperative

countries and territories.

A preliminary analysis of December 2000 data confirms this

trend, and the majority of these findings describe wire transfer activity either to or from the country in question. Dollar amounts involving wire transfer activity tend to be high, frequently in the millions of dollars.

The remaining suspicious activity reports described for the most

part structuring of cash and monetary instrument transactions inVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00128 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
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volving money orders, traveler’s checks, and cashier’s checks. In

most instances, financial institutions in the United States are a

link in the chain of international transactions, as opposed to the

originating or end point in the movement of suspicious funds.

Although further FinCEN analysis is needed with respect to

these suspicious activity reports, it is apparent that international

correspondent account activity of the type discussed in the Minority

staff’s report has been and continues to be noted. Such correspondent account activity was also identified in a separate study

of domestic U.S. shell company activity that was summarized last

fall in the initial issue of the SAR activity review.

The challenge we now face is to make effective use of this information, both in investigations and in providing feedback to the financial services community. I want to emphasize that the FATF

project and our support for it are works in progress. There is a second round of review currently underway and we expect to be in a

position to put additional jurisdictions on the list in June.

As I have indicated, we are also actively involved in helping jurisdictions respond to the concerns. Unfortunately, some of them

have shown very little progress. The FATF indicated its special

concern about the relative lack of progress in the Russian Federation, Lebanon, the Philippines, and Nauru. Each has its own particular obstacles to address, but the international community is expecting a positive response to the concerns identified. The FATF is

planning in June to reach a decision with respect to countermeasures for those jurisdictions which have not made adequate

progress. Secretary O’Neill attended his first meeting with his G– 7 counterparts in Palermo 2 weeks ago, where the Ministers confirmed their support for countermeasures as necessary.

By statute, the National Money Laundering Strategy is due to

the Congress each year on February 1. This year, with the new administration in office, we have asked for an extension of the deadline until April 1. As we work to meet that deadline, we look forward to a continuing cooperative effort in pursuit of our common

goal to prevent criminals from realizing the profits of their crimes.

The Minority staff’s report raises a number of important issues.

We are carefully considering them. As we consider what additional

measures may be necessary to reduce the risk of abuse in this area,

it will be important to ensure that such measures do not interfere

with legitimate commerce and international trade finance, or put

our institutions at a competitive disadvantage in the global marketplace.

The Treasury is committed to working with the Congress to

ensure that we have all the necessary tools to combat money laundering. We will carefully evaluate the various legislative proposals

that have been and may be put forward in this area. In so doing,

we will consult with the interagency community and financial institutions, and seek to balance the legitimate interests of law enforcement with the equally legitimate concerns about privacy and regulatory burden.

Meanwhile, we will continue to pursue the FATF work. We will

be prepared to implement countermeasures as necessary, and we

will take the findings of this hearing into consideration in the context of our review of the FATF 40 recommendations.

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1The prepared statement of Ms. Warren appears in the Appendix on page 256.

Thank you again for the opportunity to appear today. I will be

happy to answer any questions you may have.

Senator COLLINS. Thank you, Mr. Myers.

Ms. Warren.

TESTIMONY OF MARY LEE WARREN,1 DEPUTY ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT

OF JUSTICE, WASHINGTON, DC

Ms. WARREN. Thank you, Madam Chairman and Ranking Minority Senator Levin. I appreciate the invitation to appear today to

offer the Department of Justice’s views regarding the use and

abuse of correspondent banking relationships in the United States.

The Criminal Division has been pleased to provide the Subcommittee with information concerning law enforcement’s concerns

and our insights on the obstacles and hindrances presented by correspondent banking to investigations and prosecutions. We look forward to continuing this cooperative arrangement.

Today, I would like to focus on three main areas identified in the

report of the Minority staff: The extent to which money laundering

through U.S. correspondent bank accounts is a significant law enforcement concern, some of the legal and practical challenges in

seizing alleged illicit funds and identifying beneficial owners of and

depositors into such accounts, and our general views on the recommendation for amending the U.S. forfeiture law and enhancing

law enforcement-industry communications with regard to correspondent bank accounts.

The international movement of illicit proceeds through correspondent bank accounts servicing foreign institutions is often difficult for law enforcement to detect. Even when detected, law enforcement may encounter significant hurdles in tracing, seizing,

and forfeiting such funds, made once again all the more difficult

when it is hard to discern the true beneficial owner of the funds

being transferred.

Most often, as the Minority staff’s report concludes, this occurs

when U.S. financial institutions offer banking relations to foreign

shell banks, offshore banks, and to banks in those jurisdictions

with unduly broad bank secrecy protections and those that have little or no effective anti-money laundering regimes. Typically, such

banks fail to make and maintain proper account and transaction

records as well.

From a prosecutor’s perspective, in order to attack the abuse of

correspondent banking by money launderers, the U.S. financial institutions must be vigilant and the U.S. Government must work to

ensure that our laws provide the necessary tools to prosecute individuals who knowingly facilitate the transfer of illicit funds, and to

identify, seize, freeze, and forfeit criminal proceeds transacted

through such accounts. We need that help as well.

Let me hasten to add that with all these frustrations and difficulties, the Departments of Justice and Treasury, in our coordinated fight against international financial crime, have scored some

significant successes.

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In my full written statement, I have outlined Operation

Skymaster and Operation Juno, in which our investigators and

prosecutors were able to penetrate the use of the Black Market

Peso Exchange scheme and to identify the traffickers and those

who facilitated trafficking through money laundering.

These successful cases also revealed and highlighted some problems facing law enforcement in tracing and forfeiting criminal proceeds in foreign countries and in instances when correspondent

banking is used. Our money laundering laws, dating to 1986, addressed primarily a domestic problem in the beginning and unfortunately have not always kept pace with the developments in technology and international commerce.

Three major areas of problems emerge. First, when offshore

banks in one jurisdiction have their representatives in another, it

can be difficult for U.S. law enforcement to determine the actual

location of the funds and in which jurisdiction we should focus our

forfeiture efforts. Once U.S. law enforcement pinpoints the correct

foreign jurisdiction, our ability to forfeit these funds is dependent

upon the level of cooperation offered by that jurisdiction and by the

strength of that jurisdiction’s forfeiture laws.

The second major problem area is the complexities that can arise

from our own forfeiture law with respect to jurisdiction and venue

in forfeiture cases in the United States. This is particularly true in

cases when U.S. law enforcement does not know initially the final

destination or beneficiary of the funds sent through a correspondent account and only determines that fact much later on.

Third, the relevant U.S. statute of limitations requires the government to bring forfeiture actions against fungible property, such

as funds in a bank account, within 1 year from the date of a money

laundering offense. If the government does not file within that

deadline period, we are required to make a strict one-for-one tracing review of the funds or prove that the foreign bank itself was

involved in the wrongdoing. These requirements are often difficult

to satisfy, particularly in cases involving correspondent bank accounts.

Some of these problems were best exemplified in the forfeiture

cases resulting from Operation Casablanca. Criminal Division prosecutors in Washington filed civil forfeiture complaints in the District of Columbia against the funds wire-transferred to other foreign accounts. We used the statutory authority granted in Title 18,

United States Code, Section 981(a) and 984, as well as 28 U.S.C.

Section 1355(b).

In one instance in Operation Casablanca, funds had been wiretransferred to a bank account in one jurisdiction, a foreign location.

After filing our civil forfeiture complaint, the Department requested assistance from that foreign government. It was learned by

our foreign counterparts, however, that the bank, as well as the account into which the funds had been transferred, were actually located in the second jurisdiction.

In the second country, the Department advised authorities that

we had information concerning the transfer of drug proceeds to

bank accounts within its jurisdiction. That country’s officials then

filed a criminal forfeiture action, the only forfeiture available in

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that particular country. They based their criminal case on our request for assistance. That jurisdiction froze the accounts.

But then because the defendants were not before the court, it

was uncertain whether they could indeed be forfeited criminally. In

addition, the bank did not appear to have any actual buildings or

branches within the court’s jurisdictions, and the assets securing

the bank’s obligations were not located in the country.

Finally, having come almost full circle, it was determined that

the assets we were pursuing were likely located in the foreign

bank’s correspondent account back here in the United States, at a

U.S. bank in New York City. This was a tortuous, time-consuming

chase.

The prospects for success in our U.S. civil forfeiture action in

that particular instance remain uncertain. There is a potential

claim that the assets in question were actually located in the foreign bank’s correspondent account in New York City. Jurisdiction,

venue, and the 1-year statute of limitations then may become

grounds for challenge. Now, I need to note this was an instance

when we had enormous cooperation from the foreign jurisdictions

and we still had all these obstacles.

Let me shift very briefly to the recommendations in the Minority

staff’s report.

The first four recommendations, I think, are better treated by

regulators and supervisors. The final two recommendations, however, deal with law enforcement issues. They suggest better U.S.

communication with the industry and assistance to the bank in

identifying and evaluating high-risk foreign banks. The final recommendation was forfeiture protections in the United States perhaps should be amended to enhance our ability to seize and forfeit

illicit funds.

These are valuable recommendations, and we concur that they

warrant further study and review. We would be pleased to work

with the Subcommittee and members of the staff toward these

goals.

With respect to improving communication channels between the

U.S. Government and U.S. banks, Mr. Myers has already noted

several of the ways we are working bilaterally, multilaterally and

with the industry itself. Law enforcement intends to continue to

enhance these working relationships, all, of course, within the constraints that we cannot reveal ongoing criminal investigations and

the sensitive information in those investigations.

With respect to the final recommendation amending our asset

forfeit laws, we believe that such a provision would be beneficial

in terms of pursuing and prosecuting forfeiture cases and, as I stated, is well-deserving of further study and review. We strongly believe that illicit proceeds, wherever located in the world, should not

be hidden from detection or immune from forfeiture when money

launderers take advantage of some weak link somewhere in the

world in the international money laundering campaign.

There should be no safe haven for money that is the proceeds of

crime. We understand at the same time, of course, that the prosecutor’s concerns would need to be carefully balanced against other

needs in the U.S. financial system and legitimate commerce.

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Once again, I commend the Subcommittee and staff for focusing

attention on this important issue. We look forward to continuing

our work with the staff and the Members to find solutions to the

problems you have highlighted.

I look forward to your questions.

Senator COLLINS. Thank you very much, Ms. Warren, for your

testimony.

Mr. Myers, you mentioned in your statement that Treasury and

Justice have jointly issued two national money laundering strategies, and that in both correspondent banking relationships, in particular international correspondent banking relationships, were

found to be vulnerable to abuse by criminals seeking to launder

funds.

You go on to say that the advisories issued by the Financial

Crimes Enforcement Network—FinCEN, I believe, is the acronym—do not discourage banks from maintaining relationships with

non-cooperative countries. Instead, in your written testimony you

indicate that they are intended to encourage banks to exercise caution in such relationships, but not actually to discourage them.

I am curious why not. Why wouldn’t you discourage banks from

maintaining relationships with foreign banks in countries that

have been non-cooperating and aren’t showing the kind of progress

that the countries that you have listed that have moved on antimoney laundering laws have shown?

Mr. MYERS. Thank you, Senator. We essentially view the

advisories as a warning. Our best analogy is to a sign on a highway

bridge, for example, that would say ‘‘slippery when wet.’’ We are

not telling a driver not to cross the bridge, but we are telling the

driver to be very careful and to take into account the circumstances

of the road, the weather conditions, the type of car he or she is

driving, the speed at which he or she is traveling.

In this way, when we look at a complex array of factors that may

influence a decision to do business in a particular jurisdiction, we

recognize that our banks are in very different circumstances.

Across the United States, we have large money center banks with

very sophisticated compliance systems. We have small independent

banks without a lot of international connections.

Similarly, in particular jurisdictions that we have named on our

list, take Israel, for example, they don’t have a money laundering

law. On the other hand, they have a fairly mature and well-functioning bank regulatory system. So we wouldn’t want in that case

to tell banks not to deal with Israel or advise them that it is—

Senator COLLINS. Well, you used Israel as an example of a country that has taken steps. I am talking about those countries that

are non-cooperating and haven’t taken any steps.

Mr. MYERS. I guess my point, Senator, is simply to try to clarify.

The countries that made it on to this infamous list made it on to

that list for various reasons, and the world presents itself to us in

shades of gray. We thought it best in the first instance for the first

year around to issue warnings and to tell our banks specifically

about our concerns and to make those concerns public. We have

seen that that has provoked a lot of movement in the jurisdictions,

and also we think a lot more caution in our banking community.

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As I have indicated, however, if the jurisdictions are not willing

to change their practices, if we find that it is not working, we are

prepared to consider further countermeasures and all options are

on the table as far as we are concerned. But we are only—we are

9 months into this public process, and I remind you we have consensus across 29 jurisdictions to take these steps. We certainly

weren’t in a position to build a consensus around cutting off 15

countries from the world’s financial systems without some kind of

fair notice and opportunity for them to amend their ways.

Senator COLLINS. One of our banking representatives last week— I believe it was the witness from Bank of America—emphasized

that U.S. banks would welcome more guidance from FinCEN about

which banks the American Government believes are promoting illegal activities or closing their eyes to illegal activities. These banks

seem to be asking for more guidance from FinCEN on where they

should do business, and are essentially telling us that they would

welcome more red flags.

Could you comment on that?

Mr. MYERS. Yes, thank you. I would agree with you that the

banks have made it very clear to us that they welcome as much

guidance as we can give them. I note that the OCC, Treasury’s

main regulator, has historically issued alerts to the banking industry and other regulators about offshore shell banks and other institutions that hold themselves out as banks but lack licenses from

recognized authorities or otherwise are not suitable to be engaged

in the banking business. These advisories have come out regularly

and so we try to meet this obligation.

Beyond that, I would just echo the comments made by my colleague from the Justice Department that we are very interested in

trying to provide this kind of information where we can, but it obviously raises, as does the process through which we identify drug

kingpins and others with respect to whom we cut out of the U.S.

financial system under OFAC sanctions—this raises a host of concerns about disclosure of sensitive information, both from the law

enforcement community and also the intelligence community.

Senator COLLINS. You mentioned shell banks and doing business

with shell banks. Senator Levin and other experts on money laundering have raised the question of prohibiting U.S. banks from

opening correspondent accounts for foreign shell banks because

they have no physical location, and are not affiliated with any

other regulated financial institutions.

I would like to ask both of you for your opinion on whether steps

should be taken to prohibit U.S. banks from having correspondent

accounts with shell banks.

Mr. MYERS. Yes, thank you. We are carefully studying this recommendation, and I want to congratulate the Subcommittee and

the staff for focusing as you have. I note that the report defines

very narrowly, and you have been defining in the hearing very narrowly the term ‘‘shell bank,’’ and I think that is very productive.

We recognize that these institutions, as you have defined them,

pose a significant risk and that they are often used to perpetuate

all types of fraud and are the subject, as I indicated in my previous

answer, of a series of Office of the Comptroller of the Currency

alerts. We also welcome the news that jurisdictions such as the

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Cayman Islands and the Bahamas have taken steps to eliminate

such institutions.

We are still struggling around the margins on this issue before

we can give a ringing endorsement of the recommendation, and let

me try to explain. We understand, for example—and we are still

studying this with relevant regulatory authorities—that entities

may be subsidiaries of, for example, securities companies or insurance companies. They may be set up in a way that might meet

your definition of shell bank, or shell financial institution if I can

broaden it out a little bit, and there may be legitimate purposes occasionally for institutions like that. We also can imagine an example of an Internet bank that doesn’t really exist anywhere but may

be legitimate and sufficiently supervised.

So with those caveats and with those concerns that we have that

we are trying to work through, we do think there may be scope for

work in this area. We welcome what I understand to be a new initiative on behalf of the New York Clearing House banks to develop

best practices in this area, and we think we should work with the

private sector and with the Congress on any specific proposals in

this area.

Senator COLLINS. Ms. Warren, what is your judgment on this

issue?

Ms. WARREN. I need to first caveat that our view is from a prosecutorial perspective or an investigator’s perspective, and in many

ways it is the view from the medical examiner’s office or the pathologist. We see where it really goes wrong, and there have been

enormous harms visited on those who have been the victims of

fraud or have allowed drug trafficking to proceed.

So from our very limited perspective, we would certainly applaud

the recommendation. But we also understand that ours is only one

part of a much larger view of what needs to be looked at in terms

of regulating and controlling this kind of banking, and we would

look to work together to provide our insights from our medical pathologist office with those who have a different piece of the puzzle

to provide.

Senator COLLINS. Ms. Warren, does the Justice Department have

concerns that if it alerts banks to problems with a specific jurisdiction’s bank that you may compromise an ongoing investigation?

I am trying to figure out why the government doesn’t more readily share information with U.S. banks that would prevent them

from doing business with people who may, in fact, be facilitating

the laundering of criminal proceeds.

Ms. WARREN. I can foresee some instances where the information

about not dealing with a bank, of such identifiable particularity,

would alert others to our ongoing investigation. And we would need

to weigh, and ask that others weigh, the importance of our proceeding with our investigation against immediately shutting down

such a bank by providing information of such a peculiar nature

that it would lead to a conclusion that this one bank was the target, or its customers the targets of our investigation. There might

be such instances.

If it is information of an ongoing investigation, there may be

some ways that we can provide more generic advice. But we don’t

want to jeopardize our investigation, and more than that, we don’t

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want to jeopardize any of our undercover officers who are often

right in the middle of such an investigation. Their lives could be

on the line.

Senator COLLINS. I am just going to raise quickly one more issue

with you before turning to Senator Levin for his questions.

In your written testimony, you indicated that the United States

must bring a civil forfeiture action against criminal proceeds in a

bank account within 1 year of the date of the money laundering offense, and that is in order to take advantage, as I understand it,

of the relaxed tracing requirements in the current law. Is that accurate?

Ms. WARREN. That is correct.

Senator COLLINS. Are there any similar time limitations under

the criminal forfeiture statutes?

Ms. WARREN. In the criminal context, we don’t have the advantage of the fungible property provision of that 1-year statute of limitations in Title 18 for civil actions. So we don’t have that at all

in a criminal forfeiture proceeding today. We would have to do

strict tracing of the assets in a criminal forfeiture action.

Senator COLLINS. If you have any recommendations to the Subcommittee on changing these laws, I would very much welcome

hearing them today or having you submit them in writing.

Ms. WARREN. Understood.

Senator COLLINS. Thank you.

Senator Levin.

Senator LEVIN. Thank you, Madam Chairman.

On the question of shell banks and the purpose they serve, we

had two U.S. banks in front of us who testified that they don’t open

correspondent accounts for shell banks and they could not see any

reason not to prohibit correspondent accounts for shell banks, as

we define that term.

Are you familiar with their testimony? Were you or someone else

present for that testimony?

Mr. MYERS. Yes, sir, I am familiar. Thank you.

Senator LEVIN. You are looking, I think, at the edges, you said,

as to what conceivable legitimate purpose there would be to open

up a correspondent account with a shell bank. I think that is well

and good, but I think we also have got to look at the problem that

is created and try to address that problem.

If U.S. legitimate banks can’t see any reason, or at least the ones

who were in front of us can’t see a reason for opening up a correspondent account with a shell bank, I would hope that you would

take their thoughts into consideration and move on with it.

You know, the M.A. Bank was affiliated with a financial institution. That was the excuse that was used there. First of all, even

if the regulatory process for a financial institution is good, as we

hope it is in the United States, it is a very different regulatory

process than the one for a bank. So I don’t think that that part of

the fringe that you are looking at will provide adequate assurance

that the bank regulator effort—the regulations that the bank inspectors and bank regulators enforce—are being enforced by securities investigators. It is a different form of regulation.

So I don’t see offhand how saying, well, there could be a shell

bank that is associated with a financial institution or an insurance

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company—I don’t see how that provides any answer in terms of

bank regulation.

Mr. MYERS. Thank you, Senator. I am not sure that we disagree

at all. I hope you will appreciate that we have a new administration, and I certainly don’t want to be in a position of having committed my Secretary to something on which he hasn’t been fully

briefed.

Senator LEVIN. Well, we can appreciate that, but if you could

give yourselves a reasonable time line to reach a conclusion on it

and let us know what that conclusion is, I think we would appreciate that. Is that all right?

Mr. MYERS. Yes, sir. In fact, we very much look forward to continued discussion and we think you have raised a very important

issue. We are looking very carefully at it.

Senator LEVIN. Do you think that you give us your opinion within a couple of months? Does that sound fair?

Mr. MYERS. Yes, it sounds fair to me, sir.

Senator LEVIN. Now, on the question of offshore banks that

aren’t shell banks but are offshore banks that are not allowed to

do business with the people who live in the jurisdiction granting

the license, we had testimony here from a former offshore bank

owner named John Mathewson. He testified that 95 percent of his

bank’s 1,500 clients were Americans, and he thought that all of

them were engaged in tax evasion.

He has spent the last 5 years cooperating with the Justice Department identifying people who had, in fact, evaded our tax laws,

some of his former clients. He said that his bank is not unique; it

was a ‘‘run of the mill’’ bank in the Cayman Islands. He thinks, in

other words, that most of these offshore banks are engaged mostly

in that, hiding the assets of Americans who are evading taxes.

The question is how do we try to get at that issue, as well. It

seems to me that the shell bank issue, frankly, is a relatively easy

one. I don’t think that should take us a whole lot of time, although

you want to make sure there are not any unintended consequences.

One of our witnesses called it a no-brainer—I think that is what

he said, and it seems to me it is pretty close to a no-brainer. I don’t

want to imply that your brains won’t be at work for the next 60

days, but I will put it that way. To me, at least, it is pretty close

to a no-brainer.

Now, let’s talk about offshore banks. We have pretty good evidence, and Mr. Mathewson in his cooperating role has provided an

extraordinary amount of it, as to what so many of these offshore

banks—again, we are talking banks that are not affiliated with our

regulated institutions—but what these offshore banks are mainly

about, or many of them are about or most of them are about.

Now, how do we get at it? How do we take a look at these unaffiliated offshore banks opening up accounts in American banks and

then using all the services of our banks to hide assets and to really

get involved in tax evasion for their clients? What do you suggest?

It is going on, it is rampant.

Ms. Warren, why don’t you start?

Ms. WARREN. This is a much harder puzzle. Again, there may be

legitimate commercial reasons for these offshore entities that are

not affiliated with regulated institutions to continue. That is not

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what we see from the Justice Department’s viewpoint because of

our particular perspective. We see where they are abused and

abuse our citizens.

I believe we need to hear—and this set of hearings has tried to

bring out—all the available information from the other pieces in

the puzzle, from the bankers themselves, from the industry, from

the regulators, and from those who have to look at the much larger

picture to try and see how best to do this. Again, I can only speak

from the prosecutor-investigator point of view, and that is when

these banks, these institutions are clearly abused.

Senator LEVIN. How do we get at the abuses? They are out there.

Mr. MYERS. Thank you, Senator. Let me start by agreeing with

your estimation that this is a much more thorny problem. As I am

sure you are well aware, the historical antecedents for offshore finance are deep and long, and we have much of U.S. business and

securities trading, insurance, takes place taking advantage of offshore markets through subsidiaries and complex arrangements.

Our basic view on this is that—

Senator LEVIN. Again, we are only talking unaffiliated.

Mr. MYERS. Yes, I understand, I understand.

Senator LEVIN. When you say subsidiaries, you are not addressing my question. I am talking about unaffiliated offshore banks.

Mr. MYERS. Right. Given a global economy where we have this

historical basis and then we have, I think, the emergence in sophisticated offshore markets like the Cayman Islands and the Channel

Islands of banks and other firms that would like to compete with

the subsidiaries of U.S. firms or of London firms or of Dutch firms

or German firms, I don’t know that we can draw a line around subsidiaries of U.S. firms in a way that would protect our firms’ competitiveness with their foreign counterparts from England, Germany, other major centers.

That said, we do think there are things that can be done. We are

working actively in a couple of areas. One, through the FATF and

other international standard-setting bodies, we believe—and we

assert this repeatedly and often—that it shouldn’t matter to a regulatory regime whether they are regulating offshore or onshore entities.

For purposes of money laundering control, tax evasion, cooperation on tax matters, it shouldn’t matter whether a firm is offshore

or onshore, and we push that point of view in all of our foreign relations and through all of the international bodies in which we participate. The FATF is active in that respect, as is the OECD tax

initiative which, as I understand it, is going forward on the view

that there really again is no excuse for not cooperating in tax matters and offering up a transparent regime. Put aside the question

of tax rates. Competition on tax rates is another issue, and that is

one where there is a lot more heated debate.

Senator LEVIN. You used the analogy of a traffic sign that says

‘‘slippery when wet.’’ I would suggest that that is not what we are

dealing with here. These banks, most of them, are slippery under

any weather conditions.

This isn’t a case of a few bad apples ruining a barrel. This is a

case of a few good apples somewhere in the barrel.

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I really think that unless your assessment of the use of these unaffiliated—I emphasize that—offshore banks is different from that

staff report, that is the way you should go at it. We have got to

try to protect the relatively few good by insisting on, first, regulation of these banks. And if they are not regulated by a jurisdiction

that has good regulation, we should tell our banks forget it. We

don’t have to regulate them, but we want a good jurisdiction that

does have regulatory capability to do the regulating.

Second, it seems to me we should be able to know who the beneficial owners are of these banks. We don’t know that now. We just

heard the example this morning of a victim who was victimized by

a bank that had a fancy name on it, but which is a rogue bank that

is stealing money, and you can’t find out who the owners of that

bank are. They have bank secrecy laws in the jurisdiction that licenses it.

It seems to me that as a condition of accepting a correspondent

account with an offshore bank, or opening an account for an offshore bank, our banks ought to be told ‘‘you must get the list of

beneficial owners of that bank; you must have that in your possession and require that bank to notify you of any changes, at a minimum’’ so our law enforcement officials aren’t faced with some secrecy laws down in wherever the island is or wherever the country

is, and where people who have been victimized by that bank can,

through a subpoena process, get access to the beneficial owners of

that bank and go after them in the case of this bank we have heard

about this morning.

We also have to do, it seems to me, much more in terms of seizure of assets, and I will get back into that in my next round. I

am over already. Thank you.

Shall I go ahead?

Senator COLLINS. Yes.

Senator LEVIN. Thank you.

We have a handbook which is issued by the Office of the Comptroller of the Currency for bank examiners which says that a

bank—and this is the September 2000 version of it—it says a bank

must exercise caution and due diligence in determining the level of

risk associated with each of its correspondent accounts. That caution and due diligence is set forth in some detail on page 22, which

really sounds pretty good.

My question is going to be how is this enforced, but here is the

way it reads: ‘‘A bank must exercise caution and due diligence in

determining the level of risk associated with each of its correspondent accounts. Information should be gathered to understand

fully the nature of the correspondent’s business. Factors to consider

include the purpose of the account; whether the correspondent

bank is located in a bank secrecy or money laundering haven; if so,

the nature of the bank license, i.e. shell or offshore bank, fully licensed bank, or an affiliate subsidiary of a major financial institution; the level of the correspondent’s money laundering prevention

and detection efforts; and the condition of bank regulation and supervision in the correspondent’s country.’’

That gets at a whole bunch of issues we have been talking about

for 3 days. My question: In your judgment, how many of the corVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00139 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
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respondent accounts at U.S. banks are subjected to that degree of

scrutiny right now? Can you give us a guess?

Mr. MYERS. I am sorry, Senator. I am sitting here today not able

to give you that number. I would be happy to get it for you as soon

as I can. I would need to call my friends at the OCC. I do know

that they have begun, as I think I indicated in my testimony—if

I didn’t say it, it is in the written part—they have begun doing targeted examinations on the basis of that handbook from which you

just quoted. So I will endeavor to get you an answer.

Senator LEVIN. On the question of seizure of assets, where there

is credible evidence that dirty money is in a correspondent account,

assume the same standard, whatever the standard is for seizure of

assets in a domestic account. And I am not sure of the exact standard, but let’s say it is credible evidence that there is illegal money

in a U.S. bank account.

The Justice Department, as I understand it—and I want you to

comment on this because I may be wrong, but the Justice Department, I believe, has greater capability to seize the asset in a regular domestic account than it does in a correspondent account. Is

that correct?

Ms. WARREN. Yes, that is. Checking with my experts, yes.

Senator LEVIN. So we have a bizarre situation where a foreign

bank’s bank account at a U.S. bank is given greater protection than

a U.S. citizen’s account in a domestic bank. Is that correct?

Ms. WARREN. Correct.

Senator LEVIN. Now, I think it is pretty clear that we ought to

be changing that, and again I think it is as clear as it is that we

ought to be changing some of the shell bank regulation. The offshore bank that isn’t a shell bank is a little more complicated, as

we have talked about.

Nonetheless, this one, it seems to me, is fairly clear. We should

not be giving greater protection to a foreign bank’s bank account

than we are to a domestic person’s bank account at our U.S. banks.

I am wondering if the Justice Department could give us, first, a

reaction to the proposal which is in the staff report and, second,

give us any suggested changes in that approach and give us actual

language that you might recommend. And then we would ask the

Treasury Department to—why don’t you do this jointly, if you can,

or give us separate recommendations either way? But can you do

that within a 30-day period?

Ms. WARREN. Agreed.

Senator LEVIN. Are you able to do that?

Mr. MYERS. Yes, sir.

Senator LEVIN. What about the confirmation of beneficial ownership of the foreign offshore bank? I made reference to that a few

moments ago, but I didn’t get a reaction from you. Do you think

it is reasonable to require that our banks in opening correspondent

accounts for offshore banks have in their files a representation as

to who the beneficial owners of that bank are? Is that a reasonable

requirement, do you believe?

Ms. WARREN. It certainly sounds reasonable for the initial opening. Unfortunately, the problems are not just in the initial opening

of the account, though. How do you monitor that as the account

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proceeds, particularly as we learn about nested accounts and those

kinds of transfers? Peeling back that onion is a lot more difficult.

Senator LEVIN. We could require, however, that the respondent

bank who has that account at the U.S. bank notify the bank of any

changes. I mean, if they violate that, then what the remedy is

might be difficult. Nonetheless, we could require that right up front

the beneficial owners be listed, and that the bank tell its customer

that if there are changes, you must notify us.

Is there any problem in doing that? I know there is a problem

in what happens if they lie and don’t follow through, but nonetheless there is some deterrence in just that requirement. Is there any

problem in going that far that you can see offhand, Ms. Warren?

Ms. WARREN. There are no problems that I foresee or that I

would foresee in my own very small business relationships. I would

like to know that. I would think—and this is just a prosecutor’s

view—that a bank, for instance, if it were extending credit, would

certainly want to know that if it is providing these other kinds of

services. It seems appropriate, again, from this limited perspective,

to ask the same questions.

Senator LEVIN. Mr. Myers.

Mr. MYERS. Yes, Senator, I tend to agree with my colleague. I

think where we are today is that your report has shown a lot of

light on what has been viewed as a complicated problem. I don’t

think it has been fully understood, and as Ms. Warren pointed out,

the history here is that banks have been very careful when they

extend credit and they have been a little less careful when they

simply provide services. I think there are some lessons learned—

Senator LEVIN. A little less careful? I think you are being a little

too cautious.

Mr. MYERS. They have been less careful, and I think that is

changing. It does seem to me perfectly reasonable for any bank to

know the owners of another bank they are doing business with.

Senator LEVIN. I want to go back to the question of a moment

ago relative to the beneficial owners being made known to our U.S.

bank when they open up a correspondent bank account.

Isn’t the knowledge of ownership of a customer, in this case a respondent bank, really something that banks should be doing under

the ‘‘know your customer’’ requirement anyway? I guess I should

look first to Mr. Myers on this one.

Mr. MYERS. If the question is knowing who owns the bank with

whom they are doing business—

Senator LEVIN. Yes.

Mr. MYERS. Yes, sir, absolutely.

Senator LEVIN. Since we have ‘‘know your customer’’ requirements, ongoing requirements, that would address the question that

Ms. Warren raised about what happens if they don’t tell you if

there is a change in beneficial ownership. The answer is that then

our ‘‘know your customer’’ effort would have been thwarted and

frustrated. But at least we do have a requirement that our banks

put in place a ‘‘know your customer’’ regime, and presumably that

effort would at least be aimed at knowing if there is a change in

the beneficial ownership of a correspondent bank customer.

Is that accurate, would you say?

132

Mr. MYERS. I think that is accurate. If I might just offer—this

issue does become, as Ms. Warren suggested, a question of peeling

the onion. Our regulators have taken a view that our banks need

to make a risk-based assessment and then make decisions about

how many layers of the onion to peel.

We find in our international discussion there is really no agreed

standard here. We use the term ‘‘know your customer’’ to mean

customer identification at the outset of the account-opening. There

are really no agreed standards about what steps should be taken

on an ongoing relationship. I fully agree with you that our regulators expect our banks to be careful and to keep apprised of who

they are doing business with.

Senator LEVIN. I would like to pursue a question that the Chairman was getting into relative to the exchange of information. When

there is negative information that is forthcoming about what we

call a high-risk foreign bank—that is either a shell bank or an offshore bank or a bank from a jurisdiction that doesn’t have a good

regulatory process—we call those a problem bank or a high-risk

foreign bank.

So when negative information is received about a high-risk foreign bank, for instance that a bank has been indicted or that a

bank is under investigation by an investigatory wing of a government, I know that the regulators issue advisories. But is the kind

of information that I just talked about part of that advisory, where

a bank is under investigation or only where there has been an indictment?

Mr. MYERS. As I understand it, Senator, that kind of information

may very well—almost certainly will inform a decision whether to

issue an advisory and it may be a part of an advisory. I think typically the problem that our banks have expressed through this hearing and to us directly is that they think sometimes the warnings

are too little, too late, because the investigation is already concluded. We have to work that out on a case-by-case basis with our

agencies and the Justice Department that are conducting the investigation.

Senator LEVIN. I want to raise the case of the American International Bank, where before there was any indictment or conviction there were a lot of subpoenas which were issued. So I want

to talk about information short of indictment or conviction.

Law enforcement agencies examining the American International

Bank had issued numerous subpoenas to the bank’s correspondents

for records of the bank and its clients. When the American International Bank tried to open a new correspondent account with a

different U.S. bank, that new correspondent bank had no idea of

the subpoenas and the questionable activity that led to them. Had

the new correspondent bank known, it might have refused to open

an account for the American International Bank.

So I wonder whether or not there are any steps that can be

taken to let U.S. banks know about that kind of a situation without

jeopardizing the investigation. Here, I would include both Ms. Warren and you, Mr. Myers, in this question because we don’t want to

jeopardize investigations. But at that level where subpoenas have

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respondent banks of at least what the current problems are or are

alleged to be?

Ms. Warren, can we start with you on that?

Ms. WARREN. I think it would be a greater problem to alert about

subpoenas. For example, if there are grand jury subpoenas, we

would not be able to share that information. There are often, however, very public indicia that the bank is in trouble. I mean, in

some of the cases cited in the report, there had been forfeitures already effected or freeze orders in place, and those are public information and that information should be shared, in my view, as

swiftly as possible because in the end it just means there will be

more victims over time.

Senator LEVIN. Could you go through some of the records—not

today but perhaps for the record, could you go through some of the

files and experiences of the Justice Department and give us examples of where there were public indicia or other indicia that you

think could legitimately and should legitimately be on that advisory which are currently not now part of, or assumed to be part of

that advisory?

This is a question which our Chairman was getting into in terms

of exchanging of information. Even if the subpoena particularly to

a grand jury can’t be referred to, for reasons that you have given,

there could be, it seems to me, additional items which are expected

to be on an advisory which historically have not or have been overlooked. If perhaps both of you could look through your files and

give us examples of those and how you think that problem could

be addressed so we could get the better of information that was referred to, that would be very helpful.

Ms. WARREN. We will undertake that, and I think maybe in our

review of that information we might also come up with, I would

hope, some further suggestions about how law enforcement could

be more forward-leaning in terms of providing information that is

available.

We recognize that part of law enforcement is making public announcements, providing that information either to the target community or to the citizenry at large to protect victims. Clearly, we

can always do a better job at that.

Senator LEVIN. When we started to investigate the offshore bank

which we heard about this morning, the British Trade and Commerce Bank, staff came across a number of criminal investigations

and prosecutions that dealt with specific incidents at the bank, but

not the bank itself. The bank itself is a major problem. This is

truly a rogue bank, and that may be generous.

Here are some of the incidents: One Federal prosecutor in New

Jersey went after William Koop, a U.S. citizen who had defrauded

his victims and laundered about $12 million through three offshore

banks, including the British Trade and Commerce Bank. The prosecution obtained a guilty plea from Mr. Koop, but no action was

taken relative to the bank.

A second prosecution is underway in Arizona against Benjamin

Cook, a U.S. citizen who is alleged to have defrauded other U.S.

citizens out of $40 million, and who then laundered the money

through a number of banks, including the British Trade and ComVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00143 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
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merce Bank. Again, the prosecution is focusing on the person who

committed the fraud, but not the offshore banks that he used.

Other criminal and SEC investigations are going on in California, Texas, Washington State, and Florida. All are looking at the

possible frauds, but none at the offshore bank or banks that facilitated the frauds by accepting the fraud proceeds with little or no

due diligence.

It seems to me that the prosecutors here—and I am not being

critical of them at all, believe me, because I know the problems

that they go through. But the prosecutors are each sort of touching

a different part of the elephant without anyone taking aim at the

elephant itself.

I am wondering if there is any strategy at the Justice Department to go after the offshore banks that are operating in the

United States through these U.S. bank accounts and acting as repositories in multiple instances of laundered funds. That is the specific question.

Ms. WARREN. There is certainly a general strategy that we look

for banks as corporations, as entities, as defendants themselves if

it appears that they are guilty of wrongdoing. We have prosecuted—and we have a chart that goes on for many pages of numbers of financial institutions that we have proceeded against directly and not just against any particular offender within that

bank.

What you suggest as certainly the collection now of so many instances of wrongdoing from one relatively small bank may suggest,

or more than suggest some rottenness at the very core here. Those

are the kinds of instances that we need to analyze to see if we can

meet our standards for corporate liability proof in a criminal case

against the entity itself. We have found that proceeding in that

way has had an enormously deterrent effect in the banking community, not just in the United States but our efforts against foreign

banks as well, and could have a salutary effect here.

Senator LEVIN. Is there a place where the information is put together that the same offshore bank is being mentioned in numerous criminal investigations or prosecutions, even though it is not

the target of the investigation itself? Is there one place where the

banks that are named in those investigations are accumulated so

that you can see whether or not the bank itself should become a

target?

Ms. WARREN. Between the Treasury Department’s entities and

the Justice Department’s entities, there are several databases that

help us even down to particular accounts in terms of collecting instances where they are misused. We are just learning some facility

with that information and how to use it in a more active way. I

predict that we will get much better in time.

If I just might add a postscript on the instance you raise about

a rogue bank in a series of violations, in order to prove our case

we are going to still need the documentary evidence from that entity or from that jurisdiction, and sometimes that can be very difficult. If we have a mutual legal assistance treaty with the overseeing jurisdiction, we ought to be able to obtain that readily.

If we have other agreements for financial information production,

then we can secure it. But without the documentary corroboration,

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our cases can be very difficult to prove. So there remain some obstacles and we just have to keep working at it.

Senator LEVIN. Should we not allow correspondent accounts from

banks that are licensed by jurisdictions with whom we have no

such treaties or agreements?

Ms. WARREN. Perhaps there are other ways to look at it. That

is one way. Another might be in terms of your ‘‘know your customer’’ rules, an extension of that is to also have an entry on that

who is your representative for service of process here in the United

States so that if, in fact, they are doing business through their correspondent account, they are present for purposes of service of our

process as well to retrieve that information. I think there are many

ways that we could look at this and see what might best help us.

Senator LEVIN. We would welcome all the suggestions from both

of you and your agencies in this effort.

Thank you.

Senator COLLINS. Thank you, Senator Levin.

I want to thank our witnesses of this panel, and I want to second

Senator Levin’s request and urge your assistance in helping us to

strike the right balance as we seek to prevent money laundering,

but to do so in such a way that we don’t needlessly hamper the legitimate operations of the international banking system. I would

encourage you to work very closely with us as we proceed to help

us find that right balance.

I want to thank you both for your testimony this morning. The

two witnesses are excused.

Ms. WARREN. Thank you.

Mr. MYERS. Thank you.

Senator COLLINS. The 3 days of hearings that we have held during the past week on the role of correspondent banking in international money laundering have truly been an eye-opening experience.

Most Americans give little thought to the world of offshore banking at all. If and when they do so, I suspect that they assume, as

I did, that it is a shady world of wealthy criminals and tax evaders

that exists entirely separate and apart from the normal world of

reputable banking institutions in the domestic arena with familiar

and prestigious names that we all know. Such thoughts would only

be half right.

The offshore banking and shell bank world certainly contains

more than its fair share of shady characters and outright criminals.

But these hearings have made very clear that prestigious and reputable American banks with excellent reputations have far too

often failed to escape being indirectly tied to institutions that either knowingly or with their eyes deliberately shut are facilitating

money laundering.

As we have seen, the offshore shell banks and other poorly regulated institutions can often insinuate themselves into the reputable

world of the premiere banks by means of correspondent banking accounts. The Minority’s investigation has provided an important

service in pointing out the vulnerability of our correspondent banking system to abuse by money launderers, and in making clear how

lax due diligence and sloppy oversight by otherwise distinguished

American banks can play right into the hands of criminals.

136

I am pleased to hear that American banks are making important

strides in improving their due diligence and account-opening and

monitoring procedures. I hope, however, that the case studies that

the Minority’s investigation has undertaken will spur them to do

much more to strengthen their procedures. I also believe that we

need an even greater effort by the Federal Government working

with other countries to crack down on international money laundering.

All in all, I hope and believe that the Subcommittee has been

able to contribute in important ways to the goal of ensuring that

our banking industry is made far less vulnerable to abuse by

money launderers and other criminals.

I want to thank all of the witnesses who have participated in the

Subcommittee’s investigation. They have made important contributions to the work of this Subcommittee.

I also would again like to commend Senator Levin and his staff

for their very hard and diligent work on a complex and fascinating

topic, and for all of their efforts in undertaking and leading this

complicated investigation.

Finally, I would like to thank the members of my own Subcommittee staff who also worked very hard on these hearings, especially Eileen Fisher, Claire Barnard, Rena Johnson, Chris Ford,

and Mary Robertson. Their hard work and attention to detail has

also been indispensable in bringing these hearings to fruition.

Senator Levin.

Senator LEVIN. Madam Chairman, first let me thank you for

your invaluable support, both yourself personally and your staff, of

this investigation.

We have already achieved some significant results, including the

delicensing and closure of some rogue banks that should have been

closed a long time ago. We have heightened the awareness in a

number of jurisdictions that do not do an adequate job, to put it

mildly, of controlling their own banks.

But we have a responsibility of controlling our banks and to

make sure that our banks do not unwittingly aid and abet money

laundering through the correspondent accounts that they maintain

with foreign banks. That has been the goal of this investigation. It

is a 450-page report which really is the book now, as far as I can

tell, on the way in which correspondent accounts are being used to

facilitate improper activities by foreign banks.

I can’t say enough about my own staff and their year-long-plus

effort to put this book together. It is an extraordinary contribution

to a very complicated area about which there has been too much

mystery. We have got to rip away that mystique and we have got

to make sure that our banks, our legitimate banks, are not misused

by foreign banks who either are shell banks with no physical presence anywhere or offshore banks which are not allowed to do business with the people who live in the jurisdiction that licenses the

banks or banks that come from jurisdictions that have no strong

regulatory process. We just don’t want them to misuse anymore

their accounts with American banks to take full use of the services

of those banks, including earning interest, including separating

ownership from money, hiding ownership, investing that dirty

money, and so forth.

137

That is our responsibility as a people. We give a lot of very

strongly-held lectures and sermons to other countries about trying

to end corruption. We cannot allow the product of that corruption

to flow through our banks. We prohibit our own corporations from

giving bribes. It is a crime for an American corporation to give a

bribe. We cannot allow that money to flow through and be cleansed

by American banks.

We feel very strongly about the impact of drugs on this society.

We spend billions of dollars trying to stop the flow of drugs into

this country and then dealing with the impact of those drugs when

they do reach our shores. We cannot accept our banks, knowingly

or unwittingly, being the depository of dirty drug money.

There have been some steps taken, and as a result of this investigation there have been some additional steps taken, but we have

a long way to go regulatory-wise and in terms of our laws. We will

be working very hard on trying to close the loopholes in our laws,

trying to strengthen our laws, trying to, in my judgment at least,

end correspondent accounts for shell banks, trying to tighten up on

the use of correspondent accounts for offshore banks and for banks

that are licensed in jurisdictions which have no effective regulation.

We have to try to be sure that the beneficial owners of these accounts are made known to our banks so that we have access

through subpoenas and through lawsuits to people who do perpetrate fraud and then try to cleanse their money through our

banks, or who do take bribe money and try to cleanse the money,

or who make drug money and then try to cleanse it through our

banks, and so forth.

That is our responsibility. It is a heavy responsibility. Our Chairman very properly points out that we are going to attempt to do

that in way which does not impact on the legitimate operations of

legitimate banks, but that is surely our goal. No one should mistake either our intention to get after the misuse of our correspondent accounts or our determination that in getting after the

misuse that we are not going to be doing damage to the legitimate

use of correspondent accounts. Both of those goals are in mind.

Again, I want to thank our Chairman for her support of this investigation. We could not have gotten here without your full support or get to where we are going without it, and I again thank you

and your staff for that support.

Senator COLLINS. Thank you, Senator Levin.

The Subcommittee hearings are now adjourned.

[Whereupon, at 12:18 p.m., the Subcommittee was adjourned.]

(139)

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CORRESPONDENT BANKING:

A GATEWAY FOR MONEY LAUNDERING

A REPORT BY THE

MINORITY STAFF OF THE

PERMANENT SUBCOMMITTEE ON

INVESTIGATIONS

274

C O N T E N T S

I. Executive Summary ......................................................................................... 277

II. Minority Staff Investigation Into Correspondent Banking ................. 284

III. Anti-Money Laundering Obligations ........................................................ 285

IV. Correspondent Banking Industry in the United States ...................... 287

A. Correspondent Banking Products and Services ........................................ 288

B. Three Categories of High Risk Banks ........................................................ 289

Shell Banks .............................................................................................. 289

Offshore Banks ........................................................................................ 290

Banks in Non-Cooperating Jurisdictions ............................................... 292

C. Survey on Correspondent Banking ............................................................ 293

D. Internet Gambling ....................................................................................... 298

V. Why Correspondent Banking is Vulnerable to Money Laundering ... 301

A. Culture of Lax Due Diligence ..................................................................... 301

B. Role of Correspondent Bankers .................................................................. 307

C. Nested Correspondents ............................................................................... 310

D. Foreign Jurisdictions with Weak Banking or Accounting Practices ....... 311

E. Bank Secrecy ................................................................................................ 314

F. Cross Border Difficulties ............................................................................. 316

G. U.S. Legal Barriers to Seizing Funds in U.S. Correspondent Accounts . 316

VI. How an Offshore Bank Launders Money Through a U.S. Correspondent Account: The Lessons of Guardian Bank ......................... 318

VII. Conclusions and Recommendations ........................................................ 330

VIII. Ten Case Histories ..................................................................................... 333

No. 1: American International Bank .............................................................. 333

No. 2: Caribbean American Bank ................................................................... 333

No. 3: Overseas Development Bank and Trust Company .............................. 333

A. THE FACTS ................................................................................................. 334

(1) American International Bank Ownership and Management ............ 334

(2) Financial Information and Primary Activities .................................... 334

(3) AIB Correspondents .............................................................................. 336

(4) AIB Operations and Anti-Money Laundering Controls ..................... 336

(5) Regulatory Oversight ............................................................................ 337

(6) Money Laundering and Fraud Involving AIB ..................................... 337

(a) The Forum Investment Scheme ...................................................... 337

(b) Nested Correspondent Banking at AIB .......................................... 343

(c) Internet Gambling/Sports Betting .................................................. 349

(d) Loans/Self Dealing ........................................................................... 350

(7) Correspondent Accounts at U.S. Banks ............................................... 353

(a) Bank of America ............................................................................... 353

(b) Toronto Dominion Bank (New York Branch) ................................. 357

(c) Chase Manhattan Bank ................................................................... 358

(d) Popular Bank of Florida (now BAC Florida Bank) ....................... 362

(e) Barnett Bank .................................................................................... 365

(8) AIB’s Relationship with Overseas Development Bank and Trust

Company ................................................................................................ 367

(a) The Koop Fraud ............................................................................... 370

(b) Financial Statement ......................................................................... 372

(c) ODBT’s Correspondent Relationships ............................................. 373

B. THE ISSUES ................................................................................................ 377

No. 4: British Trade and Commerce Bank ..................................................... 386

A. THE FACTS ................................................................................................. 386

(1) BTCB Ownership and Management .................................................... 386

(2) BTCB Financial Information ................................................................ 391

(3) BTCB Correspondents ........................................................................... 394

(4) BTCB Anti-Money Laundering Controls ............................................. 394

(5) BTCB Affiliates ...................................................................................... 396

(6) BTCB Major Lines of Business ............................................................ 398

(7) Money Laundering and Fraud Involving BTCB ................................. 404

275

(8) Correspondent Accounts at U.S. Banks ............................................... 408

(a) Banco Industrial de Venezuela (Miami Office) .............................. 409

(b) Security Bank N.A. .......................................................................... 416

(c) First Union National Bank .............................................................. 424

(d) Other U.S. Banks ............................................................................. 431

B. THE ISSUES ................................................................................................ 431

No. 5: Hanover Bank ........................................................................................ 439

A. THE FACTS ................................................................................................. 439

(1)Hanover Bank Ownership and Management ....................................... 439

(2) Hanover Bank Financial Information .................................................. 444

(3) Hanover Bank Correspondents ............................................................ 445

(4) Hanover Bank Operations and Anti-Money Laundering Controls .... 447

(5) Regulatory Oversight of Hanover Bank .............................................. 454

(6) Money Laundering and Fraud Involving Hanover Bank ................... 455

(7) Correspondent Account at Harris Bank International ....................... 467

B. THE ISSUES ................................................................................................ 470

No. 6: British Bank of Latin America ............................................................. 474

A. THE FACTS ................................................................................................. 474

(1) BBLA Ownership ................................................................................... 474

(2) BBLA Principal Lines of Business ....................................................... 475

(3) BBLA Correspondents ........................................................................... 477

(4) BBLA Management and Operations .................................................... 477

(5) Money Laundering Involving BBLA .................................................... 482

(6) Closure of BBLA .................................................................................... 487

(7) Correspondent Account at Bank of New York .................................... 487

B. THE ISSUES ................................................................................................ 490

No. 7: European Bank ...................................................................................... 495

A. THE FACTS ................................................................................................. 495

(1) European Bank Ownership and Management .................................... 495

(2) European Bank Financial Information and Primary Activities ........ 496

(3) European Bank Correspondents .......................................................... 498

(4) European Bank Operations and Anti-Money Laundering Controls .. 499

(5) Regulatory Oversight of European Bank ............................................ 501

(6) Money Laundering and Fraud Involving European Bank ................. 504

(7) Correspondent Account at Citibank ..................................................... 509

B. THE ISSUES ................................................................................................ 514

No. 8: Swiss American Bank and Swiss American National Bank ............. 521

A. THE FACTS ................................................................................................. 521

(1) Ownership and Management ............................................................... 521

(2) Financial Information and Primary Activities .................................... 523

(3) Correspondents ...................................................................................... 523

(4) Operations and Anti-Money Laundering Controls ............................. 524

(5) Regulatory Oversight ............................................................................ 524

(6) Money Laundering and Fraud Involving SAB/SANB ........................ 525

(a) Controversial Leadership ................................................................ 525

(b) The Fitzgerald Case—Drugs and Terrorist Money ....................... 527

(c) The Gherman Fraud ......................................................................... 531

(d) The DeBella Fraud ........................................................................... 533

(e) The Fortuna Alliance Fraud ............................................................ 538

(f) Other Frauds/Questionable Accounts .............................................. 541

(g) Internet Gambling/Sports Betting .................................................. 544

(7) Correspondent Accounts at U.S. Banks ............................................... 543

(a) Bank of New York ............................................................................ 543

(b) Bank of America ............................................................................... 553

(c) Chase Manhattan Bank ................................................................... 560

B. THE ISSUES ................................................................................................ 576

No. 9 and No. 10: M.A. Bank and Federal Bank ......................................... 579

A. THE FACTS ................................................................................................. 580

M.A. Bank

(1) M.A. Bank Ownership and Management ............................................ 580

(2) Financial Information and Primary Activities .................................... 581

(3) M.A. Bank’s Correspondents ................................................................ 582

(4) M.A. Bank’s Operations and Anti-Money Laundering Controls ........ 582

(5) Regulatory Oversight ............................................................................ 582

(6) Money Laundering and Fraud Involving M.A. Bank ......................... 584

276

(a) Laundering of Drug Proceeds through M.A. Bank ........................ 584

(b) Unsound and Illegal Banking Practices ......................................... 588

(7) Correspondent Account at Citibank ..................................................... 593

Federal Bank

(1) Grupo Moneta and Banco Republica ................................................... 605

(2) Federal Bank Ownership ...................................................................... 606

(3) Financial Information and Primary Activities .................................... 607

(4) CEI ......................................................................................................... 609

(5) Correspondent Account at Citibank ..................................................... 610

(6) Regulatory Oversight ............................................................................ 611

(7) Central Bank of Argentina Concerns .................................................. 613

(8) American Exchange Company .............................................................. 619

(9) Suspicious Activity At Federal Bank ................................................... 620

B. THE ISSUES ................................................................................................ 624

APPENDIX

(1) Bank of New York Scandal ................................................................... 644

(2) Koop Fraud ............................................................................................ 646

(3) Cook Fraud ............................................................................................ 654

(4) Gold Chance Fraud ............................................................................... 659

(5) $10 Million CD Interpleader ................................................................ 665

(6) Other Suspect Transactions At BTCB: KPJ Trust, Michael Gendreau, Scott Brett, Global/Vector Medical Technologies ................... 671

(7) Taves Fraud and the Benford Account ................................................ 675

(8) IPC Fraud .............................................................................................. 686

(277)

1See ‘‘Private Banking and Money Laundering: A Case Study of Opportunities and

Vulnerabilities,’’ S. Hrg. 106–428 (November 9 and 10, 1999), Minority Staff report at 872.

MINORITY STAFF OF THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

REPORT ON

CORRESPONDENT BANKING:

A GATEWAY FOR MONEY LAUNDERING

February 5, 2001

U.S. banks, through the correspondent accounts they provide to

foreign banks, have become conduits for dirty money flowing into

the American financial system and have, as a result, facilitated illicit enterprises, including drug trafficking and financial frauds.

Correspondent banking occurs when one bank provides services to

another bank to move funds, exchange currencies, or carry out

other financial transactions. Correspondent accounts in U.S. banks

give the owners and clients of poorly regulated, poorly managed,

sometimes corrupt, foreign banks with weak or no anti-money

laundering controls direct access to the U.S. financial system and

the freedom to move money within the United States and around

the world.

This report summarizes a year-long investigation by the Minority

Staff of the U.S. Senate Permanent Subcommittee on Investigations, under the leadership of Ranking Democrat Senator Carl

Levin, into correspondent banking and its use as a tool for laundering money. It is the second of two reports compiled by the Minority Staff at Senator Levin’s direction on the U.S. banking system’s vulnerabilities to money laundering. The first report, released in November 1999, resulted in Subcommittee hearings on

the money laundering vulnerabilities in the private banking activities of U.S. banks.1

I. Executive Summary

Many banks in the United States have established correspondent

relationships with high risk foreign banks. These foreign banks

are: (a) shell banks with no physical presence in any country for

conducting business with their clients; (b) offshore banks with licenses limited to transacting business with persons outside the

licensing jurisdiction; or (c) banks licensed and regulated by jurisdictions with weak anti-money laundering controls that invite

banking abuses and criminal misconduct. Some of these foreign

banks are engaged in criminal behavior, some have clients who are

engaged in criminal behavior, and some have such poor anti-money

laundering controls that they do not know whether or not their clients are engaged in criminal behavior.

278

2The term ‘‘U.S. bank’’ refers in this report to any bank authorized to conduct banking activities in the United States, whether or not the bank or its parent corporation is domiciled in the

United States. 3The term ‘‘offshore bank’’ is used in this report to refer to banks whose licenses bar them

from transacting business with the citizens of their own licensing jurisdiction or bar them from

transacting business using the local currency of the licensing jurisdiction. See also the International Narcotics Control Strategy Report issued by the U.S. Department of State (March

2000)(hereinafter ‘‘INCSR 2000’’), ‘‘Offshore Financial Centers’’ at 565–77. 4The term ‘‘respondent bank’’ is used in this report to refer to the client of the bank offering

correspondent services. The bank offering the services is referred to as the ‘‘correspondent

bank.’’ All of the respondent banks examined in this investigation are foreign banks.

These high risk foreign banks typically have limited resources

and staff and use their correspondent bank accounts to conduct operations, provide client services, and move funds. Many deposit all

of their funds in, and complete virtually all transactions through,

their correspondent accounts, making correspondent banking integral to their operations. Once a correspondent account is open in

a U.S. bank, not only the foreign bank but its clients can transact

business through the U.S. bank. The result is that the U.S. correspondent banking system has provided a significant gateway into

the U.S. financial system for criminals and money launderers.

The industry norm today is for U.S. banks 2 to have dozens, hundreds, or even thousands of correspondent relationships, including

a number of relationships with high risk foreign banks. Virtually

every U.S. bank examined by the Minority Staff investigation had

accounts with offshore banks,3 and some had relationships with

shell banks with no physical presence in any jurisdiction.

High risk foreign banks have been able to open correspondent accounts at U.S. banks and conduct their operations through their

U.S. accounts, because, in many cases, U.S. banks fail to adequately screen and monitor foreign banks as clients.

The prevailing principle among U.S. banks has been that any

bank holding a valid license issued by a foreign jurisdiction qualifies for a correspondent account, because U.S. banks should be able

to rely on the foreign banking license as proof of the foreign bank’s

good standing. U.S. banks have too often failed to conduct careful

due diligence reviews of their foreign bank clients, including obtaining information on the foreign bank’s management, finances,

reputation, regulatory environment, and anti-money laundering efforts. The frequency of U.S. correspondent relationships with high

risk banks, as well as a host of troubling case histories uncovered

by the Minority Staff investigation, belie banking industry assertions that existing policies and practices are sufficient to prevent

money laundering in the correspondent banking field.

For example, several U.S. banks were unaware that they were

servicing respondent banks 4 which had no office in any location,

were operating in a jurisdiction where the bank had no license to

operate, had never undergone a bank examination by a regulator,

or were using U.S. correspondent accounts to facilitate crimes such

as drug trafficking, financial fraud or Internet gambling. In other

cases, U.S. banks did not know that their respondent banks lacked

basic fiscal controls and procedures and would, for example, open

accounts without any account opening documentation, accept deposits directed to persons unknown to the bank, or operate without

written anti-money laundering procedures. There are other cases in

which U.S. banks lacked information about the extent to which reVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00288 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
279

5 Cash management services are non-credit related banking services such as providing interest-bearing or demand deposit accounts in one or more currencies, international wire transfers

of funds, check clearing, check writing, or foreign exchange services.

spondent banks had been named in criminal or civil proceedings

involving money laundering or other wrongdoing. In several instances, after being informed by Minority Staff investigators about

a foreign bank’s history or operations, U.S. banks terminated the

foreign bank’s correspondent relationship.

U.S. banks’ ongoing anti-money laundering oversight of their correspondent accounts is often weak or ineffective. A few large banks

have developed automated monitoring systems that detect and report suspicious account patterns and wire transfer activity, but

they appear to be the exception rather than the rule. Most U.S.

banks appear to rely on manual reviews of account activity and to

conduct limited oversight of their correspondent accounts. One

problem is the failure of some banks to conduct systematic antimoney laundering reviews of wire transfer activity, even though

the majority of correspondent bank transactions consist of incoming

and outgoing wire transfers. And, even when suspicious transactions or negative press reports about a respondent bank come to

the attention of a U.S. correspondent bank, in too many cases the

information does not result in a serious review of the relationship

or concrete actions to prevent money laundering.

Two due diligence failures by U.S. banks are particularly noteworthy. The first is the failure of U.S. banks to ask the extent to

which their foreign bank clients are allowing other foreign banks

to use their U.S. accounts. On numerous occasions, high risk foreign banks gained access to the U.S. financial system, not by opening their own U.S. correspondent accounts, but by operating

through U.S. correspondent accounts belonging to other foreign

banks. U.S. banks rarely ask their client banks about their correspondent practices and, in almost all cases, remain unaware of

their respondent bank’s own correspondent accounts. In several instances, U.S. banks were surprised to learn from Minority Staff investigators that they were providing wire transfer services or handling Internet gambling deposits for foreign banks they had never

heard of and with whom they had no direct relationship. In one instance, an offshore bank was allowing at least a half dozen offshore

shell banks to use its U.S. accounts. In another, a U.S. bank had

discovered by chance that a high risk foreign bank it would not

have accepted as a client was using a correspondent account the

U.S. bank had opened for another foreign bank.

The second failure is the distinction U.S. banks make in their

due diligence practices between foreign banks that have few assets

and no credit relationship, and foreign banks that seek or obtain

credit from the U.S. bank. If a U.S. bank extends credit to a foreign

bank, it usually will evaluate the foreign bank’s management, finances, business activities, reputation, regulatory environment and

operating procedures. The same evaluation usually does not occur

where there are only fee-based services, such as wire transfers or

check clearing. Since U.S. banks usually provide cash management

services5 on a fee-for-service basis to high risk foreign banks and

infrequently extend credit, U.S. banks have routinely opened and

maintained correspondent accounts for these banks based on inadVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00289 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
280

equate due diligence reviews. Yet these are the very banks that

should be carefully scrutinized. Under current practice in the

United States, high risk foreign banks in non-credit relationships

seem to fly under the radar screen of most U.S. banks’ anti-money

laundering programs.

The failure of U.S. banks to take adequate steps to prevent

money laundering through their correspondent bank accounts is

not a new or isolated problem. It is longstanding, widespread and

ongoing.

The result of these due diligence failures has made the U.S. correspondent banking system a conduit for criminal proceeds and

money laundering for both high risk foreign banks and their criminal clients. Of the ten case histories investigated by the Minority

Staff, numerous instances of money laundering through foreign

banks’ U.S. bank accounts have been documented, including:

—laundering illicit proceeds and facilitating crime by accepting

deposits or processing wire transfers involving funds that the

high risk foreign bank knew or should have known were associated with drug trafficking, financial fraud or other wrongdoing;

—conducting high yield investment scams by convincing investors to wire transfer funds to the correspondent account to

earn high returns and then refusing to return any monies to

the defrauded investors;

—conducting advance-fee-for-loan scams by requiring loan applicants to wire transfer large fees to the correspondent account,

retaining the fees, and then failing to issue the loans;

—facilitating tax evasion by accepting client deposits, commingling them with other funds in the foreign bank’s correspondent account, and encouraging clients to rely on bank

and corporate secrecy laws in the foreign bank’s home jurisdiction to shield the funds from U.S. tax authorities; and

—facilitating Internet gambling, illegal under U.S. law, by using

the correspondent account to accept and transfer gambling proceeds.

While some U.S. banks have moved to conduct a systematic review of their correspondent banking practices and terminate questionable correspondent relationships, this effort is usually relatively recent and is not industry-wide.

Allowing high risk foreign banks and their criminal clients access

to U.S. correspondent bank accounts facilitates crime, undermines

the U.S. financial system, burdens U.S. taxpayers and consumers,

and fills U.S. court dockets with criminal prosecutions and civil litigation by wronged parties. It is time for U.S. banks to shut the

door to high risk foreign banks and eliminate other abuses of the

U.S. correspondent banking system.

281

HIGH RISK FOREIGN BANKS

EXAMINED BY PSI MINORITY STAFF INVESTIGATION

NAME OF BANK CURRENT STATUS LICENSE AND OPERATION U.S. CORRESPONDENTS EXAMINED MONEY LAUNDERIN

CONCERNS

American International Bank (AIB)1992–1998

In Receivership • Licensed in Antigua/Barbuda

• Offshore• Physical presence in Antigua

BAC of FloridaBank of AmericaBarnett BankChase Manhattan BankToronto DominionUnion Bank of Jamaica

• Financial fraud mone• Nested corresponden• Internet gambling

British Bank of Latin America (BBLA)1981–2000

Closed • Licensed by Bahamas

• Offshore• Physical presence in Bahamas

and Columbia

• Wholly owned subsidiary of

Lloyds TSB Bank

Bank of New York • Drug money from Bla

Market Peso Exchan

British Trade and Commerce Bank

(BTCB)

1997–present

Open • Licensed by Dominica

• Offshore• Physical presence in Dominica

Banco Industrial de Venezuela

(Miami)

First Union National BankSecurity Bank N.A.

• Financial fraud mone• High yield investmen• Nested corresponden• Internet gambling

Caribbean American Bank (CAB)1994–1997

In Liquidation • Licensed by Antigua/Barbuda

• Offshore• No physical presence

U.S. correspondents of AIB • Financial fraud mone

• Nested corresponden• Shell bank

European Bank1972–present

Open • Licensed by Vantuatu

• Onshore• Physical presence in Vantuatu

ANZ Bank (New York)Citibank

• Credit card fraud mo

Federal Bank1992–present

Open • Licensed by Bahamas

• Offshore• No physical presence

Citibank • Bribe money

• Shell bank

HIGH RISK FOREIGN BANKS

EXAMINED BY PSI MINORITY STAFF INVESTIGATION—Continued

NAME OF BANK CURRENT STATUS LICENSE AND OPERATION U.S. CORRESPONDENTS EXAMINED MONEY LAUNDERIN

CONCERNS

Guardian Bank and Trust (Cayman) Ltd.1984–1995

Closed • Licensed by Cayman Islands

• Offshore• Physical presence in Cayman Islands

Bank of New York • Financial fraud mone

• Tax evasion

Hanover Bank1992–present

Open • Licensed by Antigua/Barbuda

• Offshore• No physical presence

Standard Bank (Jersey) Ltd.’s

U.S. correspondent, HarrisBank International (New York)

• Financial fraud mone• Nested corresponden• Shell bank

M.A. Bank1991–present

Open • Licensed by Cayman Islands

• Offshore• No physical presence

CitibankUnion Bank of Switzerland (New

York)

• Drug money• Shell bank

Overseas Development Bank and Trust

(ODBT)

1996–present

Open • Licensed by Dominica

• Offshore• Physical presence in Dominica

(formerly in Antigua)

U.S. correspondents of AIBAmTrade International (Florida)Bank One

• Financial fraud mone• Nested corresponden

Swiss American Bank (SAB)1983–present

Open • Licensed by Antigua/Barbuda

• Offshore• Physical presence in Antigua

Bank of AmericaChase Manhattan Bank

• Financial fraud mone• Internet gambling• Drug and illegal arms 

money

Swiss American National Bank (SANB)1981–present

Open • Licensed by Antigua/Barbuda

• Onshore• Physical presence in Antigua

Bank of New YorkChase Manhattan Bank

• Financial fraud mone• Drug and illegal arms 

money

Prepared by Minority Staff of the U.S. Senate Permanent Subcommittee on Investigations, January 2001.

284

II. Minority Staff Investigation Into Correspondent Banking

To examine the vulnerability of correspondent banking to money

laundering, the Minority Staff investigation interviewed experts;

reviewed relevant banking laws, regulations and examination

manuals; surveyed U.S. banks about their correspondent banking

practices; reviewed court proceedings and media reports on cases of

money laundering and correspondent banking; and developed ten

detailed case histories of money laundering misconduct involving

U.S. correspondent accounts. The 1-year investigation included

hundreds of interviews and the collection and review of over 25

boxes of documentation, including subpoenaed materials from 19

U.S. banks.

The Minority Staff began its investigation by interviewing a variety of anti-money laundering and correspondent banking experts.

Included were officials from the U.S. Federal Reserve, U.S. Department of Treasury, Internal Revenue Service, Office of the Comptroller of the Currency, Financial Crimes Enforcement Network

(‘‘FinCEN’’), U.S. Secret Service, U.S. State Department, and U.S.

Department of Justice. Minority Staff investigators also met with

bankers from the American Bankers Association, Florida International Bankers Association, and banking groups in the Bahamas

and Cayman Islands, and interviewed at length a number of U.S.

bankers experienced in monitoring correspondent accounts for suspicious activity. Extensive assistance was also sought from and provided by government and law enforcement officials in Antigua and

Barbuda, Argentina, Australia, Bahamas, Cayman Islands, Dominica, Jersey, Ireland, the United Kingdom, and Vanuatu.

Due to a paucity of information about correspondent banking

practices in the United States, the Minority Staff conducted a survey of 20 banks with active correspondent banking portfolios. The

18-question survey sought information about the U.S. banks’ correspondent banking clients, procedures, and anti-money laundering

safeguards. The survey results are described in Chapter IV.

To develop specific information on how correspondent banking is

used in the United States to launder illicit funds, Minority Staff investigators identified U.S. criminal and civil money laundering indictments and pleadings which included references to U.S. correspondent accounts. Using these public court pleadings as a starting point, the Minority Staff identified the foreign banks and U.S.

banks involved in the facts of the case, and the circumstances associated with how the foreign banks’ U.S. correspondent accounts

became conduits for laundered funds. The investigation obtained

relevant court proceedings, exhibits and related documents, subpoenaed U.S. bank documents, interviewed U.S. correspondent bankers and, when possible, interviewed foreign bank officials and government personnel. From this material, the investigation examined

how foreign banks opened and used their U.S. correspondent accounts and how the U.S. banks monitored or failed to monitor the

foreign banks and their account activity.

The investigation included an interview of a U.S. citizen who formerly owned a bank in the Cayman Islands, has pleaded guilty to

money laundering, and was willing to explain the mechanics of how

his bank laundered millions of dollars for U.S. citizens through

U.S. correspondent accounts. Another interview was with a U.S.

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6See, for example, ‘‘German Officials Investigate Possible Money Laundering,’’ Wall Street

Journal (1/16/01)(Germany); ‘‘Prosecutors set to focus on Estrada bank records,’’ Business World

(1/15/01)(Philippines); Canada’s Exchange Bank & Trust Offers Look at ‘Brass-Plate’ Banks,’’ Wall Street Journal (12/29/00)(Canada, Nauru, St. Kitts-Nevis); ‘‘Peru’s Montesinos hires lawyer

in Switzerland to keep bank accounts secret,’’ Agence France Presse (12/11/00)(Peru, Switzerland); ‘‘The Billion Dollar Shack,’’ New York Times Magazine (12/10/00) (Nauru, Russia); ‘‘Launderers put UK banks in a spin,’’ Financial Times (London)(United Kingdom, Luxembourg,

Switzerland, Nigeria); ‘‘Croats Find Treasury Plundered,’’ Washington Post (6/13/00)(Croatia);

‘‘Arrests and millions missing in troubled offshore bank,’’ Associated Press (9/11/00)(Grenada);

‘‘Judgement Daze,’’ Sunday Times (London) (10/18/98)(Ireland); ‘‘That’s Laird To You, Mister,’’

New York Times (2/27/00)(multiple countries). 7See, for example, 31 C.F.R. §§ 103.11 and 103.21 et seq. CTRs identify cash transactions

above a specified threshold; SARs identify possibly illegal transactions observed by bank personnel.

citizen who has pleaded guilty to conspiracy to commit money laundering and was willing to explain how he used three offshore banks

to launder illicit funds from a financial investment scheme that defrauded hundreds of U.S. citizens. Other interviews were with foreign bank owners who explained how their bank operated, how

they used correspondent accounts to transact business, and how

their bank became a conduit for laundered funds. Numerous interviews were conducted with U.S. bank officials.

Because the investigation began with criminal money laundering

indictments in the United States, attention was directed to foreign

banks and jurisdictions known to U.S. criminals. The case histories

featured in this report are not meant to be interpreted as identifying the most problematic banks or jurisdictions. To the contrary,

a number of the jurisdictions identified in this report have taken

significant strides in strengthening their banking and anti-money

laundering controls. The evidence indicates that equivalent correspondent banking abuses may be found throughout the international banking community,6 and that measures need to be taken

in major financial centers throughout the world to address the

types of money laundering risks identified in this report.

III. Anti-Money Laundering Obligations

Two laws lay out the basic anti-money laundering obligations of

all United States banks. First is the Bank Secrecy Act which, in

section 5318(h) of Title 31 in the U.S. Code, requires all U.S. banks

to have anti-money laundering programs. It states:

In order to guard against money laundering through financial institutions, the Secretary [of the Treasury] may require financial

institutions to carry out anti-money laundering programs, including at a minimum—(A) the development of internal policies, procedures, and controls, (B) the designation of a compliance officer,

(C) an ongoing employee training program, and (D) an independent audit function to test programs.

The Bank Secrecy Act also authorizes the U.S. Department of the

Treasury to require financial institutions to file reports on currency

transactions and suspicious activities, again as part of U.S. efforts

to combat money laundering. The Treasury Department has accordingly issued regulations and guidance requiring U.S. banks to

establish anti-money laundering programs and file certain currency

transaction reports (‘‘CTRs’’) and suspicious activity reports

(‘‘SARs’’).7

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8 ‘‘Bank Secrecy Act/Anti-Money Laundering Handbook’’ (September 2000), at 22. 9 Id.

The second key law is the Money Laundering Control Act of

1986, which was enacted partly in response to hearings held by the

Permanent Subcommittee on Investigations in 1985. This law was

the first in the world to make money laundering an independent

crime. It prohibits any person from knowingly engaging in a financial transaction which involves the proceeds of a ‘‘specified unlawful activity.’’ The law provides a list of specified unlawful activities,

including drug trafficking, fraud, theft and bribery.

The aim of these two statutes is to enlist U.S. banks in the fight

against money laundering. Together they require banks to refuse

to engage in financial transactions involving criminal proceeds, to

monitor transactions and report suspicious activity, and to operate

active anti-money laundering programs. Both statutes have been

upheld by the Supreme Court.

Recently, U.S. bank regulators have provided additional guidance

to U.S. banks about the anti-money laundering risks in correspondent banking and the elements of an effective anti-money

laundering program. In the September 2000 ‘‘Bank Secrecy Act/

Anti-Money Laundering Handbook,’’ the Office of the Comptroller

of the Currency (OCC) deemed international correspondent banking a ‘‘high-risk area’’ for money laundering that warrants ‘‘heightened scrutiny.’’ The OCC Handbook provides the following antimoney laundering considerations that a U.S. bank should take into

account in the correspondent banking field:

A bank must exercise caution and due diligence in determining

the level of risk associated with each of its correspondent accounts. Information should be gathered to understand fully the

nature of the correspondent’s business. Factors to consider include the purpose of the account, whether the correspondent

bank is located in a bank secrecy or money laundering haven (if

so, the nature of the bank license, i.e., shell/offshore bank, fully

licensed bank, or an affiliate/subsidiary of a major financial institution), the level of the correspondent’s money laundering prevention and detection efforts, and the condition of bank regulation and supervision in the correspondent’s country.8

The OCC Handbook singles out three activities in correspondent

accounts that warrant heightened anti-money laundering scrutiny

and analysis:

Three of the more common types of activity found in international correspondent bank accounts that should receive heightened scrutiny are funds (wire) transfer[s], correspondent accounts used as ‘‘payable through accounts’’ and ‘‘pouch/cash letter

activity.’’ This heightened risk underscores the need for effective

and comprehensive systems and controls particular to these

types of accounts.9

With respect to wire transfers, the OCC Handbook provides the

following additional guidance:

Although money launderers use wire systems in many ways,

most money launderers aggregate funds from different sources

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10 Id. at 23. 11Similar correspondent banking relationships are also often established between domestic

banks, such as when a local domestic bank opens an account at a larger domestic bank located

in the country’s financial center. 12 International correspondent banking is a major banking activity in the United States in

part due to the popularity of the U.S. dollar. U.S. dollars are one of a handful of major currencies accepted throughout the world. They are also viewed as a stable currency, less likely

to lose value over time and, thus, a preferred vehicle for savings, trade and investment. Since

U.S. dollars are also the preferred currency of U.S. residents, foreign companies and individuals

seeking to do business in the United States may feel compelled to use U.S. dollars.

In the money laundering world, U.S. dollars are popular for many of the same reasons. In

addition, U.S. residents targeted by financial frauds often deal only in U.S. dollars, and any perContinued

and move them through accounts at different banks until their

origin cannot be traced. Most often they are moved out of the

country through a bank account in a country where laws are designed to facilitate secrecy, and possibly back into the United

States. . . . Unlike cash transactions that are monitored closely,

. . . [wire transfer systems and] a bank’s wire room are designed

to process approved transactions quickly. Wire room personnel

usually have no knowledge of the customer or the purpose of the

transaction. Therefore, other bank personnel must know the

identity and business of the customer on whose behalf they approve the funds transfer to prevent money launderers from using

the wire system with little or no scrutiny. Also, review or monitoring procedures should be in place to identify unusual funds

transfer activity.10

IV. Correspondent Banking Industry in the United States

Correspondent banking is the provision of banking services by

one bank to another bank. It is a lucrative and important segment

of the banking industry. It enables banks to conduct business and

provide services for their customers in jurisdictions where the

banks have no physical presence. For example, a bank that is licensed in a foreign country and has no office in the United States

may want to provide certain services in the United States for its

customers in order to attract or retain the business of important

clients with U.S. business activities. Instead of bearing the costs of

licensing, staffing and operating its own offices in the United

States, the bank might open a correspondent account with an existing U.S. bank. By establishing such a relationship, the foreign

bank, called a respondent, and through it, its customers, can receive many or all of the services offered by the U.S. bank, called

the correspondent.11

Today, banks establish multiple correspondent relationships

throughout the world so they may engage in international financial

transactions for themselves and their clients in places where they

do not have a physical presence. Many of the largest international

banks located in the major financial centers of the world serve as

correspondents for thousands of other banks. Due to U.S. prominence in international trade and the high demand for U.S. dollars

due to their overall stability, most foreign banks that wish to provide international services to their customers have accounts in the

United States capable of transacting business in U.S. dollars.

Those that lack a physical presence in the United States will do so

through correspondent accounts, creating a large market for those

services.12

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petrator of a fraud planning to take their money must be able to process U.S. dollar checks and

wire transfers. The investigation found that foreign offshore banks often believe wire transfers

between U.S. banks receive less money laundering scrutiny than wire transfers involving an offshore jurisdiction and, in order to take advantage of the lesser scrutiny afforded U.S. bank interactions, prefer to keep their funds in a U.S. correspondent account and transact business

through their U.S. bank. In fact, all of the foreign banks examined in the Minority Staff investigation characterized U.S. dollars as their preferred currency, all sought to open U.S. dollar accounts, and all used their U.S. dollar accounts much more often than their other currency accounts. 13 ‘‘Top 75 Correspondent Bank Holding Companies,’’ The American Banker (12/8/99) at 14. 14 ‘‘Payable through accounts’’ allow a respondent bank’s clients to write checks that draw directly on the respondent bank’s correspondent account. See Advisory Letter 95–3, issued by the

Office of the Comptroller of the Currency identifying them as high risk accounts for money laundering. Relatively few banks offer these accounts at the present time. 15 ‘‘These funds transfer systems include the Society for Worldwide Interbank Financial Telecommunications (‘‘SWIFT’’), the Clearing House Interbank Payments System (‘‘CHIPS’’), and the

United States Federal Wire System (‘‘Fedwire’’).

Large correspondent banks in the U.S. manage thousands of correspondent relationships with banks in the United States and

around the world. Banks that specialize in international funds

transfers and process large numbers and dollar volumes of wire

transfers daily are sometimes referred to as money center banks.

Some money center banks process as much as $1 trillion in wire

transfers each day. As of mid-1999, the top five correspondent bank

holding companies in the United States held correspondent account

balances exceeding $17 billion; the total correspondent account balances of the 75 largest U.S. correspondent banks was $34.9 billion.13

A. Correspondent Banking Products and Services

Correspondent banks often provide their respondent banks with

an array of cash management services, such as interest-bearing or

demand deposit accounts in one or more currencies, international

wire transfers of funds, check clearing, payable through accounts,14

and foreign exchange services. Correspondent banks also often provide an array of investment services, such as providing their respondent banks with access to money market accounts, overnight

investment accounts, certificates of deposit, securities trading accounts, or other accounts bearing higher rates of interest than are

paid to non-bank clients. Along with these services, some correspondent banks offer computer software programs that enable

their respondent banks to complete various transactions, initiate

wire transfers, and gain instant updates on their account balances

through their own computer terminals.

With smaller, less well-known banks, a correspondent bank may

limit its relationship with the respondent bank to non-credit, cash

management services. With respondent banks that are judged to be

secure credit risks, the correspondent bank may also afford access

to a number of credit-related products. These services include

loans, daylight or overnight extensions of credit for account transactions, lines of credit, letters of credit, merchant accounts to process credit card transactions, international escrow accounts, and

other trade and finance-related services.

An important feature of most correspondent relationships is providing access to international funds transfer systems.15 These systems facilitate the rapid transfer of funds across international lines

and within countries. These transfers are accomplished through a

series of electronic communications that trigger a series of debit/

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credit transactions in the ledgers of the financial institutions that

link the originators and beneficiaries of the payments. Unless the

parties to a funds transfer use the same financial institution, multiple banks will be involved in the payment transfer. Correspondent relationships between banks provide the electronic

pathway for funds moving from one jurisdiction to another.

For the types of foreign banks investigated by the Minority Staff,

in particular shell banks with no office or staff and offshore banks

transacting business with non-residents in non-local currencies,

correspondent banking services are critical to their existence and

operations. These banks keep virtually all funds in their correspondent accounts. They conduct virtually all transactions external to the bank—including deposits, withdrawals, check clearings,

certificates of deposit, and wire transfers—through their correspondent accounts. Some use software provided by their correspondents to operate their ledgers, track account balances, and

complete wire transfers. Others use their monthly correspondent

account statements to identify client deposits and withdrawals, and

assess client fees. Others rely on their correspondents for credit

lines and overnight investment accounts. Some foreign banks use

their correspondents to provide sophisticated investment services to

their clients, such as high-interest bearing money market accounts

and securities trading. While the foreign banks examined in the investigation lacked the resources, expertise and infrastructure needed to provide such services in-house, they could all afford the fees

charged by their correspondents to provide these services and used

the services to attract clients and earn revenue.

Every foreign bank interviewed by the investigation indicated

that it was completely dependent upon correspondent banking for

its access to international wire transfer systems and the infrastructure required to complete most banking transactions today, including handling multiple currencies, clearing checks, paying interest

on client deposits, issuing credit cards, making investments, and

moving funds. Given their limited resources and staff, all of the foreign banks interviewed by the investigation indicated that, if their

access to correspondent banks were cut off, they would be unable

to function. Correspondent banking is their lifeblood.

B. Three Categories of High Risk Banks

Three categories of banks present particularly high money laundering risks for U.S. correspondent banks: (1) shell banks that have

no physical presence in any jurisdiction; (2) offshore banks that are

barred from transacting business with the citizens of their own licensing jurisdictions; and (3) banks licensed by jurisdictions that do

not cooperate with international anti-money laundering efforts.

Shell Banks. Shell banks are high risk banks principally because they are so difficult to monitor and operate with great secrecy. As used in this report, the term ‘‘shell bank’’ is intended to

have a narrow reach and refer only to banks that have no physical

presence in any jurisdiction. The term is not intended to encompass

a bank that is a branch or subsidiary of another bank with a physical presence in another jurisdiction. For example, in the Cayman

Islands, of the approximately 570 licensed banks, most do not

maintain a Cayman office, but are affiliated with banks that mainVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00299 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
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tain offices in other locations. As used in this report, ‘‘shell bank’’

is not intended to apply to these affiliated banks—for example, the

Cayman branch of a large bank in the United States. About 75 of

the 570 Cayman-licensed banks are not branches or subsidiaries of

other banks, and an even smaller number operate without a physical presence anywhere. It is these shell banks that are of concern

in this report. In the Bahamas, out of a total of about 400 licensed

banks, about 65 are unaffiliated with any other bank, and a smaller subset are shell banks. Some jurisdictions, including the Cayman Islands, Bahamas and Jersey, told the Minority Staff investigation that they no longer issue bank licenses to unaffiliated shell

banks, but other jurisdictions, including Nauru, Vanuatu and Montenegro, continue to do so. The total number of shell banks operating in the world today is unknown, but banking experts believe

it comprises a very small percentage of all licensed banks.

The Minority Staff investigation was able to examine several

shell banks in detail. Hanover Bank, for example, is an Antiguan

licensed bank that has operated primarily out of its owner’s home

in Ireland. M.A. Bank is a Cayman licensed bank which claims to

have an administrative office in Uruguay, but actually operated in

Argentina using the offices of related companies. Federal Bank is

a Bahamian licensed bank which serviced Argentinian clients but

appears to have operated from an office or residence in Uruguay.

Caribbean American Bank, now closed, was an Antiguan-licensed

bank that operated out of the offices of an Antiguan firm that supplied administrative services to banks.

None of these four shell banks had an official business office

where it conducted banking activities; none had a regular paid

staff. The absence of a physical office with regular employees

helped these shell banks avoid oversight by making it more difficult for bank regulators and others to monitor bank activities,

inspect records and question bank personnel. Irish banking authorities, for example, were unaware that Hanover Bank had any

connection with Ireland, and Antiguan banking regulators did not

visit Ireland to examine the bank on-site. Argentine authorities

were unaware of M.A. Bank’s presence in their country and so

never conducted any review of its activities. Cayman bank regulators did not travel to Argentina or Uruguay for an on-site examination of M.A. Bank; and regulators from the Bahamas did not

travel to Argentina or Uruguay to examine Federal Bank.

The Minority Staff was able to gather information about these

shell banks by conducting interviews, obtaining court pleadings

and reviewing subpoenaed material from U.S. correspondent banks.

The evidence shows that these banks had poor to nonexistent administrative and anti-money laundering controls, yet handled millions of dollars in suspect funds, and compiled a record of dubious

activities associated with drug trafficking, financial fraud and other

misconduct.

Offshore Banks. The second category of high risk banks in correspondent banking are offshore banks. Offshore banks have licenses which bar them from transacting banking activities with the

citizens of their own licensing jurisdiction or bar them from

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16See INCSR 2000 at 565. Offshore jurisdictions are countries which have enacted laws allowing the formation of offshore banks or other offshore entities. 17 INCSR 2000 at 566 and footnote 3, citing ‘‘The UN Offshore Forum,’’ Working Paper of the

United Nations Office for Drug Control and Crime Prevention (January 2000) at 6. 18 Id. 19 INCSR 2000 at 566 and footnote 1, citing ‘‘Offshore Banking: An Analysis of Micro- and

Macro-Prudential Issues,’’ Working Paper of the International Monetary Fund (1999), by Luca

Errico and Alberto Musalem, at 10. 20See, for example, INCSR 2000 discussion of ‘‘Offshore Financial Centers,’’ at 565–77. 21See also discussion in Chapter V, subsections (D), (E) and (F).

diction. Nearly all of the foreign banks investigated by the Minority

Staff held offshore licenses.

The latest estimates are that nearly 60 offshore jurisdictions

around the globe 16 have, by the end of 1998, licensed about 4,000

offshore banks.17 About 44% of these offshore banks are thought to

be located in the Caribbean and Latin America, 29% in Europe,

19% in Asia and the Pacific, and 10% in Africa and the Middle

East.18 These banks are estimated to control nearly $5 trillion in

assets.19 Since, by design, offshore banks operate in the international arena, outside their licensing jurisdiction, they have attracted the attention of the international financial community.

Over the past few years, as the number, assets and activities of offshore banks have expanded, the international financial community

has expressed increasing concerns about their detrimental impact

on international anti-money laundering efforts.20

Offshore banks pose high money laundering risks in the correspondent banking field for a variety of reasons. One is that a foreign country has significantly less incentive to oversee and regulate

banks that do not do business within the country’s boundaries than

for banks that do.21 Another is that offshore banking is largely a

money-making enterprise for the governments of small countries,

and the less demands made by the government on bank owners,

the more attractive the country becomes as a licensing locale. Offshore banks often rely on these reverse incentives to minimize

oversight of their operations, and become vehicles for money laundering, tax evasion, and suspect funds.

One U.S. correspondent banker told the Minority Staff that he is

learning that a large percentage of clients of offshore banks are

Americans and, if so, there is a ‘‘good chance tax evasion is going

on.’’ He said there is ‘‘no reason’’ for offshore banking to exist if not

for ‘‘evasion, crime, or whatever.’’ There is no reason for Americans

to bank offshore, he said, noting that if an offshore bank has primarily U.S. clients, it must ‘‘be up to no good’’ which raises a question why a U.S. bank would take on the offshore bank as a client.

A former offshore bank owner told the investigation that he

thought 100% of his clients had been engaged in tax evasion which

was why they sought bank secrecy and were willing to pay costly

offshore fees that no U.S. bank would charge.

Another longtime U.S. correspondent banker was asked his opinion of a former offshore banker’s comment that to ‘‘take-in’’ deposits

from U.S. nationals was not a transgression and that not reporting

offshore investments ‘‘is no legal concern of the offshore depository

institution.’’ The correspondent banker said that the comment

showed that the offshore banker ‘‘knew his craft.’’ He said that the

whole essence of offshore banking is ‘‘accounts in the name of corporations with bearer shares, directors that are lawyers that sit in

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22See FATF’s ‘‘Review to Identify Non-Cooperative Countries or Territories: Increasing the

Worldwide Effectiveness of Anti-Money Laundering Measures’’ (6/22/00), at paragraph (64). 23See FATF’s 1999–2000 Annual Report, Annex A.

their tax havens that make up minutes of board meetings.’’ When

asked if part of the correspondent banker’s job was to make sure

the client bank did not ‘‘go over the line,’’ the correspondent banker

responded if that was the case, then the bank should not be dealing

with some of the bank clients it had and should not be doing business in some of the countries where it was doing business.

Because offshore banks use non-local currencies and transact

business primarily with non-resident clients, they are particularly

dependent upon having correspondent accounts in other countries

to transact business. One former offshore banker commented in an

interview that if the American government wanted to get offshore

banks ‘‘off their back,’’ it would prohibit U.S. banks from having

correspondent relationships with offshore banks. This banker noted

that without correspondent relationships, the offshore banks

‘‘would die.’’ He said ‘‘they need an established bank that can offer

U.S. dollars.’’ How offshore banks use correspondent accounts to launder funds

is discussed in Chapter VI of this report as well as in a number

of the Case histories. The offshore banks investigated by the Minority Staff were, like the shell banks, associated with millions of

dollars in suspect funds, drug trafficking, financial fraud and other

misconduct.

Banks in Non-Cooperating Jurisdictions. The third category

of high risk banks in correspondent banking are foreign banks licensed by jurisdictions that do not cooperate with international

anti-money laundering efforts. International anti-money laundering

efforts have been led by the Financial Action Task Force on Money

Laundering (‘‘FATF’’), an inter-governmental organization comprised of representatives from the financial, regulatory and law enforcement communities from over two dozen countries. In 1996,

FATF developed a set of 40 recommendations that now serve as

international benchmarks for evaluating a country’s anti-money

laundering efforts. FATF has also encouraged the establishment of

international organizations whose members engage in self and mutual evaluations to promote regional compliance with the 40 recommendations.

In June 2000, for the first time, FATF formally identified 15

countries and territories whose anti-money laundering laws and

procedures have ‘‘serious systemic problems’’ resulting in their

being found ‘‘non-cooperative’’ with international anti-money laundering efforts. The 15 are: The Bahamas, Cayman Islands, Cook Islands, Dominica, Israel, Lebanon, Liechtenstein, Marshall Islands,

Nauru, Niue, Panama, Philippines, Russia, St. Kitts and Nevis,

and St. Vincent and the Grenadines.22 Additional countries are expected to be identified in later evaluations.

FATF had previously established 25 criteria to assist it in the

identification of non-cooperative countries or territories.23 The published criteria included, for example, ‘‘inadequate regulation and

supervision of financial institutions’’; ‘‘inadequate rules for the licensing and creation of financial institutions, including assessing

the backgrounds of their managers and beneficial owners’’; ‘‘inadVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00302 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
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24FATF 6/22/00 review at paragraph (67).

equate customer identification requirements for financial institutions’’; ‘‘excessive secrecy provisions regarding financial institutions’’; ‘‘obstacles to international co-operation’’ by administrative

and judicial authorities; and ‘‘failure to criminalize laundering of

the proceeds from serious crimes.’’ FATF explained that, ‘‘detrimental rules and practices which obstruct international co-operation against money laundering . . . naturally affect domestic prevention or detection of money laundering, government supervision

and the success of investigations into money laundering.’’ FATF

recommended that, until the named jurisdictions remedied identified deficiencies, financial institutions around the world should exercise heightened scrutiny of transactions involving those jurisdictions and, if improvements were not made, that FATF members

‘‘consider the adoption of counter-measures.’’ 24

Jurisdictions with weak anti-money laundering laws and weak

cooperation with international anti-money laundering efforts are

more likely to attract persons interested in laundering illicit proceeds. The 15 named jurisdictions have together licensed hundreds

and perhaps thousands of banks, all of which introduce money

laundering risks into international correspondent banking.

C. Survey on Correspondent Banking

In February 2000, Senator Levin, Ranking Minority Member of

the Permanent Subcommittee on Investigations, distributed a survey on correspondent banking to 20 banks providing correspondent

services from locations in the United States. Ten of the banks were

domiciled in the United States; ten were foreign banks doing business in the United States. Their correspondent banking portfolios

varied in size, and in the nature of customers and services involved. The survey of 18 questions was sent to:

ABN AMRO Bank of Chicago, Illinois

Bank of America, Charlotte, North Carolina

The Bank of New York, New York, New York

Bank of Tokyo Mitsubishi Ltd., New York, New York

Bank One Corporation, Chicago, Illinois

Barclays Bank PLC—Miami Agency, Miami, Florida

Chase Manhattan Bank, New York, New York

Citigroup, Inc., New York, New York

Deutsche Bank A.G./Bankers Trust, New York, New York

Dresdner Bank, New York, New York

First Union Bank, Charlotte, North Carolina

FleetBoston Bank, Boston, Massachusetts

HSBC Bank, New York, New York

Israel Discount Bank, New York, New York

MTB Bank, New York, New York

Riggs Bank, Washington, D.C.

Royal Bank of Canada, Montreal, Quebec, Canada

The Bank of Nova Scotia (also called ScotiaBank), New York,

New York

Union Bank of Switzerland AG, New York, New York

Wells Fargo Bank, San Francisco, California

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25 ‘‘Relationship manager’’ is a common term used to describe the correspondent bank employees responsible for initiating and overseeing the bank’s correspondent relationships.

All 20 banks responded to the survey, and the Minority Staff

compiled and reviewed the responses. One Canadian bank did not

respond to the questions directed at its correspondent banking

practices, because it said it did not conduct any correspondent

banking activities in the United States.

The larger banks in the survey each have, worldwide, over a half

trillion dollars in assets, at least 90,000 employees, a physical presence in over 35 countries, and thousands of branches. The smallest

bank in the survey operates only in the United States, has less

than $300 million in assets, 132 employees and 2 branches. Three

fourths of the banks surveyed have over one-thousand correspondent banking relationships and many have even more correspondent banking accounts. Two foreign banks doing business in

the United States had the most correspondent accounts worldwide

(12,000 and 7,500, respectively). The U.S. domiciled bank with the

most correspondent accounts reported over 3,800 correspondent accounts worldwide.

The survey showed an enormous movement of money through

wire transfers by the biggest banks. The largest number of wire

transfers processed worldwide by a U.S. domiciled bank averaged

almost a million wire transfers processed daily. The largest amount

of money processed by a U.S. domiciled bank is over $1 trillion

daily. Eleven of the banks surveyed move over $50 billion each in

wire transfers in the United States each day; 7 move over $100 billion each day. The smallest bank surveyed moves daily wire transfers in the United States totaling $114 million.

The banks varied widely on the number of correspondent banking relationship managers employed in comparison to the number

of correspondent banking relationships maintained.25 One U.S.

domiciled bank, for example, reported it had 31 managers worldwide for 2,975 relationships, or a ratio of 96 to 1. Another bank reported it had 46 relationship managers worldwide handling 1,070

correspondent relationships, or a ratio of 27 to 1. One bank had a

ratio of less than 7 to 1, but that was clearly the exception. The

average ratio is approximately 40 or 50 correspondent relationships

to each relationship manager for U.S. domiciled banks and approximately 95 to 1 for foreign banks.

In response to a survey question asking about the growth of their

correspondent banking business since 1995, three banks reported

substantial growth, six banks reported moderate growth, two banks

reported a substantial decrease in correspondent banking, one bank

reported a moderate decrease, and seven banks reported that their

correspondent banking business had remained about the same.

Several banks reporting changes indicated the change was due to

a merger, acquisition or sale of a bank or correspondent banking

unit.

The banks varied somewhat on the types of services offered to

correspondent banking customers, but almost every bank offered

deposit accounts, wire transfers, check clearing, foreign exchange,

trade-related services, investment services, and settlement services.

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counts’’ that allow a respondent bank’s clients to write checks that

draw directly on the respondent bank’s correspondent account.

While all banks reported having anti-money laundering and due

diligence policies and written guidelines, most of the banks do not

have such policies or guidelines specifically tailored to correspondent banking; they rely instead on general provisions in the

bank-wide policy for correspondent banking guidance and procedures. One notable exception is the ‘‘Know Your Customer Policy

Statement’’ adopted by the former Republic National Bank of New

York, now HSBC USA, for its International Banking Group, that

specifically addressed new correspondent banking relationships. Effective December 31, 1998, the former Republic National Bank established internal requirements for a thorough, written analysis of

any bank applying for a correspondent relationship, including,

among other elements, an evaluation of the applicant bank’s management and due diligence policies.

In response to survey questions about opening new correspondent banking relationships, few banks said that their due

diligence procedures were mandatory; instead, the majority said

they were discretionary depending upon the circumstances of the

applicant bank. All banks indicated that they followed three specified procedures, but varied with respect to others. Survey results

with respect to 12 specified account opening procedures were as follows:

All banks said they:

—Obtain financial statements;

—Evaluate credit worthiness; and

—Determine an applicant’s primary lines of business.

All but two banks said they:

—Verify an applicant’s bank license; and

—Determine whether an applicant has a fixed, operating office

in the licensing jurisdiction.

All but three banks said they:

—Evaluate the overall adequacy of banking supervision in the

jurisdiction of the respondent bank; and

—Review media reports for information on an applicant.

All but four banks said they visit an applicant’s primary office

in the licensing jurisdiction; all but five banks said they determine

if the bank’s license restricts the applicant to operating outside the

licensing jurisdiction, making it an offshore bank. A majority of the

surveyed banks said they inquire about the applicant with the jurisdiction’s bank regulators. Only six banks said they inquire about

an applicant with U.S. bank regulators.

A majority of banks listed several other actions they take to assess a correspondent bank applicant, including:

—Checking with the local branch bank, if there is one;

—Checking with bank rating agencies;

—Obtaining bank references; and

—Completing a customer profile.

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26The survey asked about correspondent relationships with banks in Antigua, Austria, Bahamas, Burma, Cayman Islands, Channel Islands, China, Colombia, Cyprus, Indonesia, Latvia,

Lebanon, Lichtenstein, Luxembourg, Malta, Nauru, Nigeria, Palau, Panama, Paraguay,

Seychelle Islands, Singapore, Switzerland, Thailand, United Arab Emirates, Uruguay, Vanuatu,

and other Caribbean and South Pacific island nations. 27The survey found that the number of U.S. correspondent relationships with Russian banks

dropped significantly after the Bank of New York scandal of 1999, as described in the appendix.

The survey asked the banks whether or not, as a policy matter,

they would establish a correspondent bank account with a bank

that does not have a physical presence in any location or whose

only license requires it to operate outside the licensing jurisdiction,

meaning it holds only an offshore banking license. Only 18 of the

20 banks responded to these questions. Twelve banks said they

would not open a correspondent account with a bank that does not

have a physical presence; nine banks said they would not open a

correspondent account with an offshore bank. Six banks said there

are times, depending upon certain circumstances, under which they

would open an account with a bank that does not have a physical

presence in any country; eight banks said there are times when

they would open an account with an offshore bank. The circumstances include a bank that is part of a known financial group

or a subsidiary or affiliate of a well-known, internationally reputable bank. Only one of the surveyed banks said it would, without

qualification, open a correspondent account for an offshore bank.

Surveyed banks were asked to identify the number of correspondent accounts they have had in certain specified countries,26

in 1995 and currently. As expected, several banks have had a large

number of correspondent accounts with banks in China. For example, one bank reported 218 relationships, another reported 103 relationships, and four others reported 45, 43, 39 and 27 relationships, respectively. Seven banks reported more than 30 relationships with banks in Switzerland, with the largest numbering 95 relationships. Five banks reported having between 14 and 49 relationships each with banks in Colombia.

The U.S. State Department’s March 2000 International Narcotics

Control Strategy Report and the Financial Action Task Force’s

June 2000 list of 15 jurisdictions with inadequate anti-money laundering efforts have raised serious concerns about banking practices

in a number of countries, and the survey showed that in some of

those countries, U.S. banks have longstanding or numerous correspondent relationships. For example, five banks reported having

between 40 and 84 relationships each with banks in Russia, down

from seven banks reporting relationships that numbered between

52 and 282 each in 1995.27 Five banks reported having between 13

and 44 relationships each with banks in Panama. One bank has a

correspondent relationship with a bank in Nauru, and two banks

have one correspondent relationship each with a bank in Vanuatu.

Three banks have correspondent accounts with one or two banks

in the Seychelle Islands and one or two banks in Burma.

There are several countries where only one or two of the surveyed banks has a particularly large number of correspondent relationships. These are Antigua, where most banks have no relationships but one bank has 12; the Channel Islands, where most banks

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ships but two banks have 34 and 31 relationships, respectively; and

Uruguay, where one bank has 28 correspondent relationships and

the majority of other banks have ten or less. One bank reported

having 67 correspondent relationships with banks in the Bahamas;

only two other banks have more than 10 correspondent relationships there. That same bank has 146 correspondent relationships

in the Cayman Islands; only two banks have more than 12 such relationships, and the majority of banks have 2 or less.

The survey asked the banks to explain how they monitor their

correspondent accounts. The responses varied widely. Some banks

use the same monitoring systems that they use with all other accounts—relying on their compliance departments and computer

software for reviews. Others place responsibility for monitoring the

correspondent banking accounts in the relationship manager, requiring the manager to know what his or her correspondent client

is doing on a regular basis. Nine banks reported that they placed

the monitoring responsibility with the relationship manager, requiring that the manager perform monthly monitoring of the accounts under his or her responsibility. Others reported relying on

a separate compliance office in the bank or an anti-money laundering unit to identify suspicious activity. Monitoring can also be

done with other tools. For example, one bank said it added news

articles mentioning companies and banks into an information database available to bank employees.

Several banks reported special restrictions they have imposed on

correspondent banking relationships in addition to the procedures

identified in the survey. One bank reported, for example, that it

prohibits correspondent accounts in certain South Pacific locations

and monitors all transactions involving Antigua and Barbuda,

Belize and Seychelles. Another bank said it requires its relationship managers to certify that a respondent bank does not initiate

transfers to high risk geographic areas, and if a bank is located in

a high risk geographic area, it requires a separate certification.

One bank said its policy is to have a correspondent relationship

with a bank in a foreign country only if the U.S. bank has a physical presence in the country as well. Similarly, another bank said

it does not accept transfers from or to Antigua, Nauru, Palau, the

Seychelles, or Vanuatu. One bank reported that it takes relationship managers off-line, that is, away from their responsibility for

their correspondent banks, for 10 days at a time to allow someone

else to handle the correspondent accounts as a double-check on the

activity. The Minority Staff did not attempt to examine how these

stated policies are actually put into practice in the banks.

The surveyed banks were asked how many times between 1995

and 1999 they became aware of possible money laundering activities involving a correspondent bank client. Of the 17 banks that

said they could answer the question, seven said there were no instances in which they identified such suspicious activity. Ten banks

identified at least one instance of suspicious activity. One bank

identified 564 SARs filed due to ‘‘sequential strings of travelers

checks and money orders.’’ The next largest number was 60 SARs

which the surveyed bank said involved ‘‘correspondent banking and

possible money laundering.’’ Another bank said it filed 52 SARs in

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28The National Gambling Impact Study Commission (‘‘NGISC’’) was created in 1996 to conduct a comprehensive legal and factual study of the social and economic impacts of gambling

in the United States. The NGISC report, published in June 1999, contains a variety of information and recommendations related to Internet gambling. The FinCEN report, published in September 2000, examines money laundering issues related to Internet gambling.

the identified time period. Two banks identified only one instance;

the remaining banks each referred to a handful of instances.

There were a number of anomalies in the survey results. For example, one large bank which indicated in an interview that it does

not market correspondent accounts in secrecy havens, reported in

the survey having 146 correspondent relationships with Cayman

Island banks and 67 relationships with banks in the Bahamas,

both of which have strict bank secrecy laws. Another bank said in

a preliminary interview that it would ‘‘never’’ open a correspondent

account with a bank in Vanuatu disclosed in the survey that it, in

fact, had a longstanding correspondent relationship in Vanuatu.

Another bank stated in its survey response it would not open an

account with an offshore bank, yet also reported in the survey that

its policy was not to ask bank applicants whether they were restricted to offshore licenses. Two other banks reported in the survey that they would not, as a policy matter, open correspondent accounts with offshore or shell banks, but when confronted with information showing they had correspondent relationships with these

types of banks, both revised their survey responses to describe a

different correspondent banking policy. These and other anomalies

suggest that U.S. banks may not have accurate information or a

complete understanding of their correspondent banking portfolios

and practices in the field.

D. Internet Gambling

One issue that unexpectedly arose during the investigation was

the practice of foreign banks using their U.S. correspondent accounts to handle funds related to Internet gambling. As a result,

the U.S. correspondent banks facilitated Internet gambling, an activity recognized as a growing industry providing new avenues and

opportunities for money laundering.

Two recent national studies address the subject: ‘‘The Report of

the National Gambling Impact Study Commission,’’ and a report

issued by the Financial Crimes Enforcement Network (‘‘FinCEN’’)

entitled, ‘‘A Survey of Electronic Cash, Electronic Banking, and

Internet Gaming.’’ 28 Together, these reports describe the growth of

Internet gambling and related legal issues. They report that Internet gambling websites include casino-type games such as virtual

blackjack, poker and slot machines; sports event betting; lotteries;

and even horse race wagers using real-time audio and video to

broadcast live races. Websites also typically require players to fill

out registration forms and either purchase ‘‘chips’’ or set up accounts with a minimum amount of funds. The conventional ways

of sending money to the gambling website are: (1) providing a credit card number from which a cash advance is taken; (2) sending a

check or money order; or (3) sending a wire transfer or other remittance of funds.

An important marketing tool for the Internet gambling industry

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29More than a dozen companies develop and sell turnkey software for Internet gambling operations. Some of these companies provide full service packages, which include the processing of

financial transactions and maintenance of offshore hardware, while the ‘‘owner’’ of the gambling

website simply provides advertising and Internet access to gambling customers. These turnkey

services make it very easy for website owners to open new gambling sites. 30See, for example, the FinCEN report, which states at page 41: ‘‘Opposition in the United

States to legalized Internet gaming is based on several factors. First, there is the fear that

Internet gaming . . . offer[s] unique opportunities for money laundering, fraud, and other

crimes. Government officials have also expressed concerns about underage gaming and addictive

gambling, which some claim will increase with the spread of Internet gaming. Others point to

the fact that specific types of Internet gaming may already be illegal under State laws.’’ 31 ‘‘Internet Gambling: Overview of Federal Criminal Law,’’ Congressional Research Service,

CRS Report No. 97–619A (3/17/00), Summary. 32 Id.

curely.29 These money transfers together with the off-shore locations of most Internet gambling operations and their lack of regulation provide prime opportunities for money laundering.30 As technology progresses, the speed and anonymity of the transactions

may prove to be even more attractive to money launderers.

One researcher estimates that in 1997, there were as many as

6.9 million potential Internet gamblers and Internet gambling revenues of $300 million. By 1998, these estimates had doubled, to an

estimated 14.5 million potential Internet gamblers and Internet

gambling revenues of $651 million. The River City Group, an industry consultant, forecasts that U.S. Internet betting will rise

from $1.1 billion in 1999, to $3 billion in 2002.

Current Federal and State laws. In the United States, gambling regulation is primarily a matter of State law, reinforced by

Federal law where the presence of interstate or foreign elements

might otherwise frustrate the enforcement policies of State law.31

According to a recent Congressional Research Service report, Internet gambling implicates at least six Federal criminal statutes,

which make it a Federal crime to: (1) conduct an illegal gambling

business, 18 U.S.C. § 1955 (illegal gambling business); (2) use the

telephone or telecommunications to conduct an illegal gambling

business, 18 U.S.C. § 1084 (Interstate Wire Act); (3) use the facilities of interstate commerce to conduct an illegal gambling business,

18 U.S.C. § 1952 (Travel Act); (4) conduct the activities of an illegal

gambling business involving either the collection of an unlawful

debt or a pattern of gambling offenses, 18 U.S.C. § 1962 (RICO); (5)

launder the proceeds from an illegal gambling business or to plow

them back into the business, 18 U.S.C. § 1956 (money laundering); or (6) spend more than $10,000 of the proceeds from an illegal gambling operation at any one time and place, 18 U.S.C. § 1957 (money

laundering).32

The NGISC reports that the laws governing gambling in cyberspace are not as clear as they should be, pointing out, for example,

that the Interstate Wire Act was written before the Internet was

invented. The ability of the Internet to facilitate quick and easy

interactions across geographic boundaries makes it difficult to

apply traditional notions of State and Federal jurisdictions and,

some argue, demonstrates the need for additional clarifying legislation.

Yet, there have been a number of successful prosecutions involving Internet gambling. For example, in March 1998, the U.S. Attorney for the Southern District of New York indicted 21 individuals

for conspiracy to transmit wagers on sporting events via the InterVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00309 Fmt 6601 Sfmt 6601 71166.TXT SAFFAIRS PsN: SAFFAIRS
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33 In December 1997, the Attorney General of Florida and Western Union signed an agreement that Western Union would cease providing Quick Pay money transfer services from Florida residents to known offshore gaming establishments. Quick Pay is a reduced-fee system normally used to expedite collection of debts or payment for goods.

net, in violation of the Interstate Wire Act of 1961. At that time,

U.S. Attorney General Janet Reno stated, ‘‘The Internet is not an

electronic sanctuary for illegal betting. To Internet betting operators everywhere, we have a simple message, ‘You can’t hide online

and you can’t hide offshore.’ ’’ Eleven defendants pled guilty and

one, Jay Cohen, was found guilty after a jury trial. He was sentenced to 21 months in prison, a 2-year supervised release, and a

$5,000 fine.

In 1997, the Attorney General of Minnesota successfully prosecuted Granite Gate Resorts, a Nevada corporation with a Belizebased Internet sports betting operation. The lawsuit alleged that

Granite Gate and its president, Kerry Rogers, engaged in deceptive

trade practices, false advertising, and consumer fraud by offering

Minnesotans access to sports betting, since such betting is illegal

under State laws. In 1999, the Minnesota Supreme Court upheld

the prosecution. Missouri, New York, and Wisconsin have also successfully prosecuted cases involving Internet gaming.

Given the traditional responsibility of the States regarding gambling, many have been in the forefront of efforts to regulate or prohibit Internet gambling, Several States including Louisiana, Texas,

Illinois, and Nevada have introduced or passed legislation specifically prohibiting Internet gambling. Florida has taken an active

role, including cooperative efforts with Western Union, to stop

money-transfer services for 40 offshore sports books.33 In 1998, Indiana’s Attorney General stated as a policy that a person placing

a bet from Indiana with an offshore gaming establishment was engaged in in-state gambling just as if the person engaged in conventional gambling. A number of State attorneys general have initiated court actions against Internet gambling owners and operators,

and several have won permanent injunctions.

Legislation and recommendations. Several States have concluded that only the Federal Government has the potential to effectively regulate or prohibit Internet gambling. The National Association of Attorneys General has called for an expansion in the

language of the Federal anti-wagering statute to prohibit Internet

gambling and for Federal-State cooperation on this issue. A number of Internet gambling bills have been introduced in Congress.

The National Gambling Impact Study Commission report made

several recommendations pertaining to Internet gambling, one of

which was to encourage foreign governments to reject Internet

gambling organizations that prey on U.S. citizens.

The Minority Staff investigation found evidence of a number of

foreign banks using their U.S. correspondent accounts to move proceeds related to Internet gambling, including wagers or payments

made in connection with Internet gambling websites, deposits

made by companies managing Internet gambling operations, and

deposits made by companies active in the Internet gambling field

in such areas as software development or electronic cash transfer

systems. One U.S. bank, Chase Manhattan Bank, was fully aware

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34For a description of the Bank of New York scandal, see the appendix.

respondent accounts; other U.S. banks were not. Internet gambling

issues are addressed in the case histories involving American International Bank, British Trade and Commerce Bank, and Swiss

American Bank.

V. Why Correspondent Banking is Vulnerable to Money

Laundering

Until the Bank of New York scandal erupted in 1999,34 international correspondent banking had received little attention as a

high-risk area for money laundering. In the United States, the general assumption had been that a foreign bank with a valid bank

license operated under the watchful eye of its licensing jurisdiction

and a U.S. bank had no obligation to conduct its own due diligence.

The lesson brought home by the Bank of New York scandal, however, was that some foreign banks carry higher money laundering

risks than others, since some countries are seriously deficient in

their bank licensing and supervision, and some foreign banks are

seriously deficient in their anti-money laundering efforts.

The reality is that U.S. correspondent banking is highly vulnerable to money laundering for a host of reasons. The reasons include: (A) a culture of lax due diligence at U.S. correspondent

banks; (B) the role of correspondent bankers or relationship managers; (C) nested correspondents, in which U.S. correspondent accounts are used by a foreign bank’s client banks, often without the

express knowledge or consent of the U.S. bank; (D) foreign jurisdictions with weak banking or accounting standards; (E) bank secrecy

laws; (F) cross border difficulties; and (G) U.S. legal barriers to

seizing illicit funds in U.S. correspondent accounts.

A. Culture of Lax Due Diligence

The U.S. correspondent banks examined during the investigation

operated, for the most part, in an atmosphere of complacency, with

lax due diligence, weak controls, and inadequate responses to troubling information.

In initial meetings in January 2000, U.S. banks told the investigation there is little evidence of money laundering through correspondent accounts. Chase Manhattan Bank, which has one of the

largest correspondent banking portfolios in the United States,

claimed that U.S. banks do not even open accounts for small foreign banks in remote jurisdictions. These representations, which

proved to be inaccurate, illustrate what the investigation found to

be a common attitude among correspondent bankers—that money

laundering risks are low and anti-money laundering efforts are unnecessary or inconsequential in the correspondent banking field.

Due in part to the industry’s poor recognition of the money laundering risks, there is substantial evidence of weak due diligence

practices by U.S. banks providing correspondent accounts to foreign

banks. U.S. correspondent bankers were found to be poorly informed about the banks they were servicing, particularly small foreign banks licensed in jurisdictions known for bank secrecy or

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tion about a foreign bank’s management, major business activities,

reputation, regulatory history, or anti-money laundering procedures. Monitoring procedures were also weak. For example, it was

often unclear who, if anyone, was supposed to be reviewing the

monthly account statements for correspondent accounts. At larger

banks, coordination was often weak or absent between the correspondent bankers dealing directly with foreign bank clients and

other bank personnel administering the accounts, reviewing wire

transfer activity, or conducting anti-money laundering oversight.

Even though wire transfers were frequently the key activity engaged in by foreign banks, many U.S. banks conducted either no

monitoring of wire transfer activity or relied on manual reviews of

the wire transfer information to identify suspicious activity. Subpoenas directed at foreign banks or their clients were not always

brought to the attention of the correspondent banker in charge of

the foreign bank relationship.

Specific examples of weak due diligence practices and inadequate

anti-money laundering controls at U.S. correspondent banks included the following:

—Security Bank N.A., a U.S. bank in Miami, disclosed that, for

almost 2 years, it never reviewed for suspicious activity numerous wire transfers totaling $50 million that went into and out

of the correspondent account of a high risk offshore bank called

British Trade and Commerce Bank (BTCB), even after questions arose about the bank. These funds included millions of

dollars associated with money laundering, financial fraud and

Internet gambling. A Security Bank representative also disclosed that, despite an ongoing dialogue with BTCB’s president, he did not understand and could not explain BTCB’s

major business activities, including a high yield investment

program promising extravagant returns.

—The Bank of New York disclosed that it had not known that

one of its respondent banks, British Bank of Latin America

(BBLA), a small offshore bank operating in Colombia and the

Bahamas, which moved $2.7 million in drug money through its

correspondent account, had never been examined by any bank

regulator. The Bank of New York disclosed further that: (a) despite being a longtime correspondent for banks operating in

Colombia, (b) despite 1999 and 2000 U.S. National Money

Laundering Strategies’ naming the Colombian black market

peso exchange as the largest money laundering system in the

Western Hemisphere and a top priority for U.S. law enforcement, and (c) despite having twice received seizure orders for

the BBLA correspondent account alleging millions of dollars in

drug proceeds laundered through the Colombian black market

peso exchange, the Bank of New York had not instituted any

special anti-money laundering controls to detect this type of

money laundering through its correspondent accounts.

—Several U.S. banks, including Bank of America and Amtrade

Bank in Miami, were unaware that their correspondent accounts with American International Bank (AIB), a small offshore bank in Antigua that moved millions of dollars in financial frauds and Internet gambling through its correspondent

303

accounts, were handling transactions for shell foreign banks

that were AIB clients. The U.S. correspondent bankers apparently had failed to determine that one of AIB’s major lines of

business was to act as a correspondent for other foreign banks,

one of which, Caribbean American Bank, was used exclusively

for moving the proceeds of a massive advance-fee-for-loan

fraud. Most of the U.S. banks had also failed to determine that

the majority of AIB’s client accounts and deposits were generated by the Forum, an investment organization that has

been the subject of U.S. criminal and securities investigations.

—Bank of America disclosed that it did not know, until tipped

off by Minority Staff investigators, that the correspondent account it provided to St. Kitts-Nevis-Anguilla National Bank, a

small bank in the Caribbean, was being used to move hundreds of millions of dollars in Internet gambling proceeds.

Bank of America had not taken a close look at the source of

funds in this account even though this small respondent bank

was moving as much as $115 million in a month and many of

the companies named in its wire transfer instructions were

well known for their involvement in Internet gambling.

—Citibank correspondent bankers in Argentina indicated that

while they opened a U.S. correspondent account for M.A. Bank,

an offshore shell bank licensed in the Cayman Islands and operating in Argentina that later was used to launder drug

money, and handled the bank’s day-to-day matters, they did

not, as a rule, see any monthly statements or monthly activity

reports for the bank’s accounts. The Argentine correspondent

bankers indicated that they assumed Citibank personnel in

New York, who handled administrative matters for the accounts, or Citibank personnel in Florida, who run the bank’s

anti-money laundering unit, reviewed the accounts for suspicious activity. Citibank’s Argentine correspondent bankers

indicated, however, that they could not identify specific individuals who reviewed Argentine correspondent accounts for

possible money laundering. They also disclosed that they did

not have regular contact with Citibank personnel conducting

anti-money laundering oversight of Argentine correspondent

accounts, nor did they coordinate any anti-money laundering

duties with them.

—When U.S. law enforcement filed a 1998 seizure warrant alleging money laundering violations and freezing millions of dollars in a Citibank correspondent account belonging to M.A.

Bank and also filed in court an affidavit describing the frozen

funds as drug proceeds from a money laundering sting,

Citibank never looked into the reasons for the seizure warrant

and never learned, until informed by Minority Staff investigators in 1999, that the frozen funds were drug proceeds.

—Citibank had a 10-year correspondent relationship with Banco

Republica, licensed and doing business in Argentina, and its

offshore affiliate, Federal Bank, which is licensed in the Bahamas. Citibank’s relationship manager for these two banks told

the investigation that it was ‘‘disturbing’’ and ‘‘shocking’’ to

304

learn that the Central Bank of Argentina had reported in audit

reports of 1996 and 1998 that Banco Republica did not have

an anti-money laundering program. When the Minority Staff

asked the relationship manager what he had done to determine whether or not there was such a program in place at

Banco Republica, he said he was told by Banco Republica management during his annual reviews that the bank had an antimoney laundering program, but he did not confirm that with

documentation. The same situation applied to Federal Bank.

—A June 2000 due diligence report prepared by a First Union

correspondent banker responsible for an account with a high

risk foreign bank called Banque Francaise Commerciale (BFC)

in Dominica, contained inadequate and misleading information. For example, only 50% of the BFC documentation required by First Union had been collected, and neither BFC’s

anti-money laundering procedures, bank charter, nor 1999 financial statement was in the client file. No explanation for the

missing documentation was provided, despite instructions requiring it. The report described BFC as engaged principally in

‘‘domestic’’ banking, even though BFC’s monthly account statements indicated that most of its transactions involved international money transfers. The report also failed to mention

Dominica’s weak banking and anti-money laundering controls.

—A number of U.S. banks failed to meet their internal requirements for on-site visits to foreign banks. Internal directives

typically require a correspondent banker to visit a foreign

bank’s offices prior to opening an account for the bank and to

pay annual visits thereafter. Such visits are intended, among

other purposes, to ensure the foreign bank has a physical presence, to learn more about the bank’s management and business activities, and to sell new services. However, in many

cases, the required on-site visits were waived, postponed or

conducted with insufficient attention to important facts. For

example, a Chase Manhattan correspondent banker responsible for 140 accounts said she visited the 25 to 30 banks with

the larger accounts each year and visited the rest only occasionally or never. First Union National Bank disclosed that no

correspondent banker had visited BFC in Dominica for 3 years.

Security Bank N.A. disclosed that it had not made any visits

to BTCB in Dominica, because Security Bank had only one account on the island and it was not ‘‘cost effective’’ to travel

there. In still another instance, Citibank opened a correspondent account for M.A. Bank, without traveling to either

the Cayman Islands where the bank was licensed or Uruguay

where the bank claimed to have an ‘‘administrative office.’’ Instead, Citibank traveled to Argentina and visited offices belonging to several firms in the same financial group as M.A.

Bank, apparently deeming that trip equivalent to visiting M.A.

Bank’s offices. Citibank even installed wire transfer software

for M.A. Bank at the Argentine site, although M.A. Bank has

no license to conduct banking activities in Argentina and no office there. Despite repeated requests, Citibank has indicated

that it remains unable to inform the investigation whether or

305

35 A correspondent bank’s analysis of credit risk does not necessarily include the risk of money

laundering; rather it is focused on the risk of monetary loss to the correspondent bank, and the

two considerations can be very different. For example, one correspondent bank examined in the

investigation clearly rejected a credit relationship with a respondent bank due to doubts about

its investment activities, but did not hesitate to continue providing it with cash management

services such as wire transfers.

not M.A. Bank has an office in Uruguay. The investigation has

concluded that M.A. Bank is, in fact, a shell bank with no

physical presence in any jurisdiction.

—Harris Bank International, a New York bank specializing in

correspondent banking and international wire transfers, told

the investigation that it had no electronic means for monitoring the hundreds of millions of dollars in wire transfers it

processes each day. Its correspondent bankers instead have to

conduct manual reviews of account activity to identify suspicious activity. The bank said that it had recently allocated

funding to purchase its first electronic monitoring software capable of analyzing wire transfer activity for patterns of possible

money laundering.

Additional Inadequacies with Non-Credit Relationships. In

addition to the lax due diligence and monitoring controls for correspondent accounts in general, U.S. banks performed particularly

poor due diligence reviews of high risk foreign banks where no

credit was provided by the U.S. bank. Although often inadequate,

U.S. banks obtain more information and pay more attention to correspondent relationships involving the extension of credit where

the U.S. bank’s assets are at risk than when the U.S. bank is providing only cash management services on a fee basis.35 U.S. banks

concentrate their due diligence efforts on their larger correspondent

accounts and credit relationships and pay significantly less attention to smaller accounts involving foreign banks and where only

cash management services are provided.

Money launderers are primarily interested in services that facilitate the swift and anonymous movement of funds across international lines. These services do not require credit relationships,

but can be provided by foreign banks with access to wire transfers,

checks and credit cards. Money launderers may even prefer small

banks in non-credit correspondent relationships since they attract

less scrutiny from their U.S. correspondents. Foreign banks intending to launder funds may choose to limit their correspondent relationships to non-credit services to avoid scrutiny and move money

quickly, with few questions asked.

Under current practice in the United States, high-risk foreign

banks in non-credit correspondent relationships seem to fly under

the radar screen of U.S. banks conducting due diligence reviews.

Yet from an anti-money laundering perspective, these are precisely

the banks which—if they hold an offshore license, conduct a shell

operation, move large sums of money across international lines, or

demonstrate other high risk factors—warrant heightened scrutiny.

Specific examples of the different treatment that U.S. banks afforded to foreign banks in non-credit relationships included the following:

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—One Chase Manhattan correspondent banker said that she did

not review the annual audited financial statement of a foreign

bank in a non-credit relationship. Another Chase Manhattan

representative described Chase’s attitude towards non-credit

correspondent relationships as ‘‘essentially reactive’’ and said

there was no requirement to make an annual visit to bank clients in non-credit relationships.

—Bank of America representatives said that most small correspondent bank relationships were non-credit in nature, Bank

of America ‘‘has lots’’ of these, it views them as ‘‘low risk,’’ and

such relationships do not require an annual review of the respondent bank’s financial statements.

—One bank that maintained a non-credit correspondent relationship for a year with American International Bank (AIB), an

offshore bank which used its correspondent accounts to move

millions of dollars connected to financial frauds and Internet

gambling, sought significantly more due diligence information

when AIB requested a non-secured line of credit. To evaluate

the credit request, the correspondent bank asked AIB to provide such information as a list of its services; a description of

its marketing efforts; the total number of its depositors and ‘‘a

breakdown of deposits according to maturities’’; a description of

AIB management’s experience ‘‘in view of the fact that your institution has been operating for only 1 year’’; a profile of the

regulatory environment in Antigua’’; the latest financial statement of AIB’s parent company, and information about certain

loan transactions between AIB and its parent. Apparently none

of this information was provided a year earlier when the bank

first established a non-credit correspondent relationship with

AIB.

—A Security Bank representative reported that when he encountered troubling information about British Trade and Commerce

Bank, a bank that used its correspondent accounts to move

millions of dollars connected with financial frauds, he decided

against extending credit to the bank, but continued providing

it with cash management services such as wire transfers, because he believed a non-credit relationship did not threaten Security Bank with any monetary loss.

Inadequate Responses to Troubling Information. While

some U.S. banks never learned of questionable activities by their

foreign bank clients, when troubling information did reach a U.S

correspondent banker, in too many cases, the U.S. bank took little

or no action in response. For example:

—Citibank left open a correspondent account belonging to M.A.

Bank and allowed hundreds of millions of dollars to flow

through it, even after receiving a seizure order from U.S. law

enforcement alleging drug money laundering violations and

freezing $7.7 million deposited into the account. Citibank also

failed to inquire into the circumstances surrounding the seizure warrant and, until informed by Minority Staff investigators, failed to learn that the funds were drug proceeds from a

money laundering sting.

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—Chase Manhattan Bank left open a correspondent account with

Swiss American Bank (SAB), an offshore bank licensed in Antigua and Barbuda, even after SAB projected that it would need

10,000 checks per month and began generating monthly bank

statements exceeding 200 pages in length to process millions

of dollars in Internet gambling proceeds.

—First Union National Bank left open a money market account

with British Trade and Commerce Bank (BTCB) for almost 18

months after receiving negative information about the bank.

When millions of dollars suddenly moved through the account

8 months after it was opened, First Union telephoned BTCB

and asked it to voluntarily close the account. When BTCB refused, First Union waited another 9 months, replete with troubling incidents and additional millions of dollars moving

through the account, before it unilaterally closed the account.

—When Citibank was asked by the Central Bank of Argentina

for information about the owners of Federal Bank, an offshore

bank licensed in the Bahamas with which Citibank had a 10-

year correspondent relationship, Citibank responded that its

‘‘records contain no information that would enable us to determine the identity of the shareholders of the referenced bank.’’

Citibank gave this response to the Central Bank despite clear

information in its own records identifying Federal Bank’s owners. When the Minority Staff asked the relationship manager

to explain Citibank’s response, the relationship manager said

he had the impression that the Central Bank ‘‘was trying to

play some kind of game,’’ that it was ‘‘trying to get some legal

proof of ownership.’’ After further discussion, the relationship

manager said that he now knows Citibank should have answered the letter ‘‘in a different way’’ and that Citibank

‘‘should have done more.’’

The investigation saw a number of instances in which U.S. banks

were slow to close correspondent accounts, even after receiving

ample evidence of misconduct. When asked why it took so long to

close an account for Swiss American Bank after receiving troubling

information about the bank, Chase Manhattan Bank representatives explained that Chase had solicited Swiss American as a client

and felt ‘‘it wasn’t ethical to say we’ve changed.’’ Chase personnel

told the investigation, we ‘‘couldn’t leave them.’’ Bank of America

explained its delay in closing a correspondent account as due to

fear of a lawsuit by the foreign bank seeking damages for hurting

its business if the account were closed too quickly. A First Union

correspondent banker expressed a similar concern, indicating that

it first asked BTCB to close its account voluntarily so that First

Union could represent that the decision had been made by the customer and minimize its exposure to litigation. The Minority Staff

found this was not an uncommon practice, even though the investigation did not encounter any instance of a foreign bank’s filing

such a suit.

B. Role of Correspondent Bankers

Correspondent bankers, also called relationship managers,

should serve as the first line of defense against money laundering

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36The case histories in this report provide specific examples of how rogue foreign banks or

their clients are using U.S. correspondent account to launder funds or facilitate crime, including

from drug trafficking, prime bank guarantees, high yield investment scams, advanced-fee-forloan scams, stock fraud, Internet gambling and tax evasion. Correspondent bankers appear to

receive little or no training in recognizing and reporting suspicious activity related to such correspondent banking abuses.

in the correspondent banking field, but many appear to be inadequately trained and insufficiently sensitive to the risk of money

laundering taking place through the accounts they manage. These

deficiencies are attributable, in part, to the industry’s overall poor

recognition of money laundering problems in correspondent banking.

The primary mission of most correspondent bankers is to expand

business—to open new accounts, increase deposits and sell additional services to existing accounts. But many are also expected to

execute key anti-money laundering duties, such as evaluating prospective bank clients and reporting suspicious activity. Those correspondent bankers are, in effect, being asked to fill contradictory

roles—to add new foreign banks as clients, while maintaining a

skeptical stance toward those same banks and monitoring them for

suspicious activity. The investigation found that some banks compensate their correspondent bankers by the number of new accounts they open or the amount of money their correspondent accounts bring into the bank. The investigation found few rewards,

however, for closing suspect accounts or filing suspicious activity

reports. In fact, the financial incentive is just the opposite; closing

correspondent accounts reduces a bank’s income and can reduce a

correspondent banker’s compensation. The result was that a correspondent banker’s anti-money laundering duties were often a low

priority.

For example, the Bank of America told the Minority Staff investigation that their relationship managers used to be seen as sales

officers, routinely seeking new accounts, maintaining a ‘‘positive

sales approach,’’ and signing up as many correspondent banks as

possible. Bank of America’s attitude in the early and middle 1990s,

it said, was that ‘‘banks are banks’’ and ‘‘you can trust them.’’ The

bank said it has since changed its approach and is no longer ‘‘beating the bushes’’ for new correspondent relationships.

Even if correspondent bankers were motivated to watch for signs

of money laundering in their accounts, the investigation found that

most did not have the tools needed for effective oversight. Large

correspondent banks in the United States operate two or three

thousand correspondent accounts at a time and process billions of

dollars of wire transactions each day. Yet until very recently, most

U.S. banks did not invest in the software, personnel or training

needed to identify and manage money laundering risks in correspondent banking. For example, U.S. correspondent bankers reported receiving limited anti-money laundering training and

seemed to have little awareness of the money laundering methods,

financial frauds and other wrongdoing that rogue foreign banks or

their clients perpetrate through correspondent accounts.36 Standard due diligence forms were sometimes absent or provided insufficient guidance on the initial and ongoing due diligence information

that correspondent bankers should obtain. Coordination between

correspondent bankers and anti-money laundering bank personnel

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was often lacking. Automated systems for reviewing wire transfer

activity were usually not available. Few banks had pro-active antimoney laundering programs in place to detect and report suspect

activity in correspondent accounts. The absence of effective antimoney laundering tools is further evidence of the low priority assigned to this issue in the correspondent banking field.

Examples of correspondent bankers insufficiently trained and

equipped to identify and report suspicious activity included the following:

—A Bank of New York relationship manager told the investigation that there had been little anti-money laundering training

for correspondent banking, but it is ‘‘in the developmental

stages now.’’ The head of Bank of New York’s Latin American

correspondent banking division disclosed that she had received

minimal information about the black market peso exchange

and was unaware of its importance to U.S. law enforcement.

She also said the bank had not instituted any means for detecting this type of money laundering, nor had it instructed its

respondent banks to watch for this problem and refuse wire

transfers from money changers involved in the black market.

—A Chase Manhattan Bank relationship manager who handled

140 correspondent accounts told the investigation that she had

received no anti-money laundering training during her employment at Chase Manhattan or her prior job at Chemical Bank;

she was not trained in due diligence analysis; the bank had no

standard due diligence forms; and she received no notice of

countries in the Caribbean to which she should pay close attention when opening or monitoring a correspondent banking relationship.

—A Bank of America official said that anti-money laundering

training had received little attention for several years as the

bank underwent a series of mergers. The bank said it is now

improving its efforts in this area.

—A relationship manager at the Miami office of Banco Industrial

de Venezuela told the investigation that she had received no

training in recognizing possible financial frauds being committed through foreign bank correspondent accounts and never

suspected fraudulent activity might be a problem. She indicated that, even after several suspicious incidents involving a

multi-million-dollar letter of credit, a proof of funds letter discussing a prime bank guarantee, repeated large cash withdrawals by the respondent bank’s employees, and expressions

of concern by her superiors, no one at the bank explained the

money laundering risks to her or instructed her to watch the

relationship.

A few banks have developed new and innovative anti-money

laundering controls in their correspondent banking units, including

wire transfer monitoring software and pro-active reviews of correspondent bank activity. A number of the banks surveyed or interviewed by the Minority Staff expressed new interest in developing

stronger due diligence and monitoring procedures for correspondent

accounts. But most of the U.S. banks contacted during the invesVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00319 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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tigation had not devoted significant resources to help their correspondent bankers detect and report possible money laundering.

C. Nested Correspondents

Another practice in U.S. correspondent banking which increases

money laundering risks in the field is the practice of foreign banks

operating through the U.S. correspondent accounts of other foreign

banks. The investigation uncovered numerous instances of foreign

banks gaining access to U.S. banks—not by directly opening a U.S.

correspondent account—but by opening an account at another foreign bank which, in turn, has an account at a U.S. bank, In some

cases, the U.S. bank was unaware that a foreign bank was ‘‘nested’’

in the correspondent account the U.S. bank had opened for another

foreign bank; in other cases, the U.S. bank not only knew but approved of the practice. In a few instances, U.S. banks were surprised to learn that a single correspondent account was serving as

a gateway for multiple foreign banks to gain access to U.S. dollar

accounts, U.S. wire transfer systems and other services available in

the United States.

Examples uncovered during the investigation included the following:

—In 1999, First Union National Bank specifically rejected a request by a Dominican bank, British Trade and Commerce

Bank (BTCB), to open a U.S. correspondent account. First

Union was unaware, until informed by Minority Staff investigators, that it had already been providing wire transfer services to BTCB for 2 years, through BTCB’s use of a First Union

correspondent account belonging to Banque Francaise Commerciale (BFC). BFC is a Dominican bank which had BTCB as

a client.

—A Chase Manhattan Bank correspondent banker said that she

was well aware that American International Bank (AIB) was

allowing other foreign banks to utilize its Chase account. She

said that she had no problem with the other banks using AIB’s

correspondent account, since she believed they would otherwise

have no way to gain entry into the U.S. financial system. She

added that she did not pay any attention to the other foreign

banks doing business with AIB and using its U.S. account. One

of the banks using AIB’s U.S. account was Caribbean American

Bank, a bank used exclusively for moving the proceeds of a

massive advance-fee-for-loan fraud.

—The president of Swiss American Bank in Antigua said that no

U.S. bank had ever asked SAB about its client banks, and SAB

had, in fact, allowed at least two other offshore banks to use

SAB’s U.S. accounts.

—Harris Bank International in New York said that its policy was

not to ask its respondent banks about their bank clients. Harris Bank indicated, for example, that it had a longstanding correspondent relationship with Standard Bank Jersey Ltd., but

no information on Standard Bank’s own correspondent practices. Harris Bank disclosed that it had been unaware that, in

providing correspondent services to Standard Bank, it had also

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37See, for example, discussion of ‘‘Offshore Financial Centers,’’ INCSR 2000, at 565–77.

been providing correspondent services to Hanover Bank, a

shell bank which, in 1998 alone, handled millions of dollars associated with financial frauds. Hanover Bank apparently would

not have met Harris Bank’s standards for opening an account

directly, yet it was able to use Harris Bank’s services through

Standard Bank. Harris Bank indicated that it still has no information on what foreign banks may be utilizing Standard

Bank’s U.S. correspondent account, and it has no immediate

plans to find out.

Case histories on American International Bank, Hanover Bank,

and British Trade and Commerce Bank demonstrate how millions

of dollars can be and have been transferred through U.S correspondent accounts having no direct links to the foreign banks

moving the funds. Despite the money laundering risks involved, no

U.S. bank contacted during the investigation had a policy or procedure in place requiring its respondent banks to identify the banks

that would be using its correspondent account, although Harris

Bank International said it planned to institute that policy for its

new bank clients and, during a Minority Staff interview, Bank of

America’s correspondent banking head stated ‘‘it would make sense

to know a correspondent bank’s correspondent bank customers.’’

D. Foreign Jurisdictions with Weak Banking or Accounting Practices

International correspondent accounts require U.S. banks to

transact business with foreign banks. U.S. correspondent banks are

inherently reliant, in part, on foreign banking and accounting practices to safeguard them from money laundering risks in foreign jurisdictions. Weak banking or accounting practices in a foreign jurisdiction increase the money laundering risks for U.S. correspondent

banks dealing with foreign banks in that jurisdiction.

Weak Foreign Bank Licensing or Supervision. The international banking system is built upon a hodge podge of differing

bank licensing and supervisory approaches in the hundreds of

countries that currently participate in international funds transfer

systems. It is clear that some financial institutions operate under

substantially less stringent requirements and supervision than others. It is also clear that jurisdictions with weak bank licensing and

supervision offer more attractive venues for money launderers

seeking banks to launder illicit proceeds and move funds into bank

accounts in other countries.37

Licensing requirements for new banks vary widely. While some

countries require startup capital of millions of dollars in cash reserves deposited with a central bank and public disclosure of a

bank’s prospective owners, other countries allow startup capital to

be kept outside the country, impose no reserve requirements, and

conceal bank ownership. Regulatory requirements for existing

banks also differ. For example, while some countries use government employees to conduct on-site bank examinations, collect annual fees from banks to finance oversight, and require banks to operate anti-money laundering programs, other countries conduct no

bank examinations and collect no fees for oversight, instead relying

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38See global-money.com/offshore/europe-montenegro-bank.html. See also web.offshore.by.net/

unitrust/enmontenegro-bank.html and www.permanenttourist.com/offshore-montenegrobank.html. 39www.permanenttoursit.com/offshore-montenegro-bank.html.

on self-policing by the country’s banking industry and voluntary

systems for reporting possible money laundering activities.

Offshore banking has further increased banking disparities.

Competition among jurisdictions seeking to expand their offshore

banking sectors has generated pressure for an international ‘‘race

to the bottom’’ in offshore bank licensing, fees and regulation. Domestic bank regulators appear willing to enact less stringent rules

for their offshore banks, not only to respond to the competitive

pressure, but also because they may perceive offshore banking

rules as having little direct impact on their own citizenry since

offshore banks are barred from doing business with the country’s

citizens. Domestic bank regulators may also have less incentive to

exercise careful oversight of their offshore banks, since they are

supposed to deal exclusively with foreign citizens and foreign currencies. A number of countries, including in the East Caribbean

and South Pacific, have developed separate regulatory regimes for

their onshore and offshore banks, with less stringent requirements

applicable to the offshore institutions.

The increased money laundering risks for correspondent banking

are apparent, for example, in a web site sponsored by a private

firm urging viewers to open a new bank in the Republic of Montenegro. The web site trumpets not only the jurisdiction’s minimal

bank licensing requirements, but also its arrangements for giving

new banks immediate access to international correspondent accounts.

‘‘If you’re looking to open a FULLY LICENSED BANK which

is authorized to carry on all banking business worldwide, the

MOST ATTRACTIVE JURISDICTION is currently the REPUBLIC OF MONTENEGRO. . . . JUST USD$9,999 for a full functioning bank (plus USD$4,000 annual fees). . . . No large capital

requirements—just USD$10,000 capital gets your Banking License (and which you get IMMEDIATELY BACK after the Bank

is . . . set-up)[.] . . . [N]o intrusive background checks! . . . The

basic package includes opening a CORRESPONDENT BANK

[ACCOUNT] at the Bank of Montenegro. This allows the new

bank to use their existing correspondent network which includes

Citibank, Commerzbank, Union Bank of Switzerland etc[.] for

sending and receiving payments. For additional fee we can arrange direct CORRESPONDENT ACCOUNTS with banks in

other countries.’’ 38 [Emphasis and capitalization in original text.]

A similar web site offers to provide new banks licensed in Montenegro with a correspondent account not only at the ‘‘State Bank of

Montenegro,’’ but also at a ‘‘Northern European Bank.’’ 39 When

contacted, Citibank’s legal counsel indicated no awareness of the

web sites or of how many banks may be transacting business

through its Bank of Montenegro correspondent account.

Weak Foreign Accounting Practices. Working in tandem

with banking requirements are accounting standards which also

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40 ‘‘See correspondence on CAB between the Minority Staff, the PriceWaterhouseCoopers auditor and the auditor’s legal counsel in the case study on American International Bank.

pants in bank regulatory regimes by certifying the financial statements of particular banks as in line with generally accepted accounting principles. Government regulators and U.S. banks, among

others, rely on these audited financial statements to depict a bank’s

earnings, operations and solvency. Accountants may also perform

bank examinations or special audits at the request of government

regulators. They may also be appointed as receivers or liquidators

of banks that have been accused of money laundering or other misconduct.

The investigation encountered a number of instances in which

accountants in foreign countries refused to provide information

about a bank’s financial statements they had audited or about reports they had prepared in the role of a bank receiver or liquidator.

Many foreign accountants contacted during the investigation were

uncooperative or even hostile when asked for information.

—The Dominican auditing firm of Moreau Winston & Company,

for example, refused to provide any information about the 1998

financial statement of British Trade and Commerce Bank, even

though the financial statement was a publicly available document published in the country’s official gazette, the firm had

certified the statement as accurate, and the statement contained unusual entries that could not be understood without

further explanation.

—A PriceWaterhouseCoopers auditor in Antigua serving as a

government-appointed liquidator for Caribbean American Bank

(CAB) refused to provide copies of its reports on CAB’s liquidation proceedings, even though the reports were filed in court,

they were supposed to be publicly available, and the Antiguan

government had asked the auditor to provide the information

to the investigation.40

—Another Antiguan accounting firm, Pannell Kerr Foster, issued

an audited financial statement for Overseas Development

Bank and Trust in which the auditor said certain items could

not be confirmed because the appropriate information was not

available from another bank, American International Bank.

Yet Pannell Kerr Foster was also the auditor of American

International Bank, with complete access to that bank’s financial records.

The investigation also came across disturbing evidence of possible conflicts of interest involving accountants and the banks they

audited, and of incompetent or dishonest accounting practices. In

one instance, an accounting firm verified a $300 million item in a

balance sheet for British Trade and Commerce Bank that, when

challenged by Dominican government officials, has yet to be substantiated. In another instance, an accounting firm approved an

offshore bank’s financial statements which appear to have concealed indications of insolvency, insider dealing and questionable

transactions. In still another instance raising conflict of interest

concerns, an accountant responsible for auditing three offshore

banks involving the same bank official provided that bank official

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with a letter of reference, which the official then used to help one

of the banks open a U.S. correspondent account.

U.S. correspondent bankers repeatedly stated that they attached

great importance to a foreign bank’s audited financial statements

in helping them analyze the foreign bank’s operations and solvency.

Weak foreign accounting practices damage U.S. correspondent

banking by enabling rogue foreign banks to use inaccurate and

misleading financial statements to win access to U.S. correspondent accounts.

International banking and accounting organizations, such as the

International Monetary Fund, Basle Committee for Banking Supervision, and International Accounting Standards Committee, have

initiated efforts to standardize and strengthen banking and

accounting standards across international lines. A variety of published materials seek to improve fiscal transparency, bank licensing and supervision, and financial statements, among other measures. For the foreseeable future, however, international banking

and accounting variations are expected to continue, and banks will

continue to be licensed by jurisdictions with weak banking and accounting practices. The result is that foreign banks operating without adequate capital, without accurate financial statements, without anti-money laundering programs, or without government oversight will be knocking at the door of U.S. correspondent banks.

U.S. correspondent banks varied widely in the extent to which

they took into account a foreign country’s banking and anti-money

laundering controls in deciding whether to open an account for a

foreign bank. Some U.S. banks did not perform any country analysis when deciding whether to open a foreign bank account. Several

U.S. correspondent bankers admitted opening accounts for banks in

countries about which they had little information. Other U.S.

banks performed country evaluations that took into account a country’s stability and credit risk, but not its reputation for banking or

anti-money laundering controls. Still other U.S. banks performed

extensive country evaluations that were used only when opening

accounts for foreign banks requesting credit. On the other hand, a

few banks, such as Republic National Bank of New York, explicitly

required their correspondent bankers to provide information about

a country’s reputation for banking supervision and anti-money

laundering controls on the account opening documentation, and

routinely considered that information in deciding whether to open

an account for a foreign bank.

E. Bank Secrecy

Bank secrecy laws further increase money laundering risks in

international correspondent banking. Strict bank secrecy laws are

a staple of many countries, including those with offshore banking

sectors. Some jurisdictions refuse to disclose bank ownership. Some

refuse to disclose the results of bank examinations or special investigations. Other jurisdictions prohibit disclosure of information

about particular bank clients or transactions, sometimes refusing

to provide that information to correspondent banks and foreign

bank regulators.

The Minority Staff identified several areas where bank secrecy

impedes anti-money laundering efforts. One area involves secrecy

315

surrounding bank ownership. In a case involving Dominica, for example, government authorities were legally prohibited from confirming a Dominican bank’s statements to a U.S. bank concerning

the identity of the Dominican bank’s owners. In a case involving

the South Pacific island of Vanuatu, bank ownership secrecy impeded local oversight of offshore banks. A local bank owner, who

also served as chairman of Vanuatu’s key commission regulating

offshore banks, was interviewed by Minority Staff investigators. He

indicated that Vanuatu law prohibited government officials from

disclosing bank ownership information to non-government personnel so that, even though he chaired a key offshore bank oversight body, he was not informed about who owned the 60 banks he

oversaw. When asked who he thought might own the offshore

banks, he speculated that the owners were wealthy individuals,

small financial groups or, in a few cases, foreign banks, but

stressed he had no specific information to confirm his speculation.

Another area involves secrecy surrounding bank examinations,

audits and special investigations. In several cases, government authorities said they were prohibited by law or custom from revealing

the results of bank examinations, even for banks undergoing liquidation or criminal investigations. Bank regulators in Jersey, for

example, declined to provide a special report that resulted in the

censure of Standard Bank Jersey Ltd. for opening a correspondent

account for Hanover Bank, because the Jersey government did not

routinely disclose findings of fact or documents accumulated

through investigations. The United Kingdom refused a request to

describe the results of a 1993 inquiry into a 20 million scandal involving Hanover Bank and a major British insurance company,

even though the inquiry had gone on for years, resulted in official

findings and recommendations, and involved a closed matter. U.S.

Government authorities were also at times uncooperative, declining, for example, to disclose information related to Operation Risky

Business, a Customs undercover operation that exposed a $60 million fraud perpetrated through two foreign banks and multiple U.S.

correspondent accounts. Bank examinations, audits and investigations that cannot be released or explained in specific terms hinder

international efforts to gather accurate information about suspect

financial institutions, companies and individuals.

A third area involves secrecy of information related to specific

bank clients and transactions. When Minority Staff investigators

sought to trace transactions and bank accounts related to individuals or entities either convicted of or under investigation for wrongdoing in the United States, foreign banks often declined to answer

specific questions about their accounts and clients, citing their

country’s bank secrecy laws. When asked whether particular accounts involved Internet gambling, the same answer was given.

When asked about whether funds distributed to respondent bank

officials represented insider dealing, the same answer was given.

Bank secrecy laws contribute to money laundering by blocking

the free flow of information needed to identify rogue foreign banks

and individual wrongdoers seeking to misuse the correspondent

banking system to launder illicit funds. Bank secrecy laws slow law

enforcement and regulatory efforts. Bank secrecy laws also make it

difficult for U.S. banks considering correspondent bank applications

316

to make informed decisions about opening accounts or restricting

certain depositors or lines of business. Money launderers thrive in

bank secrecy jurisdictions that hinder disclosure of their accounts

and activities, even when transacting business through U.S. correspondent accounts.

F. Cross Border Difficulties

Due diligence reviews of foreign banks, if performed correctly, require U.S. correspondent banks to obtain detailed information from

foreign jurisdictions. This information is often difficult to obtain.

For example, some governments are constrained by bank secrecy

laws from providing even basic information about the banks operating in the country. Jurisdictions with weak banking oversight

and anti-money laundering regimes may have little useful information to offer in response to an inquiry by a U.S. based bank. Jurisdictions reliant on offshore businesses for local jobs or government

fees may be reluctant to disclose negative information. Other

sources of information may be limited or difficult to evaluate. Many

foreign jurisdictions have few or no public databases about their

banks. Court records may not be computerized or easily accessible.

Credit agencies may not operate within the jurisdiction. Media

databases may be limited or nonexistent. Language barriers may

impose additional difficulties. Travel to foreign jurisdictions by U.S.

correspondent bankers to gather first-hand information is costly

and may not produce immediate or accurate information, especially

if a visit is short or to an unfamiliar place. The bottom line is that

due diligence is not easy in international correspondent banking.

The difficulty continues after a correspondent account with a foreign bank is opened. Correspondent banking with foreign banks, by

necessity, involves transactions across international lines. The

most common correspondent banking transaction is a wire transfer

of funds from one country to another. Foreign exchange transactions, including clearing foreign checks or credit card transactions, and international trade transactions are also common. All

require tracing transactions from one financial institution to another, usually across international borders, and involve two or

more jurisdictions, each with its own administrative and statutory

regimes. These cross border financial transactions inevitably raise

questions as to which jurisdiction’s laws prevail, who is responsible

for conducting banking and anti-money laundering oversight, and

what information may be shared to what extent with whom. Cross

border complexities increase the vulnerability of correspondent

banking to money laundering by rendering due diligence more difficult, impeding investigations of questionable transactions, and

slowing bank oversight.

G. U.S. Legal Barriers to Seizing Funds in U.S. Correspondent Accounts

Another contributor to money laundering in correspondent banking are U.S. legal barriers to the seizure of laundered funds from

a U.S. correspondent bank account.

Under current law in the United States, funds deposited into a

correspondent bank account belong to the respondent bank that

opened and has signatory authority over the account; the funds do

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41See, for example, United States v. Proceeds of Drug Trafficking Transferred to Certain Foreign Bank Accounts (Civil Action No. 98–434(NHJ), U.S. District Court for the District of Columbia 2000), court order dated 4/11/00. 42 United States v. $15,270,885.69 (2000 U.S. Dist. LEXIS 12602, 2000 WL 1234593 SDNY

2000).

not belong to the respondent bank’s individual depositors.41 Federal civil forfeiture law, under 18 U.S.C. 984, generally prohibits

the United States from seizing suspect funds from a respondent

bank’s correspondent account based upon the wrongdoing of an individual depositor at the respondent bank. The one exception,

under 18 U.S.C. 984(d), is if the United States demonstrates that

the bank holding the correspondent account ‘‘knowingly engaged’’ in the laundering of the funds or in other criminal misconduct justifying seizure of the bank’s own funds.

Few cases describe the level of bank misconduct that would permit a seizure of funds from a U.S. correspondent account under

Section 984(d). One U.S. district court has said that the United

States must demonstrate the respondent bank’s ‘‘knowing involvement’’ or ‘‘willful blindness’’ to the criminal misconduct giving rise

to the seizure action.42 That court upheld a forfeiture complaint alleging that the respondent bank had written a letter of reference

for the wrongdoer, handled funds used to pay ransom to kidnappers, and appeared to be helping its clients avoid taxes, customs

duties and transaction reporting requirements. The court found

that, ‘‘under the totality of the circumstances . . . the complaint

sufficiently allege[d] [the respondent bank’s] knowing involvement

in the scheme.’’

Absent such a showing by the United States, a respondent bank

may claim status as an ‘‘innocent bank’’ and no funds may be

seized from its U.S. correspondent account. If a foreign bank successfully asserts an innocent bank defense, the United States’ only

alternative is to take legal action in the foreign jurisdiction where

the suspect funds were deposited. Foreign litigation is, of course,

more difficult and expensive than seizure actions under U.S. law

and may require a greater threshold of wrongdoing before it will

be undertaken by the U.S. Government.

In some instances, money launderers may be deliberately using

correspondent accounts to hinder seizures by U.S. law enforcement,

and some foreign banks may be taking advantage of the innocent

bank doctrine to shield themselves from the consequences of lax

anti-money laundering oversight. For example, there are numerous

criminal investigations in the United States of frauds committed by

Nigerian nationals and their accomplices involving suspect funds

deposited into U.S. correspondent accounts in the name of Nigerian

banks.

Nigerian financial fraud cases are a well known, widespread

problem which consumes significant U.S. law enforcement and

banking resources. The INCSR 2000 report states:

‘‘Nigeria continues to be the money laundering and financial

fraud hub of West Africa, and may be assuming that role for

the entire continent. Nigerian money launderers operate sophisticated global networks to repatriate illicit proceeds. . . .

Nigerian Advance Fee Fraud has arguably become the most lucrative financial crime committed by Nigerian criminals worldVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00327 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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43 INCSR 2000 at 713. The INCSR 2000 report also expresses concern about Nigeria’s weak

anti-money laundering efforts, which was echoed by international banking experts interviewed

by Minority Staff investigators. The Federal Deposit Insurance Corporation recently issued a

special alert urging U.S. financial institutions to scrutinize transactions to avoid funds associated with Nigerian frauds. FDIC Financial Institution Letter No. FIL–64–2000 (9/19/00). See

also, for example, ‘‘Letters from Lagos promise false riches for the gullible,’’ The Times (London)

(8/20/99); ‘‘Nigerian Con Artists Netting Millions in Advance-Fee Schemes,’’ Los Angeles Times

(1/24/98).

wide, with conservative estimates indicating hundred of millions of dollars in illicit profits generated annually. This type

of fraud is referred to internationally as ‘Four-One-Nine’ (419),

referring to the Nigerian criminal statute for fraud, and has affected a large number of American citizens and businesses.’’ 43

U.S. prosecutors seeking to recover Nigerian 4-1-9 fraud proceeds

face serious legal hurdles if the funds have been deposited into a

Nigerian bank’s U.S. correspondent account. Section 984(d) precludes seizure of the funds from the correspondent account unless

the United States demonstrates that the Nigerian bank was knowingly engaged in misconduct. Demonstrating Nigerian bank misconduct is not an easy task; Nigerian bank information is not readily available and prosecutors would likely have to travel to Nigeria

to obtain documents or interview bank personnel. Law enforcement

advised that these legal and investigatory complications make U.S.

prosecutors reluctant to pursue 4-1-9 cases, that Nigerian wrongdoers are well aware of this reluctance, and that some Nigerians

appear to be deliberately using U.S. correspondent accounts to help

shield their ill-gotten gains from seizure by U.S. authorities.

The survey conducted by the investigation discovered that at

least two U.S. banks have numerous correspondent relationships

with Nigerian banks, one listing 34 such correspondent relationships and the other listing 31. The investigation also determined

that many of these Nigerian banks were newly established, there

was little information readily available about them, and the only

method to obtain first hand information about them was to travel

to Nigeria. These U.S. correspondent accounts increase money

laundering risks in U.S. correspondent banking, not only because

of Nigeria’s poor anti-money laundering and banking controls, but

also because of U.S. legal protections that shield these accounts

from seizures of suspect funds.

The special forfeiture protections in U.S. law for deposits into

correspondent accounts are not available for deposits into any other

type of account at U.S. banks. Additional examples of U.S. legal

barriers impeding forfeiture of illicit proceeds from U.S. correspondent accounts are discussed in the case histories involving

European Bank, British Bank of Latin America, and British Trade

and Commerce Bank.

VI. How an Offshore Bank Launders Money Through a U.S.

Correspondent Account: The Lessons of Guardian Bank

In March 2000, the Minority Staff conducted an in-depth interview of a former offshore bank owner who had pled guilty to money

laundering in the United States and was willing to provide an insider’s account of how his bank used U.S. correspondent accounts

to launder funds and facilitate crime in the United States.

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44Johnson v. United States, 971 F. Supp. 862, 863 (U.S. District Court for the District of New

Jersey 1997). 45 In 1997, Mathewson pleaded guilty to charges in three Federal prosecutions. The U.S. District of New Jersey had indicted him on three counts of money laundering, United States v.

Mathewson (Criminal Case No. 96–353–AJL); the Eastern District of New York had charged him

with four counts of aiding and abetting the evasion of income tax, United States v. Mathewson

(Criminal Case No. 97–00189–001–ALJ); and the Southern District of Florida had charged him

with one count of conspiracy to commit wire fraud, United States v. Mathewson (Criminal Case

No. 97–0188–Marcus). He was also subject to a 1993 civil tax judgment for over $11.3 million

from United States v. Mathewson (U.S. District Court for the Southern District of Florida Civil

Case No. 92–1054–Davis). 46The government-appointed liquidator of Guardian Bank sued unsuccessfully to recover the

computer tapes from the U.S. Government, arguing that they had been improperly obtained and

disclosure of the bank information would violate Cayman confidentiality laws and damage the

reputation of the Cayman banking industry. Johnson v. United States, 971 F. Supp. 862 (U.S.

District Court for the District of New Jersey 1997). The Cayman Government also refused U.S.

requests for assistance in decoding the information on the computer tapes. 47Some of the former clients for whom Mathewson has provided assistance in obtaining a criminal conviction include: (1) Mark A. Vicini of New Jersey, who had deposited $9 million into

a Guardian account and pleaded guilty to evading $2.2 million in taxes (U.S. District Court for

the Eastern District of New York Case No. CR–97–684); (2) members of the Abboud family of

Omaha, Nebraska, who have been indicted for money laundering and fraud in connection with

$27 million in cable piracy proceeds transferred to Guardian Bank (U.S. District Court for the

District of Nebraska Case No. 8:99CR–80); (3) Frederick Gipp, a Long Island golf pro who had deposited $150,000 into a Guardian account and pleaded guilty to tax evasion (U.S. District

Court for the Eastern District of New York Case No. CR–98–147–ERK); (4) Dr. Jeffrey E. LaVigne, a New York proctologist who deposited $560,000 into a Guardian account and who

pleaded guilty to evading $160,000 in taxes (U.S. District Court for the Eastern District of New

York Case No. 94–1060–CR–ARR); (5) Dr. Bartholomew D’Ascoli, a New Jersey orthopedic sur- geon, who had deposited $395,000 into a Guardian account and pleaded guilty to evading

$118,000 in taxes (U.S. District Court for the Eastern District of New York Criminal Case No.

98–739–RJD); (6) Michael and Terrence Hogan of Ohio, who had deposited $750,000 of

undeclared income into a Guardian account and pleaded guilty to tax evasion (U.S. District

Court for the Southern District of Ohio Criminal Case No. CR–1–98–045); (7) David L. Bamford

of New Jersey, who had diverted corporate income into a Guardian account and pleaded guilty

Continued

Guardian Bank and Trust (Cayman) Ltd. was an offshore bank

licensed by the Cayman Islands which opened its doors in 1984 and

operated for about 10 years before being closed by the Cayman

Government. At its peak, Guardian Bank had a physical office in

the Cayman Islands’ capital city, over 20 employees, over 1,000 cli- ents, and about $150 million in assets. The bank operated until

early 1995, when it was abruptly closed by Cayman authorities and

eventually turned over to a government-appointed liquidator due to

‘‘serious irregularities’’ identified in the conduct of the Offshore

Bank’s business.44

The majority owner and chief executive of Guardian Bank for

most of its existence was John Mathewson, a U.S. citizen who was

then a resident of the Cayman Islands. In 1996, while in the

United States, Mathewson was arrested and charged with multiple

counts of money laundering, tax evasion and fraud, and later

pleaded guilty.45 As part of his efforts to cooperate with Federal

law enforcement, Mathewson voluntarily provided the United

States with an electronic ledger and rolodex providing detailed

records for a 1-year period of all Guardian Bank customers, accounts and transactions.

The encrypted computer tapes provided by Mathewson represent

the first and only time U.S. law enforcement officials have gained

access to the computerized records of an offshore bank in a bank

secrecy haven.46 Mathewson not only helped decode the tapes, but

also explained the workings of his bank, and provided extensive

and continuing assistance to Federal prosecutors in securing criminal convictions of his former clients for tax evasion, money laundering and other crimes.47

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to tax evasion (U.S. District Court for the District of New Jersey Case Number 2:98–CR–0712);

and (8) Marcello Schiller of Florida who had deposited funds in a Guardian account, pleaded

guilty to Medicare fraud, and was ordered to pay restitution exceeding $14 million (U.S. District

Court for the Southern District of Florida Criminal Case No. 1:98–CR–0397). 48The Record (Bergen County, N.J.) (8/3/97). 49 New York Times (8/3/99). 50Mathewson drew a sharp contrast between the proceeds of tax evasion, which his bank had

accepted, and the proceeds of drug trafficking, which his bank had not. He stated that Guardian

Bank had refused to accept suspected drug proceeds, and multiple reviews of its accounts by

law enforcement had found no evidence of any drug proceeds in the bank. 51Johnson v. United States, 971 F. Supp. at 865.

Mathewson stated at his sentencing hearing, ‘‘I have no excuse

for what I did in aiding U.S. Citizens to evade taxes, and the fact

that every other bank in the Caymans was doing it is no excuse.

. . . But I have cooperated.’’ His cooperation has reportedly resulted in the collection of more than $50 million in unpaid taxes

and penalties, with additional recoveries possible.48 One prosecutor

has characterized Mathewson’s assistance as ‘‘the most important

cooperation for the government in the history of tax haven prosecution.’’49

Pursuant to his plea agreement to provide assistance to government officials investigating matters related to Guardian Bank,

Mathewson provided the Minority Staff investigation with a

lengthy interview and answers to written questions on how Guardian Bank laundered funds through its U.S. correspondent accounts.

Bank Secrecy. Mathewson first explained why bank secrecy

plays a central role in the offshore banking industry. He said that

Cayman laws strictly limit government and bank disclosure of

bank records and personal information associated with depositors.

He said that, in his experience, Cayman bank clients relied on

those secrecy laws and believed no one would be able to trace a

Cayman bank account or corporation back to them. Mathewson asserted that this secrecy was and still is the basis of the Cayman

financial industry, and is protected by Cayman authorities. He indicated that, without this secrecy, he thought there would be no

reason for U.S. citizens to establish offshore bank accounts, trusts

or corporations in the Cayman Islands and pay the costly fees associated with them.

Mathewson stated at another point that he thought 100% of his

clients had been engaged in tax evasion, which was one reason

they sought bank secrecy. He pointed out that tax evasion is not

a crime in the Cayman Islands; Guardian Bank could legally accept

the proceeds of tax evasion without violating any Cayman criminal

or money laundering prohibitions; and Cayman law placed no legal

obligation on its banks to avoid accepting such deposits.50 His analysis of the bank’s clients is echoed in statements made on behalf

of the Guardian Bank liquidator in a letter warning of the consequences of Guardian computer tapes remaining in U.S. custody:

‘‘[I]t is quite obvious that the consequences of the seizure of

these records by the Federal authorities are potentially very

damaging to those of the [Offshore] Bank’s clients liable for

taxation in the U.S. In the likely event that the Federal authorities share the information . . . with the Internal Revenue

Service, we would anticipate widespread investigation and possibly prosecution of the [Offshore] Bank’s clients.’’ 51

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Subsequent U.S. tax prosecutions against Guardian clients have

demonstrated the accuracy of this prediction, establishing that numerous depositors had, in fact, failed to pay U.S. tax on the funds

in their offshore accounts.

Guardian Procedures Maximizing Secrecy. Mathewson said

that Guardian Bank had complied with Cayman secrecy requirements, and he had designed Guardian Bank policies and procedures to maximize secrecy protections for its clients. He stated, for

example, that he had begun by changing the name of the bank

from Argosy Bank to Guardian Bank. He indicated that he had selected the name Guardian Bank in part after determining that at

least 11 other banks around the world used the word Guardian in

their title. Mathewson indicated that he had thought the commonness of the name would help secure Guardian’s anonymity or at

least make it more difficult to trace transactions related to the

bank. He indicated that this was a key concern, because offshore

banks in small jurisdictions by necessity conduct most of their

transactions through international payment systems and so need to

find ways to minimize detection and disclosure of client information.

Mathewson advised that a second set of Guardian procedures designed to maximize client secrecy involved the bank’s opening client accounts in the name of shell corporations whose true ownership was not reported in public records. He said that almost all

Guardian clients had chosen to open their accounts in the name of

a corporation established by the bank. Mathewson explained that

Guardian Bank had typically set up several corporations at a time

and left them ‘‘on the shelf ’’ for ready use when a client requested

one.

Mathewson said that Guardian Bank had typically charged $5,000 to supply a ‘‘shelf corporation’’ to a client and $3,000 to

cover the corporation’s first-year management fee, for a total initial charge of $8,000. He said that clients were then required to pay an

annual management fee of $3,000 for each corporation they owned.

He said that these fees represented mostly revenue for Guardian

Bank, since, at the time, the only major expense per corporation

was about $500 charged by the Cayman authorities each year for

taxes and other fees. He said that many Cayman banks offered the

same service, and $8,000 was the going rate at the time.

According to Mathewson, for an additional fee, Guardian clients

could obtain an ‘‘aged’’ shelf corporation. He explained that an aged

shelf corporation was one which had been in existence for several

years and which either had never been sold to a client or had been

sold and returned by a client after a period of time. Mathewson indicated that some clients wanted aged shelf corporations in order

to back-date invoices or create other fictitious records to suggest

past years of operation. He said that this type of corporation helped

Guardian clients with preexisting tax problems to fabricate proof of

corporate existence and business activity. Mathewson stated that

he and other Cayman bankers would customize these aged shelf

corporation to suit a client’s specific needs.

In addition to providing a shelf corporation to serve as a client’s

accountholder, Mathewson stated that Guardian Bank usually provided each client with nominee shareholders and directors to furVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00331 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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ther shield their ownership of the corporation from public records.

He explained that Cayman law allowed Cayman corporations to

issue a single share which could then be held by a single corporate

shareholder. He said that a Guardian subsidiary, such as Fulcrum

Ltd., was typically named as the shelf corporation’s single shareholder. He said that Fulcrum Ltd. would then be the only shareholder listed on the incorporation papers.

Mathewson said that Guardian also usually supplied nominee directors for the shelf corporation. He explained that Cayman law required only one director to appear on the incorporation papers, allowed that director to be a corporation, and allowed companies to

conduct business in most cases with only one director’s signature.

He said that a Guardian subsidiary called Guardian Directors Ltd.

was typically used to provide nominee directors for clients and to

manage their shelf corporations. He said that the only director’s

name that would appear on a shelf corporation’s incorporation papers was ‘‘Guardian Directors Ltd.,’’ and that only one signature

from the subsidiary was then needed to conduct business on the

shelf corporation’s behalf. That meant, Mathewson advised, that a

client’s name need never appear on the shelf corporation’s incorporation papers or on any other document requiring a corporate signature; signatures were instead provided by a person from Guardian Directors Ltd. In this way, Mathewson indicated, a client’s corporation ‘‘could do business worldwide and the U.S. client (beneficial owner) could be confident that his name would never appear

and, in fact, he or she would have complete anonymity.’’ Mathewson explained that, to establish a client’s ownership of a

particular shelf corporation, Guardian Bank typically used a separate ‘‘assignment’’ document which assigned the corporation’s single share from the Guardian subsidiary to the client. He said this

assignment document was typically the only documentary evidence

of the client’s ownership of the shelf corporation. He indicated that

the assignment document could then be kept by Guardian Bank in

the Cayman Islands, under Cayman banking and corporate secrecy

laws, to further ensure nondisclosure of the client’s ownership interest.

Mathewson said Guardian Bank usually kept clients’ bank account statements in the Cayman Islands as well, again to preserve

client secrecy. His written materials state, ‘‘No bank statements

were ever sent to the client in the United States.’’ Instead, he indicated, a client visiting the Cayman Islands would give the bank a

few days notice, and Guardian Bank would produce an account

statement for an appropriate period of time, for the client’s in-person review and signature during their visit to the bank.

Guardian Use of Correspondent Accounts. Mathewson said

Guardian Bank utilized correspondent bank accounts to facilitate

client transactions, while minimizing disclosure of client information and maximizing Guardian revenues.

Mathewson noted that, because Guardian Bank was an offshore

bank, all of its depositors were required to be non-Cayman citizens.

He said that 95% of the bank’s clientele came from the United

States, with the other 5% from Canada, South America and Europe, which he said was a typical mix of clients for Cayman banks.

In order to function, he said, Guardian had to be able to handle forVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00332 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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eign currency transactions, particularly U.S. dollar transactions,

including clearing U.S. dollar checks and wires. He said that, as a

non-U.S. bank, Guardian Bank had no capability to clear a U.S.

dollar check by itself and no direct access to the check and wire

clearing capabilities of Fedwire or CHIPS. But Guardian Bank had

easily resolved this problem, he said, by opening correspondent accounts at U.S. banks.

Mathewson said that, over time, Guardian Bank had opened

about 15 correspondent accounts and conducted 100% of its transactions through them. He said, ‘‘Without them, Guardian would not

have been able to do business.’’ He said that, at various times,

Guardian had accounts at seven banks in the United States, including Bank of New York; Capital Bank in Miami; Eurobank

Miami; First Union in Miami; Popular Bank of Florida; Sun Bank;

and United Bank in Miami. He said Guardian also had accounts

at non-U.S. banks, including Bank of Butterfield in the Cayman Islands; Bank of Bermuda in the Cayman Islands; Barclay’s Grand

Cayman; Credit Suisse in Guernsey; Credit Suisse in Toronto;

Royal Bank of Canada in the Cayman Islands; and Toronto Dominion Bank.

Mathewson indicated that Guardian Bank’s major correspondents were Bank of New York, First Union in Miami, and Credit

Suisse in Guernsey, with $1–$5 million on deposit at each bank at

any given time. He said that when Guardian Bank was closed in

early 1995, it had a total of about $150 million in its correspondent

accounts. He estimated that, over 10 years of operation, about

$300–$500 million had passed through Guardian Bank’s correspondent accounts.

Mathewson said that Guardian Bank had used the services provided by its correspondent banks to provide its clients with a wide

array of financial services, including checking accounts, credit

cards, wire transfer services, loans and investments. He wrote,

‘‘The bank offered almost any service that a U.S. bank would offer,

i.e., wire transfers, current accounts, certificates of deposit, the

purchase of shares on any share market in the world, purchase of

U.S. treasury bills, bonds, credit cards (Visa), and almost any investment that the client might wish.’’ He explained that, while

Guardian Bank itself lacked the resources, expertise and infrastructure needed to provide such services in-house, it easily afforded the fees charged by correspondent banks to provide these

services for its clients.

Mathewson said that to ensure these correspondent services did

not undermine Cayman secrecy protections, Guardian Bank had

also developed a series of policies and procedures to minimize disclosure of client information.

Client Deposits. Mathewson said that one set of policies and

procedures were designed to minimize documentation linking particular deposits to particular clients or accounts and to impede the

tracing of individual client transactions. He said that Guardian

Bank provided its clients with instructions on how to make deposits with either checks or wire transfers.

Client Deposits Through Checks. If a client wanted to use a

check to make a deposit, Mathewson said, the client was advised

to make the check payable to Guardian Bank; one of Guardian’s

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subsidiaries—Fulcrum Ltd., Sentinel Ltd., or Tower Ltd.; or the client’s own shelf corporation. He said the client was then instructed

to wrap the check in a sheet of plain paper, and write their Guardian account number on the sheet of paper. He said that the client

account number was written on the plain sheet of paper rather

than on the check, so that the account number would not be directly associated with the check instrument used to make the deposit.

Mathewson said that Guardian Bank provided its clients with

several options for check payees to make a pattern harder to detect

at their own bank. He said that if a check was made out to the client’s shelf corporation, the client was advised not to endorse it on

the back and Guardian Bank would ensure payment anyway. He

said that Guardian would then stamp each check on the back with:

‘‘For deposit at [name of correspondent bank] for credit to Guardian

Bank’’ and provide Guardian’s account number at the correspondent bank. He noted that this endorsement included no reference to the Cayman Islands which meant, since there were multiple Guardian Banks around the world, the transaction would be

harder to trace.

Mathewson said that after Guardian Bank accumulated a number of U.S. dollar checks sent by its clients to the bank in the Cayman Islands, it batched them into groups of 50 to 100 checks and

delivered them by international courier to one of its U.S. correspondent banks for deposit into a Guardian account. He said that

the U.S. bank would then clear the client checks using its own U.S.

bank stamp, which meant the client’s U.S. bank records would

show only a U.S. bank, and not a Cayman bank, as the payor. He

said the correspondent bank would then credit the check funds to

Guardian’s account, leaving it to Guardian Bank itself to apportion

the funds among its client accounts.

Mathewson explained that Guardian Bank never actually transferred client funds out of Guardian’s correspondent accounts to the

bank in the Cayman Islands, nor did it create subaccounts within

its U.S. correspondent accounts for each client. He said that Guardian Bank purposely left all client funds in its correspondent accounts in order to earn the relatively higher interest rates paid on

large deposits, thereby generating revenue for the bank. For example, Mathewson said, a Guardian correspondent account might generate 6% interest, a higher rate of return based on the large

amount of funds on deposit, and Guardian Bank would then pay

its clients 5%, keeping the 1% differential for itself. He said that

Guardian might also transfer some funds to an investment account

in its own name to generate still larger revenues for the bank. He

said that Guardian Bank had opened investment accounts at 10 or

more securities firms, including Prudential Bache in New York,

Prudential Securities in Miami, Smith Barney Shearson, and

Charles Schwab.

He explained that Guardian did not create client subaccounts or

otherwise ask its correspondent banks keep track of Guardian client transactions, since to do so would have risked disclosing specific client information. Instead, he said, transactions involving individual Guardian accounts were recorded in only one place,

Guardian Bank’s ledgers. He said that Guardian Bank’s ledgers

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were kept electronically, using encrypted banking software that

was capable of tracking multiple clients, accounts, transactions and

currencies and that ran on computers physically located in the

Cayman Islands, protected by Cayman bank secrecy laws.

Client Deposits Through Wire Transfers. Mathewson also

described the arrangements for client deposits made through wire

transfers. He said that clients were provided the names of banks

where they could direct wire transfers for depositing funds into a

Guardian correspondent account. He said the wire instructions

typically told clients to transfer their funds to the named bank ‘‘for

further credit to Guardian Bank,’’ and provided Guardian’s correspondent account number.

Mathewson said that Guardian Bank had preferred its clients to

send wire deposits to a non-U.S. bank, such as Credit Suisse in

Guernsey, or the Bank of Butterfield in the Caymans, to minimize

documentation in the United States. He said the clients were given

Guardian’s account number at each of the banks and were instructed to direct the funds to be deposited into Guardian’s account, but not to provide any other identifying information on the

wire documentation. He said clients were then instructed to telephone Guardian Bank to alert it to the incoming amount and the

account to which it should be credited. He said that Guardian Bank

commingled the deposit with other funds in its correspondent account, recording the individual client transaction only in its Cayman records.

Mathewson stated that, although discouraged from doing so,

some clients did wire transfer funds to a Guardian correspondent

account at a U.S. bank. He said that Guardian had also, on occasion, permitted clients to make cash deposits into a Guardian

correspondent account at a U.S. bank. In both cases, however, he

indicated that the clients were warned against providing documentation directly linking the funds to themselves or their Guardian account numbers. He said that after making a deposit at a U.S.

bank, clients were supposed to telephone Guardian Bank to alert

it to the deposit and to indicate which Guardian account was supposed to be credited. He indicated that, as a precaution in such

cases, Guardian Bank would sometimes wire the funds to another

Guardian correspondent account at a bank in a secrecy jurisdiction,

such as Credit Suisse in Guernsey, before sending it to the next

destination, to protect client funds from being traced.

Mathewson said that, whether a client used a check or wire

transfer to deposit funds, if the client followed Guardian’s instructions, the documentation at the correspondent bank ought to have

contained no information directly linking the incoming funds to a

named client or to a specific account at Guardian Bank in the Cayman Islands.

Client Withdrawals. Mathewson next explained how Guardian

Bank used its U.S. correspondent accounts to provide its clients

with easy, yet difficult-to-trace access to their offshore funds. He

described three options for client withdrawals involving credit

cards, checks or wire transfers.

Client Withdrawals Through Credit Cards. Mathewson said

that Guardian Bank had recommended that its clients access their

account funds through use of a credit card issued by the bank,

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which he described as the easiest and safest way for them to access

their offshore funds. He explained that Guardian Bank had set up

a program to assign its U.S. clients a corporate Visa Gold Card

issued in the name of their shelf corporation. He said that the only

identifier appearing on the face of the card was the name of the

shelf corporation, imprinted with raised type. He said that the clients were then told to sign the back of the card, using a signature

that was reproducible but hard to read. He said that, while some

clients had expressed concern about merchants accepting the credit

card, Guardian had never experienced any problems.

Mathewson said that Guardian Bank had charged its clients an

annual fee of $100 for use of a Visa card. Mathewson explained

that the cards were issued and managed on a day-to-day basis by

a Miami firm called Credomatic. To obtain a card for a particular

client, Mathewson explained that Guardian Bank had typically

sent a letter of credit on behalf of the client’s shelf corporation to

Credomatic. He said the amount of the letter of credit would equal

the credit limit for the particular card. He said that, to ensure payment by the client, Guardian Bank would simultaneously establish

a separate account within Guardian Bank containing funds from

the client in an amount equal to twice the client’s credit card limit.

He said these client funds then served as a security deposit for the

credit card. He said, for example, if a client had a $50,000 credit

card limit, the security deposit would contain $100,000 in client

funds. He said that, while most of their cardholders had $5,000

credit limits, some went as high as $50,000.

Mathewson stated that Credomatic had not required nor conducted background checks on Guardian’s cardholders, because

Guardian Bank had guaranteed payment of their credit card balances through the letters of credit, which meant Credomatic had

little or no risk of nonpayment. Mathewson stated that Guardian

Bank had instructed Credomatic never to carry a credit card balance over to a new month, but to ensure payment in full each

month using client funds on deposit at Guardian Bank. In that

way, he said, the client funds in the security deposit eliminated

any nonpayment risk to Guardian Bank. According to Mathewson,

the arrangement was the equivalent of a monthly loan by the bank

to its clients, backed by cash, through a device which gave its U.S.

banking clients ready access to their offshore funds.

Mathewson observed that Guardian Bank had earned money

from the Visa card arrangement, not only through the $100 annual

fee, but also through commissions on the card activity. He explained that once a credit card was issued, Credomatic managed

the credit relationship, compiling the monthly charges for each

card and forwarding the balances to Guardian Bank which immediately paid the total in full and then debited each client. In return, he said, Credomatic received from merchants the standard

Visa commission of approximately 3% of the sales drafts and, because Guardian Bank had guaranteed payment of the monthly

credit card balances, forwarded 1% to the bank. He said it was a

popular service with clients and profitable for Guardian Bank. In

response to questions, he said that, as far as he knew, Credomatic

had never questioned Guardian Bank’s operations or clients and

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was ‘‘delighted’’ to have the business. Credomatic is still in operation in Miami.

Client Withdrawals Through Correspondent Checks.

Mathewson said that a second method Guardian Bank sometimes

used to provide U.S. clients with access to their offshore funds was

to make payments on behalf of its clients using checks drawn on

Guardian’s U.S. correspondent accounts.

Mathewson explained that each correspondent bank had typically

provided Guardian Bank with a checkbook that the bank could use

to withdraw funds from its correspondent account. He said that the

Bank of New York, which provided correspondent services to

Guardian Bank from 1992 until 1996, had actually provided two

checkbooks. He said the first checkbook from the Bank of New

York had provided checks in which the only identifier at the top

of the check was ‘‘Guardian Bank’’—without any address, telephone

number or other information linking the bank to the Cayman Islands—and the only account number at the bottom was Guardian’s

correspondent account number at the Bank of New York in New

York City. He said the second checkbook provided even less information—the checks had no identifier at the top at all and at the

bottom referenced only the Bank of New York and an account number that, upon further investigation, would have identified the

Guardian account. He explained that checks without any identifying information on them were common in Europe, Asia and offshore jurisdictions, and that Guardian Bank had experienced no

trouble in using them.

He said that Guardian Bank sometimes used these checks to

transact business on behalf of a client—such as sending a check to

a third party like a U.S. car dealership. He said that if the amount

owed was over $10,000, such as a $40,000 payment for a car, the

client would authorize the withdrawal of the total amount of funds

from their Cayman account, and Guardian Bank would send multiple checks to the car dealership, perhaps five or six, each in an

amount less than $10,000, to avoid generating any currency report.

He noted that, once deposited, each check would be cleared as a

payment from a U.S. bank, rather than from a Cayman bank. He

said that if the check used did not have an identifier on top, the

payee would not even be aware of Guardian Bank’s involvement in

the transaction. If traced, he noted that the funds would lead only

to the correspondent account held by Guardian Bank, rather than

to a specific Guardian client. He said that Cayman secrecy laws

would then prohibit Guardian Bank from providing any specific client information, so that the trail would end at the correspondent

account in the United States.

Mathewson said that correspondent checks, like the VISA credit

cards, gave Guardian clients ready access to their offshore funds in

ways that did not raise red flags and would not have been possible

without Guardian Bank’s correspondent relationships.

Client Withdrawals Through Wire Transfers. A third option

for clients to access their offshore funds involved the use of wire

transfers. Mathewson explained that Guardian clients had no authority to wire transfer funds directly from Guardian Bank’s correspondent accounts, since only the bank itself had signatory authority over those accounts. He said that the clients would instead

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send wire transfer instructions to Guardian Bank, which Guardian

Bank would then forward to the appropriate correspondent bank.

He said that Guardian Bank would order the transfer of funds to

the third party account specified by the client, without any client

identifier on the wire documentation itself, requiring the client to

take responsibility for informing the third party that the incoming

funds had originated from the client.

Mathewson observed that its correspondent accounts not only enabled its clients readily to deposit and withdraw their offshore

funds and hide their association with Guardian Bank, but also generated ongoing revenues for Guardian Bank, such as the higher interest paid on aggregated client deposits, credit card commissions,

and wire transfer fees.

Two Other Client Services. In addition to routine client services, Mathewson described two other services that Guardian Bank

had extended to some U.S. clients, each of which made use of

Guardian Bank’s correspondent accounts. Both of these services enabled Guardian clients to evade U.S. taxes, with the active assistance of the bank.

Invoicing. Mathewson first described a service he called

invoicing, which he said was provided in connection with sales

transactions between two corporations controlled by the same

Guardian client. He said that a typical transaction was one in

which the client’s Cayman corporation purchased a product from

abroad and then sold it to the client’s U.S. corporation at a higher

price, perhaps with a 30% markup, using an invoice provided by

Guardian Bank. He said that this transaction benefited the client

in two ways: (1) the client’s Cayman corporation could deposit the

price differential into the client’s account at Guardian Bank tax

free (since the Cayman Islands imposes no corporate taxes) and, if

the client chose, avoid mention of the income on the client’s U.S.

taxes; and (2) the client’s U.S. corporation could claim higher costs

and less revenue on its U.S. tax return, resulting in a lower U.S.

tax liability.

Mathewson said that the Guardian Bank service had included

supplying any type of invoice the client requested, with any specified price or other information. He said Guardian Bank had also

made its correspondent accounts available to transfer the funds

needed by the client’s Cayman corporation for the initial product

purchase, and to accept the sales price later ‘‘paid’’ by the client’s

U.S. corporation. In return for its services, he said, Guardian Bank

had charged the client in one of three ways: (1) a fee based upon

the time expended, such as $1,000 for 4 hours of work; (2) a flat

fee for the service provided, such as $25,000 per year; or (3) a fee

based on a percentage of the shipment cost of the product invoiced.

Mathewson observed that, at the time, he did not consider this activity to be illegal since, unlike the United States, the Cayman Islands collected no corporate taxes and did not consider tax evasion

a crime. However, Cayman authorities told Minority Staff investigators that Guardian Bank’s invoicing services were both unusual

in Cayman banking circles and a clearly fraudulent practice.

Dutch Corporations. Mathewson advised that Guardian Bank

had also assisted a few U.S. clients in obtaining Dutch corporations

to effect a scheme involving fake loans and lucrative U.S. tax deVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00338 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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ductions. He explained that Guardian Bank had begun offering this

service after hiring a new vice president who had set up Dutch corporations in his prior employment. Mathewson said, for a $30,000

fee, Guardian Bank would establish a Dutch corporation whose

shares would be wholly owned by the client’s Cayman corporation.

Mathewson said that Guardian Bank used a Dutch trust company

to incorporate and manage the Dutch corporations, paying the trust

company about $3,000–$4,000 per year per corporation. He said

that Guardian Bank was able to charge ten times that amount to

its clients, because the few clients who wanted a Dutch corporation

were willing to pay.

Once established, Mathewson said, the Dutch corporation would

issue a ‘‘loan’’ to the U.S. client, using the client’s own funds on deposit with Guardian Bank. He said the U.S. client would then

repay the ‘‘loan’’ with ‘‘interest,’’ by sending payments to the Dutch

corporation’s bank account, opened by the Dutch trust company at

ANB AMRO Bank in Rotterdam. He said that the Dutch corporation would then forward the ‘‘loan payments’’ to the client’s Guardian account, using one of Guardian Bank’s correspondent accounts.

In essence, he said, the U.S. client was using Guardian Bank’s

correspondent accounts to transfer and receive the client’s own

funds in a closed loop. He said the benefits to the client were fourfold: (1) the client secretly utilized his or her offshore funds; (2) the

client obtained seeming legitimate loan proceeds which could be

used for any purpose in the United States; (3) the client repaid not

only the loan amount, but additional ‘‘interest’’ to the Dutch corporation, which in turn sent these funds to the client’s growing account at Guardian Bank; and (4) if the client characterized the loan

as a ‘‘mortgage,’’ the client could deduct the ‘‘interest’’ payments

from his or her U.S. taxes, under a U.S.-Netherlands tax treaty

loophole which has since been eliminated.

Due Diligence Efforts of U.S. Banks. When asked about the

due diligence efforts of the U.S. banks that had provided correspondent services to Guardian Bank, Mathewson said that he

thought the U.S. banks had required little information to open a

correspondent account, had requested no information about Guardian Bank’s clients, and had conducted little or no monitoring of the

account activity.

Mathewson said the account opening process was ‘‘not difficult.’’

He said that, during the 10 years of Guardian Bank’s operation

from 1984 to 1994, U.S. banks wanted the large deposits of offshore

banks like Guardian Bank and were ‘‘delighted’’ to get the business. He said it was his understanding that they would open a correspondent relationship almost immediately upon request and completion of a simple form. He said the account was opened within

‘‘a matter of days’’ and apparently with little verification, documentation, or research by the correspondent bank. He could not recall any U.S. based bank turning down Guardian Bank’s request

for an account, nor could he recall any U.S. correspondent bank officer visiting Guardian Bank prior to initiating a correspondent relationship.

Mathewson also could not remember any effort by a U.S. based

bank to monitor Guardian Bank’s correspondent account activity.

He said, ‘‘I don’t think any of them ever attempted to monitor the

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account.’’ He stated that, to his knowledge, Guardian Bank’s correspondent banks also had no information related to Guardian’s individual clients, since Guardian Bank had designed its procedures

to minimize information about its clients in the United States.

An Insider’s View. Guardian Bank was in operation for 10 years. It had over 1,000 clients and $150 million in its correspondent accounts when it was closed by the Cayman Government in early 1995. Since then, Mathewson has pled guilty to

money laundering, tax evasion and fraud, and has helped convict

numerous former bank clients of similar misconduct. He has also

provided the most detailed account yet of the operations of an offshore bank.

Mathewson informed Minority Staff investigators that correspondent banks are fundamental to the operations of offshore

banks, because they enable offshore banks to transact business in

the United States, while cloaking the activities of bank clients.

When asked whether he thought Guardian Bank’s experience

was unusual, Mathewson said that, to his knowledge, he was ‘‘the

first and last U.S. citizen’’ allowed to attain a position of authority

at a Cayman bank. He said he thought he was both the first and

last, because Cayman authorities had been wary of allowing a U.S.

citizen to become a senior bank official due to their vulnerability

to U.S. subpoenas, and because he had met their fears of a worst

case scenario—he was, in fact, subpoenaed and, in response, had

turned over the records of all his bank clients to criminal and tax

authorities in the United States. However, in terms of Guardian

Bank’s operations, Mathewson said that Guardian Bank ‘‘was not

unusual, it was typical of the banks in the Cayman Islands and

this type of activity continues to this day.’’ He maintained that he

had learned everything he knew from other Cayman bankers, and

Guardian Bank had broken no new ground, but had simply followed the footsteps made by others in the offshore banking community.

The Mathewson account of Guardian Bank provides vivid details

about an offshore bank’s use of U.S. correspondent accounts to

move client funds, cloak client transactions, and maximize bank

revenues. One hundred percent of Guardian Bank’s transactions

took place through its correspondent accounts, including all of the

criminal transactions being prosecuted in the United States. A

number of the following case histories demonstrate that Guardian

Bank was not a unique case, and that the deliberate misuse of the

U.S. correspondent banking system by rogue foreign banks to launder illicit funds is longstanding, widespread and ongoing.

VII. Conclusions and Recommendations

The year-long Minority Staff investigation into the use of international correspondent banking for money laundering led to several

conclusions and recommendations by the Minority Staff.

Based upon the survey results, case histories and other evidence

collected during the investigation, the Minority Staff has concluded

that:

(1) U.S. correspondent banking provides a significant gateway

for rogue foreign banks and their criminal clients to carry on

money laundering and other criminal activity in the United

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States and to benefit from the protections afforded by the safety and soundness of the U.S. banking industry.

(2) Shell banks, offshore banks, and banks in jurisdictions with

weak anti-money laundering controls carry high money laundering risks. Because these high risk foreign banks typically

have limited resources and staff and operate in the international arena outside their licensing jurisdiction, they use

their correspondent banking accounts to conduct their banking

operations.

(3) U.S. banks have routinely established correspondent relationships with foreign banks that carry high money laundering

risks. Most U.S. banks do not have adequate anti-money laundering safeguards in place to screen and monitor such banks,

and this problem is longstanding, widespread and ongoing.

(4) U.S. banks are often unaware of legal actions related to

money laundering, fraud and drug trafficking that involve

their current or prospective respondent banks.

(5) U.S. banks have particularly inadequate anti-money laundering safeguards when a correspondent relationship does not

involve credit-related services.

(6) High risk foreign banks that may be denied their own correspondent accounts at U.S. banks can obtain the same access

to the U.S. financial system by opening correspondent accounts

at foreign banks that already have a U.S. bank account. U.S.

banks have largely ignored or failed to address the money

laundering risks associated with ‘‘nested’’ correspondent banking.

(7) In the last 2 years, some U.S. banks have begun to show

concern about the vulnerability of their correspondent banking

to money laundering and are taking steps to reduce the money

laundering risks, but the steps are slow, incomplete, and not

industry-wide.

(8) Foreign banks with U.S. correspondent accounts have special forfeiture protections in U.S. law which are not available

to other U.S. bank accounts and which present additional legal

barriers to efforts by U.S. law enforcement to seize illicit funds.

In some instances, money launderers appear to be deliberately

using correspondent accounts to hinder seizures by law enforcement, while foreign banks may be using the ‘‘innocent

bank’’ doctrine to shield themselves from the consequences of

lax anti-money laundering oversight.

(9) If U.S. correspondent banks were to close their doors to

rogue foreign banks and to adequately screen and monitor high

risk foreign banks, the United States would reap significant

benefits by eliminating a major money laundering mechanism,

frustrating ongoing criminal activity, reducing illicit income

fueling offshore banking, and denying criminals the ability to

deposit illicit proceeds in U.S. banks with impunity and profit

from the safety and soundness of the U.S. financial system.

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Based upon its investigation, the Minority Staff makes the following recommendations to reduce the use of U.S. correspondent

banks for money laundering:

(1) U.S. banks should be barred from opening correspondent

accounts with foreign banks that are shell operations with no

physical presence in any country.

(2) U.S. banks should be required to use enhanced due diligence and heightened anti-money laundering safeguards as

specified in guidance or regulations issued by the U.S. Treasury Department before opening correspondent accounts with

foreign banks that have offshore licenses or are licensed in jurisdictions identified by the United States as non-cooperative

with international anti-money laundering efforts.

(3) U.S. banks should conduct a systematic review of their correspondent accounts with foreign banks to identify high risk

banks and close accounts with problem banks. They should

also strengthen their anti-money laundering oversight, including by providing regular reviews of wire transfer activity and

providing training to correspondent bankers to recognize misconduct by foreign banks.

(4) U.S. banks should be required to identify a respondent

bank’s correspondent banking clients, and refuse to open accounts for respondent banks that would allow shell foreign

banks or bearer share corporations to use their U.S. accounts.

(5) U.S. bank regulators and law enforcement officials should

offer improved assistance to U.S. banks in identifying and evaluating high risk foreign banks.

(6) The forfeiture protections in U.S. law should be amended

to allow U.S. law enforcement officials to seize and extinguish

claims to laundered funds in a foreign bank’s U.S. correspondent account on the same basis as funds seized from

other U.S. accounts.

Banking and anti-money laundering experts repeatedly advised

the Minority Staff throughout the course of the investigation that

U.S. banks should terminate their correspondent relationships with

certain high risk foreign banks, in particular shell banks. They also

advised that offshore banks and banks in countries with poor bank

supervision, weak anti-money laundering controls and strict bank

secrecy laws should be carefully scrutinized. The Minority Staff believes that if U.S. banks terminate relationships with the small

percentage of high risk foreign banks that cause the greatest problems and tighten their anti-money laundering controls in the correspondent banking area, they can eliminate the bulk of the correspondent banking problem at minimal cost.

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VIII. Ten Case Histories

The investigation developed the following ten case histories of

high risk foreign banks with U.S. correspondent accounts.

Case Histories

No. 1: AMERICAN INTERNATIONAL BANK

No. 2: CARIBBEAN AMERICAN BANK

No. 3: OVERSEAS DEVELOPMENT BANK AND TRUST

COMPANY

American International Bank (AIB) is a small offshore bank that

was licensed in Antigua and Barbuda and is now in liquidation.

This case history shows how, for 5 years, AIB facilitated and profited from financial frauds in the United States, laundering millions

of dollars through a succession of U.S. correspondent accounts, before collapsing from insufficient capital, insider abuse, and the sudden withdrawal of deposits. The case history examines how, along

the way, AIB enabled other offshore shell banks to gain access to

the U.S. banking system through AIB’s own U.S. correspondent accounts, including Carribean American Bank, a notorious shell bank

set up by convicted U.S. felons. Finally, the case history shows that

AIB’s questionable financial condition went unnoticed due, in part,

to years of late and inaccurate financial statements by AIB’s outside auditor.

The following information was obtained from documents provided

by the Government of Antigua and Barbuda, the Government of

Dominica, Bank of America, Toronto Dominion Bank (New York),

Chase Manhattan Bank, Popular Bank of Florida (now BAC Florida Bank), First National Bank of Commerce (now Bank One Corporation), Jamaica Citizens Bank Ltd. (now Union Bank of Jamaica, Miami Agency), AmTrade International Bank; court pleadings; interviews of government officials and other persons in Antigua and Barbuda, the United Kingdom, Dominica, and the United

States, and other materials. Key sources of information were interviews with William Cooper, owner and Chairman of American

International Bank, conducted on October 12, 2000; John Greaves,

President of American International Bank, owner of American

International Management Services (later called Overseas Management Services), and formerly owner and Director of Overseas Development Bank and Trust of Dominica and Overseas Development

Bank (in Antigua and Barbuda), conducted on July 24 and 25,

2000; Malcolm West, owner of Overseas Development Bank and

Trust of Dominica and Overseas Development Bank (in Antigua

and Barbuda), conducted on October 13, 2000; relationship managers and other officials from Bank of America (conducted July 10,

11 and 31 and October 24, 2000), Chase Manhattan Bank (conducted August 2, 3, and 4, 2000), Popular Bank of Florida (now

BAC Florida Bank) (conducted July 31 and December 12, 2000),

Barnett Bank (conducted October 26, 2000) and AmTrade International Bank (conducted October 26, 2000); Eddie St. Clair Smith,

receiver of American International Bank, conducted October 12,

2000; and Wilbur Harrigan, partner for Pannell Keff and Forster,

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52 Although the owner of the bank at the time of formation was listed as Shirley ZeiglerFeinberg, the true owner of the bank, according to Cooper, was her son who didn’t want to be

identified as the owner of the bank. 53 At that time, Antiguan law required a bank to be capitalized with $1 million. In the case

of AIB, the capital shares of the bank were acquired through a ‘‘book entry transaction,’’ according to the bank’s current receiver. AMT Management borrowed $1 million from AIB to pay for

the purchase of the bank’s stock, and it secured that loan with the very stock AMT Management

was purchasing. The initial financial audit of the bank shows that upon opening, the bank had

$1.1 million in outstanding loans; it doesn’t show that at least $1 million was to finance the

purchase of the bank itself. This transaction set a pattern for future lending activity at the bank

that ultimately contributed to a liquidity crisis leading to its collapse. 54The companies that comprised American International Banking Group were: American

International Bank, AMT Management, AMT Trust, and Ship Registry Services, Ltd., a ship

registry company. All four companies in the group were owned by Cooper and his wife. In June

1996 Cooper formed and licensed another offshore bank, American International Bank and

Trust. It was one of the first banks licensed under Dominica’s offshore banking law which had

been enacted in early 1996. However, the bank had very little activity and ceased operations

1997.

conducted October 10, 2000. The investigation greatly benefited

from the cooperation and assistance provided by a number of officials of the Government of Antigua and Barbuda, particularly the

Executive Director of the International Financial Sector Regulatory

Authority and the Director of the Office of Drugs and Narcotics

Control Policy; and officials from the Government of Dominica.

A. THE FACTS

(1) American International Bank Ownership and Management

American International Bank (‘‘AIB’’) was incorporated as an offshore bank in Antigua and Barbuda on April 18, 1990, one day

after applying for its license. Antigua Management and Trust Ltd.,

(hereafter called ‘‘AMT Trust’’) an Antiguan trust company owned

by William Cooper and his wife, formed AIB, served as its agent

and one of the three directors of the bank, and was to manage the

bank for the shareholder, Shirley Zeigler-Feinberg of Boca Raton,

Florida.52 However, according to Cooper, the Feinbergs’ plans for

the bank never materialized, and in September 1992, Cooper and

his wife purchased the 1 million capital shares of AIB using a British Virgin Islands (BVI) corporation that they owned, called AMT

Management Ltd. (hereafter called ‘‘AMT Management’’). Cooper

then became President of AIB.53

(2) Financial Information and Primary Activities

AIB was part of a group of companies owned by Cooper and his

wife collectively known as the American International Banking

Group. The companies offered banking, trust, company formation

and management and ship registry services to clients.54

AIB’s brochures indicated that its primary banking business was

focused on private banking and investment banking services. The

bank grew quite rapidly from when it began operations in mid-1993

and became one of the largest offshore banks in Antigua and Barbuda. According to the bank’s audited financial statements, its

asset base grew from $1.2 million from the end of 1993 to $57 million at the end of 1996. According to Cooper, after 21⁄2 years of op- eration the bank had $3.5 million in accumulated earnings. No financial statement was produced in 1997, but Cooper indicated that

the assets of the bank had grown to about $100 million by the end

of 1997. AIB’s receiver put AIB’s assets as high as $110 million.

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55 International Business Corporations (‘‘IBCs’’) are corporations that are established in offshore jurisdictions and are generally licensed to conduct business only outside the country of

incorporation. Often, jurisdictions with IBC statutes will also offer little or no taxation and regulation of the IBCs and will have corporate secrecy laws that prohibit the release of information

about the ownership of the IBC. In some jurisdictions, IBCs are not required to keep books and

records. A report for the United Nations Global Programme Against Money Laundering, Financial Havens, Banking Secrecy and Money Laundering, stated: ‘‘International Business Corporations (‘‘IBCs’’) are at the heart of the money laundering problem . . . virtually all money laundering schemes use these entities as part of the scheme to hide the ownership of assets.’’ 56The Minority Staff identified 30 banks with Antiguan offshore banking licenses that identified AMT Trust as their agent. This could mean that Cooper underestimated the number of

banks he and his company formed and licensed, or that AMT Trust became the agent for some

of the banks after another company had formed and licensed the bank. 57The value of the legal requirement of a local board member is questionable, however. As

Cooper informed the Minority Staff, he never followed the activities of the banks on whose

boards he served. He said he was sitting on the board only to fulfill the legal requirement for

a local director and, in fact, required each of his client banks to sign liability waivers and indemnity provisions to protect him from any liability that might accrue as a result of his position

on the board. 58The ownership of AIMS is uncertain. Greaves informed the Minority Staff that he and

Cooper each owned half of AIMS. Cooper told the Minority Staff he had nothing to do with

AIMS. The company’s incorporation papers list only Greaves as the owner. However, the bank

management services contract used by AIMS lists both Greaves and Cooper as signing on behalf

of AIMS. Additionally, brochures on the AIB group include AIMS as a member of the group.

By the end of 1997, AIB had approximately 8,000 clients and the

same number of accounts. According to Cooper, about 50% of AIB’s

client base was from the United States; 10% was from Canada;

40% was from Europe and the Middle East. Almost all clients had

established International Business Corporations (‘‘IBCs’’)55 in

whose names the accounts were opened. Cooper said the main reason why Americans established accounts at AIB was for ‘‘confidentiality’’ reasons.

The AIB Banking Group created and operated offshore banks for

individuals with no staff of their own or any physical presence in

Antigua and Barbuda. AIB generated revenue by serving as a correspondent bank to a number of these and other offshore banks.

According to Cooper and John Greaves, former President and

Board Member of AIB, six banks formed by AMT Trust established

correspondent relationships with AIB. At least two of these banks

were the centers for financial frauds and money laundering activity.

Cooper told the Minority Staff that through AMT Trust, he

helped form and obtain Antiguan offshore banking licenses for approximately 15 other offshore banks.56 Antiguan law requires that

the board of each offshore bank include an Antiguan citizen with

banking experience. Since only a small number of Antiguans could

qualify for that position and Cooper was one of them, he often became the local director for the banks that he formed through AMT

Trust. In a number of instances he would also serve as an officer

of the bank.57

In 1995 Greaves formed American International Management

Services (AIMS).58 Greaves had over 30 years of banking experience at the time, having just served as the General Manager of the

Swiss American Bank Operation—comprised of an Antiguan bank,

an offshore bank licensed in Antigua and Barbuda, and a management and trust company (Antigua International Trust). AIMS was

created to provide back office, or administrative, operations for offshore banks. After its formation in 1995, AIMS became closely

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59 0ne of the back office services listed in the AIMS bank management contract was ‘‘the establishment of a correspondent banking relationship with American International Bank to effect

wire transfers and issue multi-currency drafts.’’ 60 Account opening documentation supplied by AIB to one of its U.S. correspondents identified

Berenberg Bank in Germany as a correspondent bank.

linked to the AIB Banking Group operations.59 AIMs assumed back

office operations for a number of AIB respondent banks, including

Caribbean American Bank, Hanover Bank and Overseas Development Bank and Trust. AIMS also serviced some other banks that

were not clients of AIB. Because of his long experience in banking,

Greaves often served as the local director for offshore banks that

were formed by AMT and/or operated by AIMS. In September 1995,

Greaves became Senior Vice President and a Director of AIB. In

November 1996, he was appointed President of AIB, with Cooper

assuming the position of Chairman of the Board. Throughout this

association with AIB, Greaves retained his ownership of AIMS.

(3) AIB Correspondents

In order to service its clients who wanted to conduct financial activity in the major economies of the world, AIB established correspondent relationships with banks in a number of countries. As

will be discussed in more detail below, AIB had numerous correspondent accounts with U.S. banks. They included: Jamaica Citizens Bank Ltd. (now Union Bank of Jamaica, Miami Agency), the

New York Branch of Toronto Dominion Bank, Bank of America,

Popular Bank of Florida (now BAC Florida Bank), Chase Manhattan Bank, Norwest Bank in Minnesota, and Barnett Bank. According to Cooper and AIB documents, AIB correspondents in other

jurisdictions included Privat Kredit Bank in Switzerland, Toronto

Dominion Bank in Canada, Midland Bank in England, a German

bank (whose name could not be recalled by Cooper) 60 and Antigua

Overseas Bank.

Antigua Overseas Bank, an offshore bank licensed by the Government of Antigua and Barbuda, became particularly useful to

AIB when AIB was no longer able to obtain correspondent accounts

at U.S. banks. Antigua Overseas Bank had a number of correspondent accounts at U.S. banks, including Bank of America,

Chase Manhattan Bank and Bank of New York. AIB, through its

relationship with Antigua Overseas Bank, exploited Antigua Overseas Bank’s correspondent relationships with U.S. banks to maintain its (AIB’s) access to the U.S. banking system.

(4) AIB Operations and Anti-Money Laundering Controls

Cooper described AIB’s due diligence and anti-money laundering

controls to the Minority Staff. According to Cooper, AIB had many

requests to establish accounts for IBCs without identifying the beneficial owner but AIB never granted the request. The bank did not

establish pseudonym accounts or numbered accounts. AIB required

the identification of the owner and shareholder of all accounts and

that it be able to contact all account holders. AIB required passports, a bank reference letter, a professional letter of reference and

the full address, and phone number for all account holders. Daily

reports on all transactions of $5,000 or more were produced and reviewed by Cooper. According to Cooper AIB’s correspondent banks

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61 Cooper estimated that 30% to 40% of AIB’s accounts were related to Forum investors.

Greaves estimated that as many as 60% of the accounts were related to Forum investors. The

AIB receiver concurs with the latter figure.

always inquired about its due diligence policies and requested a

copy of AIB’s operation manual. An AIB brochure that contained a

description of its operating procedures stated:

Each new client is screened by the account officer of American

International Bank Ltd. before being accepted. In each individual case, the origin of the funds have to be known. No cash

deposits are accepted. Any and all deposits with the bank are

to be done through wire transfer or by check.

However, in a number of AIB relationships discussed in this case

study, it is apparent that these policies were not implemented.

(5) Regulatory Oversight

During its operation between 1993 and 1998, AIB was never subjected to a bank examination by its sole regulator, the Government

of Antigua and Barbuda. Regulators did not conduct examinations

of any licensed offshore banks until 1999, relying on audited financial statements and other filings prepared by the banks as a means

of monitoring their activity. The government made an effort in the

1997–1998 period to collect information on the ownership and activities of all licensed offshore banks in Antigua and Barbuda.

However, there was no follow up on the information that was collected. In 1999, Antigua and Barbuda initiated a new program for

government bank examinations of licensed offshore banks.

(6) Money Laundering and Fraud Involving AIB

After operating for 41⁄2 years, AIB eventually failed as a result

of bad loans and loss of deposits. Despite several attempts to sell

the bank, AIB was formally placed in receivership in July 1998,

where it remains today.

During its period of operation, AIB had correspondent relationships with over seven U.S. banks. These correspondent accounts

were essential to AIB’s operations and provided AIB’s clients with

access to U.S. banks as well. AIB’s growth centered around three

activities, some of which evidence a high probability of money laundering, and which ultimately contributed to the collapse of the

bank in 1998:

• servicing accounts associated with a highly questionable investment scheme; • providing correspondent banking to other questionable banks;

and • highly questionable and unsound lending practices.

(a) The Forum Investment Scheme

As many as 3,000 to 6,000 of AIB’s 8,000 accounts were related

to investors in a highly questionable investment scheme called the

Forum.61 The Forum established a relationship with AIB shortly

after the bank was opened in 1993. The Forum is an Antiguan corporation that promotes investment schemes and provides administrative services to individuals who invest in those schemes. It has

a staff that serves as a point of contact between investors and the

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62Ford did not assume a formal position of leadership in the organization. This may be the

result of a former civil action brought against him by the SEC in the early 1990’s. (See next

footnote.) However, there are clear indications that he played a leading role in the activities of

the Forum. A 1996 story in The Washington Post on the Forum reported:

Last week Ford requested and was granted a meeting with Prime Minister [Lester] Bird

[of the Government of Antigua and Barbuda]. According to Bird, Ford represented himself

as the leader of the Forum and explained that his group’s operation was legal and aboveboard.

Many times, Ford was the featured speaker at Forum gatherings. Forum members and leaders referred to him as ‘‘Chief’’ or ‘‘chief consultant.’’ One insider described Ford as the leader

of the organization and identified Ford as the originator of many of the Forum investment

schemes. He and an associate, Gwendolyn Ford Moody, were the ones who directly dealt with

Cooper regarding the account that held the funds received from the IBCs and the fund used

for the dispersal of those funds. In interviews with the Minority Staff, both Cooper and Greaves

spoke of Ford as the leader of the Forum and its investment activities. 63Prior to his involvement with the Forum, Ford was the founder and president of an organization called the International Loan Network (‘‘ILN’’), which he described as ‘‘a financial distribution network whose members believe that through the control of money and through the

control of real estate you can accumulate wealth and become financially independent.’’ The organization included, among other things, a multi-level marketing program where ILN members

shared in the fees paid by individuals they recruited into the program, as well as descending

percentages of fees for additional members recruited by the new members they had brought in

(i.e., ‘‘downline recruitments’’). ILN also ran a series of property acquisition programs in which

ILN investors would receive their choice of either rights to property or cash pay outs equivalent

to five to ten times their initial investment within 3 to 6 months. One version of the program

also offered a refund (with 50% interest). The SEC alleged that over $11 million in refunds were

requested and only $2 million had been paid. It was estimated that participants paid over $100

million into the ILN during its operation. In May 1991 the SEC commenced an action against

Ford and one of his partners for the fraudulent sale of unregistered securities. The U.S. District

Court for the District of Columbia subsequently issued a Temporary Restraining Order and then

a Preliminary Injunction against ILN and Ford and his partner and froze the assets of ILN.

In its decision, the court concluded:

. . . the evidence is clear that ILN is nothing more than a glorified chain letter, destined

to collapse of its own weight. Despite the inevitably of this outcome, potential investors

were, until the issuance of the temporary restraining order in this case, continuing to be

promised great wealth through their participation in the ILN. The pyramid nature of the

organization was never fully revealed to them.

In 1992, the SEC and Ford reached a settlement in which Ford agreed to pay an $863,000

fine, and a trustee was appointed to recover funds for the investors. After paying approximately

$5,000 of the fine, Ford declared bankruptcy. To date, the trustee has been able to recover only

a small percentage of the investors’ funds. 64 International Debt Recovery (‘‘IDR’’), an Irish corporation that seeks to recover funds lost

by victims of frauds, representing over 1,600 Forum-related IBCs that have invested in Forumrelated ventures provided details of some of the investment schemes. They included a commercial fishing venture in Gambia called Pelican Foods, which has been directed by Chester Moody,

a close associate of Ford. The company has been unable to obtain a fishing license from the government because of non-payment of port duties. Only one of four fishing boats owned by the

offshore banks and accounting firms handling their accounts. The

Forum appears to be a Ponzi-type investment scheme, apparently

targeted at low and middle income individuals, offering investors

extraordinarily high returns. It appears that the investment returns investors received actually came from funds paid by new investors. The Forum also employed a multi-level marketing plan to

bring in new investors. That is, partners (existing investors) who

brought in new investors would receive a portion of the initial payments made by those new investors and also would receive descending percentages of the initial payments made by subsequent

members recruited by the new investors. According to AIB’s receiver, at the end of 1997, when AIB’s assets were $110 million, approximately $60 million were attributable to accounts by the

Forum and its investors.

A central figure in the Forum is Melvin Ford of Bowie, Maryland.62 Ford has a history of developing questionable investment

programs.63 Using financial empowerment messages at seminars

and rallies, Ford told attendees they could become wealthy through

a series of high yield and speculative investment schemes.64

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company is seaworthy. Workers had been unpaid for nearly 8 months and the company has

many large unpaid bills due.

Another recipient of Forum-related investors is the A.A. Mining Company, which has a joint

venture with the De Beers diamond company. A Forum-related management committee recently

wrote to investors ‘‘that the Mining company has entered into a letter of intent to joint venture

on a project which could be worth over 500 million dollars. In addition, with proper funding this

venture could start to send money back to the Trustees within 180 days.’’ However, according

to De Beers officials and publications, De Beers has put up the bulk of the funds in the operation, and results at the site which is the subject of the venture ‘‘are so far disappointing,’’ and

the prospects for discovery of diamond-containing minerals is ‘‘moderate to low.’’

A November 1999 article in The Washington Post identified two other Forum-related investments: purchases of locked boxes from Sierra Leone that reportedly contained $10 million worth

of gold, but only contained rocks and dirt, and the Diamond Club International, a venture that

sold mail order diamonds and has been sued by creditors for over $500,000 in unpaid bills. 65 In 1998 Harris filed a claim against an investigative journalist named David Marchant for

reporting these facts. Marc M. Harris v. David E. Marchant (United States District Court for

the Southern District of Florida, Miami Division, Case No. 98–761–CIV–MOORE), Final Judgment (August 10, 1999). The court’s opinion listed some of the allegations:

‘‘. . . 12. Marchant learned from Shockey [John Shockey, former investigator for the U.S. Office of the Comptroller of the Currency] that Marc M. Harris (‘‘Harris’’), the founder and de facto

Continued

Investors were required to establish International Business Corporations (IBCs) and accounts for the IBCs at overseas banks. The

accounts were structured so power of attorney to withdraw funds

from the account was transferred to other accounting and management entities. According to one individual familiar with the organization, the transfer of funds was really controlled by associates of

Ford. When investors deposited funds to their IBCs, the funds were

transferred to a holding account. Disbursements were made from

a second account (‘‘disbursement account’’). Authority to order disbursements from the disbursement account was vested in Gwendolyn Ford Moody, a close associate of Ford. The funds in the holding account were apparently used as collateral for expenditures

from the disbursement account.

The funds were used to support highly speculative investments—

many of which were controlled by Ford and his associates—and

lavish lifestyles for Ford and his associates. International Debt Recovery (‘‘IDR’’), an Irish corporation that seeks to recover funds lost

by victims of frauds and now represents over 1,600 Forum-related

IBCs that have invested in Forum-related ventures, discovered one

scheme in which Ford and his associate, Gwendolyn Ford Moody,

held AIB-issued Visa Cards with very high limits. The disbursement account was used to pay the debts accumulated on the cards.

Although the funds supporting the disbursement account represented deposits that were for investments, they were used to

fund operations, staff salaries and personal expenses of Ford and

Moody. Millions of dollars of investors’ funds were expended in this

way.

Cooper told investigators that significant sums obtained through

Ford’s schemes were transferred from AIB to The Marc Harris Organization (‘‘The Harris Organization’’) in Panama. The Harris Organization, which is the owner of a number of investment and trust

companies licensed in different offshore jurisdictions, is owned by

Marc M. Harris. Harris and the companies he controls have been

found to be behind a number of international bank and investment

frauds, including banks that have been shut down by the British

banking authorities for conducting illegal and fraudulent activities.

More recently, his organization is alleged to have co-mingled and

misapplied client funds and engaged in securities fraud.65 In addiVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00349 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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head of the Harris Organization, had operated several offshore shell banks in Montserrat in the

1980’s. These banks were subsequently closed down in 1988 by British banking authorities for

conducting ‘‘illegal and fraudulent activities.’’ According to Shockey, these banks exhibited numerous financial and fiduciary improprieties. One of the banks, the Fidelity Overseas Bank,

took fees from clients even though it never performed any services for them. Another bank, the

First City Bank, doctored its financial statements. Finally, a third bank, the Allied Reserve

Bank, was issued cease-and-desist orders for operating in the United States without authorization. . . . ‘‘. . . 33. On March 31, 1998, Marchant published an article in Offshore Alert titled ‘‘We Expose The Harris Organization’s Multi-Million Dollar Ponzi Scheme. ‘‘34. This article made a number for factual allegations, which substantively accused The Harris Organization of defrauding its clients and misappropriating clients’ funds. These allegations

specifically at issue are:

a. That The Harris Organization operates as a ‘‘Ponzi’’ scheme.

b. That The Harris Organization was insolvent by $25 million.

c. That Harris used clients funds to invest in the Infra-fit [a Chilean bicycle manufacturer]

venture.

d. That The Harris Organization inflated the land value of the LARE [Latin American Real

Estate Fund, a Harris-affiliate entity] investment in their financial statements. . . .

g. That The Harris Organization might be laundering the proceeds of crime.

h. That The Harris Organization had issued $20 million of worthless preference shares.’’ In its conclusion in support of Marchant, the court found:

‘‘. . . 8. From the time he published the initial article to the present, Marchant had evidence

which provided persuasive support for the truth of each of the allegations at issue. He spoke

with numerous inside sources, including Dilley (a consultant who served in a position equivalent

to the CEO of The Harris Organization), and outside sources such as Shockey, who appeared

credible and knowledgeable about Harris, The Harris Organization, and the financial situation

within The Organization. Marchant was privy to internal financial and management documentation which supported the information learned from his sources.’’ A 1998 Business Week article on Marc Harris (‘‘Tax Haven Whiz or Rogue Banker?’’ Business

Week, June 1, 1998, p. 136) reported that the Florida Professional Regulation Department suspended Harris’ Certified Public Accountant license in 1990 for various ‘‘accounting violations.’’ One violation cited in the order was that Harris ‘‘issued an accounting compilation, similar to

an audit, for MMH Equity Fund Inc. The compilation did not disclose that Harris was an officer

and director of the fund.’’ The article also notes that: ‘‘. . . Harris is now flouting U.S. law that prohibits U.S. citizens

from making investments in Cuba.’’ His Cuba Web site offers Americans just that . . . if Americans take his advice and form offshore corporations to invest in Cuba, that’s ‘‘entirely their decision,’’ he says. Yet a senior Treasury Dept. official says such moves are illegal: ‘‘Even if you

interpose a third-country company, it’s the same as going to Cuba directly.’’ In October 2000, La Commission Nacional de Valores, the Panamanian Securities Commission, suspended the operations of The Harris Organization. 66 ‘‘28. The Harris Organization maintained substantial links, either directly or indirectly,

with persons and entities known variously as ‘PT Shamrock,’ ‘Peter Trevellian,’ and ‘Adam

Starchild,’ that advocated in print and on the Internet offshore mechanisms for evading the payment of taxes, judgments, and other debts in the United States . . . in essence, tax evasion and

fraudulent conveyance of funds to offshore locations.’’ (Marc M. Harris v. David E. Marchant,

Case No. 98–761–CIV–MOORE, United States District Court for The Southern District of Florida Miami Division). 67 ‘‘Anthony Vigna and his son Joseph were arrested on November 9, 2000 in Panama . . .

22 months after they were criminally indicted at the U.S. District Court for the Southern District of Florida on multiple counts of money laundering and conspiracy to defraud the IRS,’’ ac- cording to Offshore Alert (‘‘Two more Harris clients deported to the US’’, Offshore Alert, November 30, 2000, Issue 46, p. 5).

The 1998 Business Week article provided a description of the structure used by Harris:

Harris insists he is not trying to help folks illegally evade taxes. But an attendee of two Harris seminars, Jay Adkisson, an Oklahoma City tax lawyer, says Harris explicitly promoted tax

evasion. He says Harris ‘‘starts with the premise: We’re going to evade taxes. No. 2, we’re going

to make this so smooth that while we’re evading taxes, we don’t get caught.’’ Adkisson sets up

offshore trusts to protect clients from the future creditors, not the IRS.

Harris’ scheme, says Adkisson, is for clients to move assets offshore to avoid taxes yet still

retain control over those assets. Harris recommends setting up what he refers to as ‘‘the octopus,’’ says Adkisson. Its head is a Panamanian foundation, an amorphous legal entity where

neither the owner of the assets nor his beneficiaries’ names need be disclosed. The foundation

creates a tangle of companies—banks, leasing companies, insurance firms—in other offshore havens that appear to be unrelated. They then bill the client for various expenses. The client pays

the invoices to offshore entities, then deducts the payments as business expenses on his tax retion, Harris and his organizations are allegedly closely associated

with organizations that advocate offshore mechanisms for evading

taxes and avoiding other legal judgments.66 Recently some clients

of Harris have been indicted in the United States for money laundering and tax evasion through offshore vehicles set up and established by The Harris Organization.67

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turn. To the IRS, it appears that the client has been billed by many unrelated third parties,

says Adkisson. Under offshore secrecy laws, the IRS can’t determine whether the entities the

octopus controls are really controlled by the same person.

The article reports that Harris said ‘‘that 80% of his ‘several thousand’ clients are Americans

or Canadians.’’ 68The AIB receiver concurred with the estimates of Cooper and the Antiguan officials. He told the Minority Staff that during 1997, large transfers on the order of $300,000 were made from

Forum-related accounts two to three times each week. He stated that most, if not all, of the

transfers went to The Harris Organization in Panama. 69For example, investment programs funded by Forum-related IBCs have been operated or

administered by a company in the Bahamas and a company in Dominica (which apparently later

moved to St. Vincent and the Grenadines), and an investment company in Nevis. In the past

few years documents indicate that Forum-related investment programs have been placed under

the control of The Wilshire Trust, which granted the shares to the WT Trust, which then appointed a company called Financial and Corporate Services as the trustee. All of those entities

are located in Nevis. 70Two accounting firms—LMB Accounting Services Ltd. (‘‘LMBASL’’) in the Bahamas and

Corporate Accounting Services Ltd. (‘‘CASL’’) in Antigua and Barbuda (now re-located to Dominica)—were utilized to administer investor IBC accounts (which included forwarding investments to the IBC accounts at the offshore banks). Each investor in an IBC was charged an annual fee of $100 for this service. LMBASL had an account at BTCB—another bank profiled in

this report. One of BTCB’s U.S. correspondent banks questioned the LMBASL deposits into

Continued

Documents show that by 1996, Ford had established four accounts in his name at The Harris Organization: Fundacion Greenwich, Greenwich Trading Company, S.A., Melvin J. Ford Trust, and

Onan Enterprises, Inc. (incorporated in Nevada). His associates,

Chester Moody and Gwendolyn Ford Moody, had established six accounts: Chester and Goldie Moody Trust, Jackson Management.

Inc., Sancar International, S.A., Argyll Trading Corporation, Steel

Management Corporation, and the Chester and Goldie Moody Trust

(business). Cooper estimated that for a period of time Ford and his

associates were transferring up to $800,000 per week from investors’ accounts to The Harris Organization and that during a period

of 6 to 8 months during 1997–1998, between $5 million and $10

million were moved to The Harris Organization. Antiguan officials

confirmed extensive transfers from the Forum-related accounts at

AIB to The Harris Organization. Antiguan officials estimate that

the amounts transferred are likely as high as tens of millions of

dollars.68 In a letter to Senator Levin, IDR estimates that during an 18-month period starting in 1997, approximately $100 million

from Forum-related investors flowed through AIB to The Harris

Organization.

Thousands of individuals were drawn into Ford’s investment

schemes. One individual close to the operation estimated that as

many as 30,000 people invested in Forum-related ventures. IDR

represents over 1,600 IBC’s whose owners (estimated to number

approximately 16,000 individuals) lost investments through Forumrelated ventures. IDR told the Subcommittee that its clients had

provided documentation of a total of $52 million that they had lost

to those ventures. In the 1998–1999 time period, Federal IRS

agents executed search warrants on the homes of Melvin Ford and

Gwendolyn Ford Moody, and the Federal investigation into this investment scheme is still continuing.

Ford and his associates used a series of offshore corporations,

banks, accounting firms and trusts that were established in offshore banking and corporate secrecy jurisdictions such as the Bahamas, Antigua and Barbuda, Nevis, Panama, St. Vincent and the

Grenadines.69 Administration of investor IBC accounts was, over

time, shifted among at least two different accounting firms.70 IBC

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BTCB’s account. LMBASL’s response provided an explanation of its operations and relationships:

LMBASL is a domestic Bahamian company which was incorporated on April 2, 1996, to provide accounting services for International Business Companies (IBC’s).

The source of LMBASL customers are Trust Companies in various Caribbean jurisdictions.

These companies are primarily engaged in company formation and off-shore financial services. LMBASL provides accounting services for companies formed by Antigua and Barbuda

Management and Trust in Antigua and Barbuda; Antigua Barbuda International Trust in

Antigua and Barbuda; International Management & Trust in Dominica and upon referral

other Trust companies.

The number of IBC’s formed by these companies number in the hundreds. Also each IBC

could have three or more members. It is not unusual for some IBC’s to have five to ten

members. LMBASL charges each IBC member a $100.00 annual fee for computer services.

This fee compensates LMBASL for accounting services involving processing transactions

which relate to individual IBC members.

Also IBC members send larger deposits for the account of the IBC. LMBASL has satisfied

itself that the sources of these IBC funds are from savings accounts or other banks, or investment accounts of the IBC members and are not derived from any questionable sources.

LMBASL has also taken steps to personally meet many of these IBC members and feel comfortable that they are solid citizens. 71 AMT Trust initially formed most of the IBCs. After AIB collapsed, Forum-investors were

told to have their IBCs renewed through LMBASL or CASL, rather than AMT Trust, Cooper’s firm. The investors were told that their investments would no longer be accepted if their IBCs

were still managed through AMT Trust. 72Other Antiguan banks were also used to hold Forum-related investments. Before the Forum

operations began to use AIB, investor funds were deposited into Swiss American Bank. Another

Antiguan bank, Worldwide International Bank (whose President, Joan DeNully, had previously

been an official at AIB), was also used by the Forum and its investors, as was Antigua Overseas

Bank. 73 Normally, AMT Trust charged a fee of $1,225 for the formation of an IBC, but in the case

of the Forum-related IBCs, AMT Trust charged clients $1,500. AMT Trust kept $1,225 and the

additional $275 was put into accounts controlled by Ford and associates at the Forum. This

business alone was very lucrative for Cooper and his company, since it is estimated that there

were approximately 3,000 to 6,000 IBC accounts at AIB. In addition, each account was charged

an annual administrative fee of $100 and an annual IBC renewal fee of approximately $800.

formation and renewal were handled by at least three different

firms.71 Investor relations with AIB, the bank that managed their

accounts, was handled through the Forum. All of this had the effect

of generating more fees, obscuring the flow of funds, obscuring the

involvement of Ford and his associates, confusing the investors and

making it more difficult for U.S. regulators and law enforcement officials to regulate and investigate their activities. A major base of

operation for the Forum was the nation of Antigua and Barbuda,

where Ford held regular meetings and seminars, drawing many

prospective U.S. investors.

AIB became the base through which Ford ran his investment

scheme 72 and millions of dollars flowed through the bank. Cooper,

the owner and Chairman of the Board of AIB, was directly involved

in servicing the Forum program. He attended Forum seminars,

spoke about offshore corporations and passed out material on offshore corporation formation and AIB. With the assistance and

encouragement of Forum personnel, investors would apply for the

creation of an IBC and an account at AIB. AMT Trust, Cooper’s

company, would form IBCs for Forum investors. (Often as many as

five, ten or more individuals would jointly invest through one

IBC.) 73 One of the entities established to manage some of the

Forum-related investments, Equity Management Services, Ltd. at

one point used the offices of AMT Trust as its mailing address.

Cooper told the Minority Staff that most of the profits that the AIB

Banking group made from Forum-related operations resulted from

the formation of the IBCs.

Ford and his associates used AIB’s correspondent accounts with

U.S. banks to hide the trail of the funds. For example, by piecing

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74One such meeting, at which Ford spoke, was held at the Raleigh Sheraton in Raleigh, North

Carolina on November 7, 1999. Presentations on IBC formation and investment are still being

held. One victim of the Forum-related investments recently received a notice of ‘‘private workshops’’ that are scheduled for 2001 and will involve the W.T. Trust, the Nevis company that

serves as trustee for many of the Forum-related investments. 75For example, an organization called the Offshore Business Managers Association (formerly

called the Offshore Business Managers Forum) was established to: ‘‘provide a vehicle to bring

together parties that share an interest in wealth accumulation through international trade and

international financial activities. The common theme among all members is the use of the International Business Company (IBC) as a trading and financial entity and the belief that confidentiality and the right to financial privacy is a right that the government should respect and not

hinder.’’ (See the organization’s Web site at www.osbma.com.) In the early stages of the organization, the Executive Committee included such close Ford associates as Gwendolyn Ford Moody

and Chester Moody. More recently, the Chairman was Earl Coley, a frequent speaker at the

Forum meetings and reportedly a relative of Moody. According to the organization’s mailings,

the point of contact for the organization was the Forum offices in Antigua and Barbuda.

together documents made available to the Minority Staff and the

Government of Antigua and Barbuda, it can be seen that a number

of transfers from Forum accounts utilized AIB’s correspondent relationship with Chase Manhattan Bank. From there, the funds were

transferred to Banco de Brazil in New York. Banco de Brazil then

transferred the funds to its branch in Panama, which transferred

the funds to The Harris Organization in Panama. Funds were also

transferred from AIB to Gwendolyn Ford Moody’s account at a

Maryland branch of NationsBank.

The Forum is still an operating organization. Meetings and seminars are still held in the U.S.74 and elsewhere to continue to attract investors. Offshoot organizations, controlled by Ford associates, are still promoting investments.75

(b) Nested Correspondent Banking at AIB

AIB provided correspondent banking services to a number of

other offshore banks licensed in Antigua and Barbuda. By establishing correspondent accounts at AIB, those banks (and their clients), like Russian Matryoshka dolls, nested within AIB and gained

access to the same U.S. dollar accounts at U.S. banks that AIB enjoyed through its correspondent accounts at those U.S. banks. The

U.S. banks performed no due diligence review of AIB’s correspondent accounts. Instead, they relied on AIB to review and

clear its client banks, even though the U.S. correspondent banks

were the vehicles for their access into the U.S. financial system. In

a number of instances, AIB’s client banks utilized their accounts

with AIB to launder funds and take advantage of AIB’s correspondent accounts with U.S. banks to work the illicit funds into

the U.S. financial system. The most notorious example is Caribbean American Bank.

Caribbean American Bank. Caribbean American Bank

emerged as the focal point of a major advance-fee-for-loan fraud

that originated in the United States and defrauded victims across

the world of over $60 million over 8 years. Between 1991 and 1997,

members of the organization posed as representatives of a group of

venture capital investors willing to provide funding to business

projects. Individuals and businesses seeking capital were required

to pay advanced fees or retainers which, ostensibly, were to be used

for processing loans and syndicating the investors. Applicants were

instructed to wire the retainers to an attorney or bank escrow account, often located at an offshore bank. However, the terms of the

funding agreements were almost impossible for the applicants to

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76 U.S. Customs Service press release ‘‘U.S. Customs and FBI Crack Huge Money Laundering

Scam,’’ May 7, 1998.

USA v. Donald Ray Gamble a/k/a Donald Jake Gamble (U.S. District Court for the Middle

District of Tennessee, Northeastern Division, Criminal Case No. 2:97–00002), Information and

Accompanying Statement of Facts, February 10, 1997.

USA v. Arthur Householder, et. al. (U.S. District Court for the Northern District of Florida,

Gainesville Division, Criminal Case No. 1:98CR19), Testimony of Lawrence Sangaree, June 19,

2000.

USA v. Lawrence Sanizaree, Terri Sangaree, Maxine Barnum and Peter Barnum (U.S. District

Court for the Northern District of Florida, Gainesville Division, Criminal Case No. 1:97CR

MMP), Statement of Facts in Support of Guilty Plea of Peter and Maine Barnum, 11/25/97, and

Statement of Facts in Support of Guilty Plea of Lawrence Sangaree, December 8, 1997.

USA v. William Cooper, et. al. (U.S. District Court for the Northern District of Florida,

Gainesville Division, Criminal Case No. 1:98CR19 MMP), Superseding Indictment, April 27,

1999.

fulfill. For example, applicants were required to produce fully

collateralized bank payment guarantees or letters of credit equivalent to 20% of the loan amount requested. Usually, the guarantee

had to be produced within 5 to 7 days. Members of the organization

targeted applicants who had little financial resources and were,

therefore, unlikely to secure such a guarantee within the 5 to 7 day

time period. Sometimes, for an additional fee, the organization

would supply the applicants with a facilitator who pretended to assist the applicants in their efforts to obtain a guarantee from a financial institution. When the applicants were unable to meet this

or other terms of the agreement, the members of the organization

notified the applicants that they had violated the terms of the

agreement, that no loans would be made and that their retainers

were forfeited. If any of the funds still remained in the escrow accounts, they were quickly moved to other accounts controlled by accomplices of the organization.76

A document seized during the execution of a search warrant

issued for the residence of one of the leaders of the organization

provided a description of the fraud. It was marked ‘‘Confidential’’ and addresses payments made by the loan applicants under the

terms of the contract. It makes clear that members of the fraud

should not expect to collect loan fees other than the initial retainer

from the applicant because the loan will never be provided. The

only fees that the organization focused on were the fees that the

client paid in advance of receipt of the loan:

You have to make the client think you are really working to

get to the second payment and the third payment. This draws

his attention away from the first payment—which is the only

payment you will see but he doesn’t know that.

. . . FOR YOUR INFORMATION the 2nd and 3rd payments

will never come. You are in it for the first payment. However,

you act like you are after all 3 payments.

. . . What all the clients refuse to see, just plain do not understand is that in Section 3 the Syndication Agreement demands

that the Payment Guarantee be COLLATERALIZED. That

means it must be cash backed or no bank will issue it. It is

the clients responsibility to do that. However, you do not call

any attention to that UNTIL you have been paid. Period. No

exceptions.

Perpetrators of the fraud also required their applicants to establish Antiguan IBCs, with the idea that all transactions would take

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77 In 1993, fairly early in the history of this fraud operation, members of the organization flew

to Antigua and Barbuda to establish a bank that would serve as the repository for the retainer

payments and facilitate the laundering of the illicit proceeds of the operations. According to

court records, they met with Vere Bird, Jr., son of the former Prime Minister of Antigua and

Barbuda. The introduction was arranged by Julien Giraud, a senior member of the Democrat

Labor Party in Dominica who knew Frank Dzwonkowski, a member of the organization who had

been convicted of distribution of methaqualone in the U.S. and had contacts in Antigua and

Barbua. In 1994, members of the organization again flew to Antigua and Barbuda and met with

William Cooper, owner of AIB. The members of the organization who made the trip were Jake

Gamble, a Tennessee attorney who served as the agent for the escrow accounts that received

the retainer payments and posed as an underwriter with access to the venture capital (backed

by a fraudulent Japanese Yen bond); Larry Sangaree, who had been convicted of murder and

served as the organization’s field operations manager; and Dzwonkowski. Dzwonkowski maintained an account at another Antiguan offshore bank, Swiss American Bank, which members

of the organization had been using to launder funds stolen in the fraud. Sangaree testified that

the group decided to establish a bank in Antigua and Barbuda because of the favorable secrecy

laws (‘‘you could effectively hide funds down there from the government’’); the connections enjoyed by Giraud; and the desire to mirror the operations of another group within the organization that was claiming to use a bank in the Cayman Islands. Cooper agreed to assist in the

formation and operation of the bank. 78 According to one U.S. bank that provided correspondent services to AIB, Cooper informed

the bank that the offshore bank licensing process in Antigua and Barbuda required detailed inContinued

place between Antiguan entities. This was an effort to ensure that

if applicants initiated legal action against the organization, the dispute would be subject to Antiguan, rather than U.S. jurisdiction

since both parties would be Antiguan entities. A document seized

from one of the organization’s representatives, entitled Business

Development Syndications Program Description, stated:

You must be an Antiguan offshore business corporation to

enter our programs. To guarantee this is done before a DBA

[sic] (Business Development Agreement-Equity Purchase) is

entered into such incorporation will be handled for you by your

syndicator. We will not accept any other method of incorporation. Neither your syndicator nor the investors wish to become

familiar with any laws, corporate or otherwise, other than

those of Antigua and Barbuda. All transactions will be done

between chartered Antiguan corporations only. No exceptions.

Between 1994 and 1998 the U.S. FBI and the U.S. Customs

Service conducted an investigation (called ‘‘Operation Risky Business’’) of the fraud operation. The Customs Service described the

operation as the largest non-drug related undercover operation that

it ever conducted. The government estimates that as many as 300

to 400 firms or individuals in 10 different countries have been victimized by the fraud. It is estimated that as much as $60 million

dollars were stolen through this operation. Twenty-two individuals

have been indicted or charged as a result of their participation in

this operation; 14 have pleaded guilty; and 4 have been found

guilty at trial. Investigations and prosecutions are continuing.

AIB, AMT Trust and AIMS played key roles in the formation and

operation of Caribbean American Bank.77 In August 1994, William

Cooper (through AMT Trust) established two IBCs–BSS Capital

and RHARTE. The beneficial owners of those corporations were, respectively, Jake Gamble and Larry Sangaree, two organizers of the

fee-for-loan scam. Cooper then formed Caribbean American Bank.

The bank license application identifies BSS Capital and RHARTE

as the shareholders/owners of the bank. Cooper was listed as the

President of both BSS Capital and RHARTE. Cooper and Gamble

were listed as the Directors of the bank.78 In September 1994, CarVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00355 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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formation about all shareholders and directors, verified with background checks, bank and professional references. The applicant, whether it is a corporation or an individual, must submit

financial information for review by the Director of International Business Corporations. Biographical information for each proposed director, officer and subscriber of 5% or more of the

bank stock must be submitted.

It appears as if AMT Trust did not comply with these requirements. The Minority Staff asked

Cooper what due diligence he performed on the owners of the bank before he submitted the application to the Antiguan licensing authority, and if he was aware of Sangaree’s conviction. Cooper stated that he had asked the Finance Minister Keith Hurst about obtaining information on

those individuals and Hurst informed him that it would not be possible to obtain information

from the United States and, based on Hurst’s statement, Cooper did not try to obtain any information on Sangaree. One part of the application asks ‘‘Have any of the proposed directors, officers or proposed stockholders of five percent or more of the IBC’s stock ever been charged with

or convicted of any criminal offense? If so, give details, including status of case.’’ The answer

on the form is ‘‘No.’’ However, Sangaree was convicted of first degree murder in Florida in 1970

and sentenced to life imprisonment. He was released from prison in the late 1980’s. He was subsequently arrested for aggravated assault in 1987 and arrested for grand theft in 1990.

To receive an offshore banking license in Antigua and Barbuda at that time, applicants were required to demonstrate that they had $1 million in capital. A report of CAB’s liquidators filed

in the High Court of Justice of Antigua and Barbuda offers the following description of CAB’s capitalization funds: There are two shareholder loans of record, both of which are for $500,00. The loans appear

to have been generated by the Bank to enable the shareholders to finance the capitalization

of the Bank. The funds were never deposited in the bank. The two shareholders are holding

companies, which have issued bearer shares, and we do not know who is in possession of

the shares. Collectibility of these loans is unlikely and the amounts have been written-off

in the books of the Bank.

Lawrence Sangaree, the owner of one of the bearer share corporations that owned CAB, testified at the trial of one of his accomplices earlier this year. He said that to comply with the $1

million capitalization requirement, perpetrators of the fraud used funds that had been wired

into the bank by one of the victims. The funds were placed in AIB in August of 1994. After

an auditing firm confirmed the presence of the $1 million in AIB, it was distributed among the

members of the organization.

ibbean American Bank was granted an offshore banking license by

the Government of Antigua and Barbuda. AMT Trust initially managed the CAB account at AIB for a fee of $5,000 per month. The

administration of CAB was taken over by AIMS after it was formed

and took over management of the correspondent accounts at AIB.

A number of other accomplices in the organization also established IBCs in Antigua and Barbuda, many of them with the assistance of Cooper and his company, AMT Trust. Those IBCs in

turn established accounts at Caribbean American Bank. The Department of Justice informed the Minority Staff that it identified

79 IBC accounts established at CAB that were controlled by members of the fee-for-loan fraud organization. According to DOJ, all of

those IBCs were formed by Cooper or his company AMT Trust.

Many were bearer share corporations, meaning that ownership was

vested in whoever had physical possession of the corporate shares.

Such an arrangement makes it virtually impossible for a bank to

really know who the ultimate account holder is and what the purpose of the organization is. Retainer fees wired into the organization’s escrow account by the fraud victims would be dispersed into

the IBC accounts controlled by accomplices of the scheme. From

there, the accomplices transferred the funds to other accounts they

maintained at other banks, using the correspondent accounts of

AIB.

AIB also issued credit cards to CAB clients. This provided a perfect avenue for money laundering. The card holder would use a

credit card to charge purchases and other transactions. The outstanding balance on the cards could be paid out of the illicit proceeds the clients had on deposit in their CAB accounts. This enabled the card holders to utilize their funds without even engaging

347

79 In April 1994, AIB requested that Bank of America confirm letters of credit for two entities.

Although AIB did not have a credit relationship with BOA, the communications AIB forwarded

to one of the targeted victims of the fraud suggest that AIB had developed a financing plan with

Bank of America. Communications sent by AIB to Bank of America 2 months later in June 1994

indicate AIB was still pursuing the confirmation of two letters of credit. Since CAB was not licensed until September 1994, it suggests that Cooper and AIB were providing assistance to the

entities involved in the fraud even before CAB was opened and those entities became account

holders at CAB.

in additional wire transfers that might raise questions about the

origins of the funds.

Documentation shows that in 1994, AIB attempted to use its correspondent relationship with Bank of America to confirm letters of

credit issued to the fraudulent venture capital companies, American European Venture Capital and Bond Street Commercial Corporation, operated by the perpetrators of the advance-fee-for-loan

fraud. The confirmed letters of credit would then be used by the

criminals to convince victims that venture capital was available

once the advance payments were made by the victims.79

In October 1996, one of the loan applicants sent a facsimile to Caribbean American Bank, instructing it to return $62,500 his

company had wired into a CAB escrow account. A copy of the facsimile was supplied to the FBI. The funds were never returned.

In early 1997, a due diligence report performed by an Antiguan

law firm for a Russian bank that was considering doing business

with the organization wrote the following about Caribbean American Bank:

Caribbean American Bank has two shareholders both of which

are non-banking offshore companies and were incorporated by

William Cooper, one of Caribbean American Bank’s two Directors, who is known to be an active figure in Antigua and Barbuda’s offshore banking industry. Non-banking offshore companies are not required to disclose details of their shareholders

or show financial statements.

The company files disclosed that inquiries similar to yours

have been addressed to the Director of International Banking

& Trust Corporations in respect of Caribbean American Bank

involving foreign investors who have been required to deposit

funds into escrow accounts to be held by Caribbean American

Bank. In one such instance Barclays Bank of Antigua made inquiries of the Director of International Banking & Trust Corporations and in light of the information received about Caribbean American Bank advised their customers not to proceed

with the transaction.

Further it may be of interest to you to learn that the share

issue of Caribbean American Bank apparently consists of bearer shares only and Caribbean American Bank’s filed annual returns disclose No Activity, in terms of movement of funds,

whatsoever.

As noted above, the report of CAB’s liquidator confirmed that the

listed owners of the bank were bearer share corporations. The current receiver of AIB informed the Minority Staff that the CAB account at AIB had multiple sub accounts. According to the receiver,

tens of millions of dollars moved quickly through the CAB account,

with the funds being wired to many different locations. In addition,

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80 In February 1997, Gamble was indicted, provided information to government officials and

pleaded guilty to money laundering in early May 1997. On February 16, 1997, a U.S. District

Court Judge issued a warrant for the search of Sangaree’s property for information and materials related to the advance-fee-for-loan fraud. Sangaree was subsequently arrested and charged

on a parole violation related to weapons possession in February 1997. Information on his role

in the fraud was brought out during a subsequent bail hearing. In August 1997, Sangaree and

several other members of the organization were indicted for money laundering and fraud.

Sangaree pleaded guilty in December 1997. 81This is the predecessor to the International Financial Sector Regulatory Authority, which

is the Government of Antigua and Barbuda authority that regulates offshore banks. 82The U.S. Government served a subpoena on one of the perpetrators of the fraud, Judith

Giglio, in January or early February of 1997. Lawrence Sangaree, one of the leaders of the

fraud, testified at the trial of one of the perpetrators that: ‘‘A copy of that subpoena was circulated by Giglio to everybody in this operation. They all knew that the U.S. Government was

targeting AIB, CAB and people associated with that operation.’’ Also, see footnote 29, above, for

additional actions taken against the perpetrators before the March/April 1997 time period.

monthly statements of AIB’s correspondent accounts at U.S. banks

clearly show movements of funds through the IBC accounts at

CAB. The Minority Staff could not gain access to the CAB ‘‘filed

annual returns’’ referenced above. However, the information contained in AIB’s monthly statements and the AIB receiver’s comments about the flow of funds suggest that either the due diligence

report on the filed financial statements was inaccurate or the financial statements filed by CAB’s manager (AIMS) were false.

Key perpetrators of the fraud were arrested and convicted in

1997.80 Greaves and Cooper told the Minority Staff that despite

their role in forming and managing CAB and forming many of the

IBCs used by the perpetrators of the fraud, they were unaware of

the fraud being perpetrated through Caribbean American Bank

and AIB. Greaves told the Minority Staff that in the March/April

1997 time frame his staff began to develop concerns about the CAB

account because of customer complaints and the transactions being

conducted. Greaves said he contacted the Antiguan Supervisor of

International Banks and Trust Corporations 81 about his concerns,

and then unilaterally froze the CAB account. However, events in

the U.S. suggest that Greaves may have been acting in response

to actions taken by U.S. law enforcement agencies.82 In addition,

CAB internal documents show that the bank continued to disburse

funds at the instruction of one of the perpetrators at least until

early May. In August 1997, the Antiguan Supervisor of International Banks and Trust Corporations appointed Price Waterhouse as the Receiver/Manager of CAB. On November 19, 1997, the

High Court of Antigua and Barbuda ordered the Receiver/Manager

to liquidate CAB.

At a hearing in a U.S. Federal District Court, a U.S. Customs

Service agent testified that U.S. law enforcement agencies investigating the fraud had identified no legitimate purpose for the existence of Caribbean American Bank. That conclusion was supported by the report of the CAB liquidator which reported that:

‘‘The shareholders of the Bank are under investigation for money

laundering’’ and that ‘‘(a)ll depositors of the Bank are under investigation for money laundering.’’

An FBI agent’s affidavit contained a description of how IBCs and

AIB’s correspondent accounts were used to perpetrate the fraud

and launder the funds that were illicitly obtained:

The violators also make extensive use of offshore corporations,

principally in Antigua, W.I., to shield themselves from invesVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00358 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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83 At the trial of one of the perpetrators of the fraud, the government produced a list of wire

codes obtained through the execution of a search warrant. The seven page document identifies

over 35 accounts at over 20 U.S. and foreign banks that the perpetrators used for the movement

of these funds. 84For more information about Hanover Bank, see the case history in this report. 85Overseas Development Bank and Trust Company Ltd., a bank licensed in 1995 in Dominica,

was a correspondent of AIB from mid-1996 until late 1997. This bank is discussed later in this

case history.

tigation and lend credibility to their assertion that they have

access to funds from unidentified offshore investors. Additionally, fees received from victims are, at the direction of the violators, transferred offshore through American International

Bank accounts in Canada, Switzerland, Germany, and elsewhere, ultimately ending up in the Caribbean American Bank

in St. Johns, Antigua. As indicated in previous paragraphs,

funds have already been traced from victims to American

International Bank correspondent accounts in the U.S. and

Caribbean American bank accounts in Antigua, W.I. These

funds have also been traced as they are returned to the violators to purchase a variety of assets.

These fund transfers were accomplished by exploiting the correspondent banking network. Since CAB had a correspondent account with AIB, CAB and its account holders could transact business through the correspondent accounts that AIB had established

with other banks, including U.S. banks. AIB accounts at Bank of

America, Chase Manhattan Bank, Toronto Dominion Bank were

used to receive wire transfers from fraud victims and/or to disburse

the illicit funds to accounts controlled by the criminals. Funds

would be transferred from AIB’s accounts in the United States to

accounts controlled by the criminals in other U.S. banks and securities firms.83 The banks that served as AIB’s correspondents were

either unaware that AIB itself had correspondent accounts, or they

relied on AIB to review and monitor its own clients, including the

banks that had accounts at AIB. Thus, by nesting within AIB, CAB

and the criminals who were its owners and account holders gained

entry into the U.S. banking system with no review or due diligence

by the host U.S. banks.

In April 1999, Cooper was also indicted in the United States for

money laundering related to the illicit funds associated with the

advance-fee-for-loan fraud.

Other Correspondent Accounts at AIB. Other banks that established correspondent accounts at AIB include Hanover Bank,84

Overseas Development Bank and Trust Company,85 Washington

Commercial Bank, and Bank Kometa.

(c) Internet Gambling/Sports Betting

Another portion of AIB’s account base was comprised of sports

gambling entities. The legal and money laundering issues related

to this type of activity are addressed in another section of this report. Many U.S. banks have been unwilling to accept these types

of accounts or enter into correspondent relationships with banks

engaged in this activity primarily because of the reputational risk

that they pose. Moreover, recent court cases in the United States

have held that the wire transfer of funds for gambling is illegal,

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86 In October 1994 Bank of America (‘‘BOA’’), a correspondent bank of AIBs, learned that a

client of AIBs was a sports betting company and that gambling proceeds were being moved

through the BOA account. In an October 1994 fax memo to BOA, Cooper wrote that, ‘‘It is clearly not our policy to deal with such companies and we are pursuing as quickly as possible to

terminate the entire relationship.’’ In May of 1997, the relationship manager who handled the

AIB account for Popular Bank (now BAC Florida Bank) asked AIB about some of AIB’s customers, including Caribe International and Sheridan Investment Trust. AIB identified those two

entities as sports betting establishments.

raising serious legal questions for banks that facilitate the transfer

of such funds.

From the earliest days of its activity, AIB serviced sports betting

accounts. In the period 1994–95, AIB had the accounts of a number

of sports betting firms that advertised widely and directed clients

to wire transfer funds through the correspondent accounts AIB had

established at U.S. correspondent banks. AIB maintained. these

types of accounts at least through 1997, despite its representation

to its correspondents that it did not want that type of business.86

Clients associated with gambling/sports betting included Top Turf,

English Sports Betting, Caribe International Sheridan Investment

Trust and World Wide Tele-Sports (‘‘WWTS’’). WWTS, an Antiguan

sports betting firm, was one of 11 sports betting firms indicted by

the U.S. Government in March 1998 for illegally accepting wagers

on sports events over the phone or Internet. In December 1997, an

article in the Atlanta Constitution described WWTS as ‘‘the island’s

largest sports book, tak[ing] 35,000 wagers a week, with a Mondayto-Sunday handle [the amount of money wagered before the payment of prizes] ranging from $5 million to $10 million.’’ The article

noted that the winnings are tax free. ‘‘If the gamblers want to declare their profits to the Internal Revenue Service, fine. But [the

director of the operation in Antigua and Barbuda]’s not forwarding

any information. . . . He points to a paper shredder in the accounting office. ‘That’s what I do for the U.S. Government,’ he says,

laughing as he guides a piece of paper into the machine. ‘We have

clients with sensitive information.’ ’’ Through AIB and its correspondent account, WWTS was able to use U.S. banks for processing customer gambling deposits and possibly disbursements.

(d) Loans/Self Dealing

In marketing brochures that it shared with prospective correspondent banks, AIB reported its loan philosophy as follows:

The bank engages in lending only under certain conditions.

Loans must be either cash collateralized or properly backed up

by valuables or other guarantees to the satisfaction of and

under control of the bank. Loans are given only to the best of

clients. A credit analysis is made, and the sources of for payback must be clearly identifiable. A reserve for loan losses will

be established, if required, but the bank will not take significant commercial lending risks.

Every loan is approved by at least two officers, and every loan

agreement is signed by at least two directors of the bank.

Every loan is reviewed at least on an annual basis.

However, within its first year of existence, the AIB loan portfolio

swelled from $1.1 million to $25 million. It receded slightly in 1994

and 1995. By the end of 1996, AIB’s loan portfolio reached $41.2

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87 Brochures of the AIB Group show that AMT Management, the BVI company wholly owned

by Cooper and his wife, owned 50% of Woods Estate Holdings Ltd. Greaves told the Subcommittee that the amount of the loan was $6 million, and that Cooper owned half of the venture. The AIB receiver confirmed the size of the loan and Cooper’s ownership. 88 In late 1997, when AIB was encountering severe financial problems, Overseas Development

Bank and Trust (‘‘ODBT’’), a Dominican bank, attempted to purchase AIB. The effort lasted

about 4 months before it was abandoned by ODBT. When it abandoned its effort to acquire AIB,

ODBT accepted approximately $4.5 million worth of AIB loans as settlement, for the funds it

had on account at AIB and for the funds it expended while it had tried to take over AIB. Many

of those loans are not being repaid. Malcolm West, owner of ODBT, informed the Minority Staff

that ODBT was planning to go to court to attempt to collect on many of those loans.

million. A significant portion of those loans (estimated by the receiver to be roughly 40%) were loans that AIB made to Cooper

(AIBs owner), his family members and business interests. According to the receiver, this included a $6 million dollar loan to Woods

Estate Holdings Ltd., which was half owned by Cooper and his

wife.87 Other loans were a loan to Julien Giraud, a well-known political figure in Dominica, who introduced some of the criminals involved in the Caribbean American Bank fraud to Vere Bird, Jr.,

and one to a broker who handled the AIB trading account at a U.S.

securities firm.

By the time AIB encountered serious financial trouble in late

1997, non-performing loans represented a substantial problem to

the institution and contributed to its closure. When AIB was placed

under the control of a receiver in July 1998, the receiver discovered

that most of the outstanding loans were non-performing. In a November 1998 letter to the bank’s clients, the receiver wrote:

I have since conducted a more thorough examination of the

records and received a draft report of the Bank’s activities for

the year ended December 31, 1997. Of particular concern to

me, has been the quality of the Bank’s assets, particularly, its

loan portfolio. In many instances, I have been forced to refer

these accounts to legal counsel for collection and where necessary, to utilize the Courts, in this exercise.

The receiver informed the Minority Staff that there were numerous non-performing loans. In some instances, provisions weren’t

made for non-performance. No security was provided for a number

of loans. According to the receiver, there were instances where

loans were issued with the expectation that security would be provided after the issuance of the loan, but no security was provided

for the loan. The receiver stated that there were also a number of

instances in which AIB had circumvented regulations that prohibit

offshore banks from making loans to local residents and businesses

by making loans to Cooper’s BVI Company, AMT Management,

which would then make loans to the local businesses. In those

cases, the collateral was assigned to AMT Management, and not

the bank. This has impeded the receiver’s efforts to collect on nonperforming loans.

Presently, the receiver estimates that there are approximately

$18 million in outstanding loans and $10 million in overdrafts on

the bank’s books. The receiver estimates that approximately 50%

of those are loans to Cooper or individuals or entities associated

with Cooper. The receiver has retained legal counsel to recover

about $13 million of the outstanding loans.88

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89The 1993 audited financial statement contains the following language under Note 4

(‘‘Loans’’) of the statement: ‘‘There were no loans requiring provision for bad debts during the

period under review.’’ The financial statements for 1993 through 1996 all contained the following language: ‘‘The provision for loan losses is based on a monthly evaluation of the loan

portfolio by management. In this evaluation management considers numerous factors including,

but not necessarily limited to, general economic conditions, loan portfolio composition, prior loan

loss experience and management’s estimation of future potential losses.’’ This seems to conflict

with the brochure distributed by AIB to potential correspondents, which stated: ‘‘Loans must

be either cash collateralized or properly backed up by valuables or other guarantees to the satisfaction of and under control of the bank. Loans are given only to the best of clients. A credit

analysis is made, and the sources of for payback must be clearly identifiable.’’

According to the receiver, the AIB annual Audited financial

statements prepared by Pannel Kerr Forster did not accurately

portray the status or nature of the loans made by AIB. Review by

the Minority Staff of the annual audits shows that the auditors

never identified any problems with the loan portfolio. The audits

did not reflect any concern about a lack of provisions for bad

loans,89 nor did they reflect that a high portion of the loans were

made to individuals or interests associated with the owner or officers of the bank. For example, the audited financials for 1993

through 1996 report that 8%, 23.9%, 18.4% and 11.9%, respectively,

of AIB’s loans were issued to owners, staff or interests associated

with owners. This sharply contrasts with the estimates made by

the receiver and Greaves.

Greaves agreed that the percentage of loans to related individuals or entities was much higher than reflected in the audited financial statements. The AIB marketing brochure states, ‘‘All reports that are made available to sources outside the bank are

checked, approved and signed by two directors.’’ When the Minority

Staff asked Greaves why he signed off on the auditor’s report if he

realized that it understated the amount of loans to related entities,

he stated that he had written a letter to the auditor advising him

that the information in the report was not correct, yet the numbers

in the report were not changed.

The auditor for Pannell Kerr Foster noted that initially, in 1993,

AIB did not make provisions for bad debts because the bank was

new and the loans were new. He stated that when AIB officials

conducted subsequent reviews of the loan portfolio, and as loans

went bad, they required provisions for bad loans. He did state that

AIB became a ‘‘little bit loose’’ with its loans. He disagreed with the

receiver that many of the loans were uncollectible and that AIB

was insolvent. He told the staff that he had conducted a review of

the loan portfolio and concluded the loans were good and AIB was

not insolvent. He noted that he had contacted Cooper and told Cooper that the loans associated with Cooper had to be ‘‘regularized’’

and that Cooper agreed to fulfill the loans that he was responsible

for and to his knowledge Cooper had not ‘‘shirked’’ any of his responsibilities to those loans.

The auditor also disagreed that a high percentage of the bank’s

loans were to individuals and entities associated with Cooper and

AIB staff. He pointed out that in December of 1997, AIB had $66

million in outstanding loans, $40 million of which were associated

with a fully collateralized loan associated with the Forum. He did

not address prior years. According to the auditor, in June 1998,

after the Forum-related loan was repaid, $13 million of the $26

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90 Cooper told the Minority Staff that all loans to his family members either had been repaid

or are in the process of being repaid.

million in outstanding loans were associated with entities or individuals associated with Cooper or AIB staff.

The auditor also told the Minority Staff that he did not receive

a letter from Greaves reporting that the information regarding the

amount of associated loans on the financial statement was incorrect.90

(7) Correspondent Accounts at U.S. Banks

Over its short life, June 1993-July 1998, AIB established correspondent accounts with a number of U.S. banks. They included:

Jamaica Citizens Bank Ltd. (now Union Bank of Jamaica, Miami

Agency), the New York Branch of Toronto Dominion Bank, Bank

of America, Popular Bank of Florida (now BAC Florida Bank),

Chase Manhattan Bank, Norwest Bank in Minnesota, and Barnett

Bank. With many of the banks, the pattern of the relationship was

similar. AIB would apply for a correspondent account at a U.S.

bank; due diligence reviews would not identify any problems with

AIB; the U.S. bank would establish a correspondent account for

AIB; then, account activity over time would generate concerns that

would lead to the termination of the account. The termination

would then often be delayed at AIB’s request to allow it to first associate with another correspondent bank.

(a) Bank of America

AIB maintained a correspondent account at Bank of America

(‘‘BOA’’) from June 1993 through April 1996. During that period,

$128 million moved through its account. AIB approached BOA

about a correspondent relationship in June 1993, shortly after it

began to function as a bank. The BOA relationship manager had

known Cooper from the time that Cooper had been manager of another offshore institution, Antigua Barbuda Investment Bank, that

was a customer of BOA. BOA employees said that before 1997,

there was a great reliance on the relationship manager’s decision

about a client, and this appears to be the case with AIB.

At that time BOA was one of the more active U.S. banks in the

Caribbean area. A senior BOA official said that at that time the

relationship managers were primarily sales officers and the primary objective of the relationship managers was on expanding the

business. BOA readily established correspondent relationships with

offshore banks that wanted demand deposit accounts or cash management services in the United States. Because no credit was involved, BOA said relationship managers placed less emphasis on

those accounts and did not follow those kind of accounts as closely

as accounts with more potential for additional business. There was

an expectation that documentation on a bank client would be obtained and available, but depending on the relationship, sometimes

it would not be required. To the extent there was concern about

risk, the focus was placed on a client bank’s credit risk, not the

money laundering risk it posed.

The BOA relationship manager for AIB said he typically did not

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lished relationships only with commercial, indigenous banks (banks

that were licensed to operate and serve residents in the jurisdiction

that granted the license). The only exceptions to that practice were

AIB and Swiss American Bank (addressed in a later section). According to the relationship manager, although he had heard that

the regulatory program in Antigua and Barbuda was weak at the

time, BOA representatives relied more upon the individual owning

the bank than the regulatory apparatus. The relationship manager

said the key to doing business in the Caribbean was to know your

customer. He told the Minority Staff that he knew Cooper personally, spoke to people in the community about him and that he

thought Cooper had a good reputation.

Account opening documentation for AIB that was provided to the

Subcommittee showed that BOA obtained the following: a background description of America International Banking Group; a copy

of the articles of incorporation of AIB; minutes of the organizational meeting of the board; and a copy of the bank license and certificate of good standing. Financial statements for the bank were

not yet available because the bank only started operation in June

1993 and the first audited financial statement was not issued until

March 1994. There were no written references.

In June 1993 the relationship manager wrote a memo to the

credit manager seeking a decision on whether to open the AIB account. He described AIB as a commercial bank in the process of formation. He said he knew the directors and major stockholders, having worked with them in their previous banks. Since AIB was a

new bank, there was not much of an operational history from

which to assess its performance. However, BOA did little probing

into the nature of the bank or its clientele. Material provided to

BOA indicated that although AIB was formed in 1990, it did not

hold its first organizational meeting until December 1992. A senior

BOA official acknowledged this was not typical operating procedure

for a bank and that it should have raised questions about the regulatory authority when it allowed such a thing to happen. However,

there is no indication in the account opening materials supplied by

BOA that this issue was a factor in BOA’s decision to open a correspondent account for AIB.

An AIB brochure identified the commercial activities and objectives of the bank: to provide offshore financial services in a tax free

environment, primarily but not exclusively to private banking and

corporate customers. It stated, ‘‘The ability to provide this complete

service in a confidential manner is seen as a competitive advantage

which will enable the bank to expand its client base on a worldwide

basis.’’ The issue of confidentiality did not raise concerns with

BOA. As one senior official noted, while it is an issue today, it was

not so in the early 1990’s. It was viewed as standard wording for

offshore banks and the relationship manager was comfortable with

the relationship.

A senior BOA official observed that more should have been done

before the account was accepted, although he said it is difficult to

say exactly what should have been done. The relationship manager

made a trip to AIB in 1993 and saw AIB’s premises and an organizational chart. In May 1994 he made another site visit and saw the

AIB offices, employees, and customers. According to the relationVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00364 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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ship manager, everything BOA heard about Cooper at that time

was positive. The senior official suggested that there should be a

more careful analysis by the bank of why it wants to do business

with a particular client, and whether the regulatory authority can

be relied upon.

Ongoing monitoring of the bank was the responsibility of the account administrator, who handled the day to day operations of the

correspondent account. The relationship manager was liaison with

80 banks that had relationships with BOA; the account administrator had more accounts to handle than the relationship manager.

In addition, as noted above, because the AIB account was a cash

management account and not classified as a full relationship involving credit, it received less attention from the relationship manager. BOA officials told the Minority Staff that the account administrator monitored account activity, but if the activity did not reach

a certain level it would likely not be noticed. The relationship manager would see summaries of balances and the checks issued by the

client to get an idea of the business being conducted, but there was

no anticipated account activity profile established and there did not

appear to be any tracking to make sure the activity in the account

was in line with account purposes. In addition, because the AIB account was a non-credit relationship, annual audited financials were

not required. No audited financial statements were issued by AIB

between March 1994 and June 1996.

In May 1994, the relationship manager wrote a description, of

his site visit:

Formed just a year ago by a former general manager of Antigua Barbuda Bank, American Int’l. is already profitable . . .

nice quarters and a very slick operation. The group includes

the bank (offshore/private), a management and trust co. (offshore records and registration), asset management and even a

ship registry Co. While probably never a user of any volume

corbank services, this is already a nice relationship. . . .

Cooper is also a big supporter of BofA as the result of his experiences at Antigua Barbuda, and provided a new lead during

the visit.

According to BOA officials, they did not see any indications of

problems with the AIB account until 1995. However, in April and

June 1994 AIB asked BOA to confirm letters of credit for two entities—American European Venture Capital and Bond Street Commercial Corporation. These requests raised a number of questions.

Although AIB did not have a credit relationship with BOA, the

communications AIB forwarded to BOA suggest that AIB had developed a financing plan with BOA. Communications sent to BOA

2 months later indicate AIB was still pursuing the confirmation of

the same letters of credit. However, these requests did not lead to

further investigation or review by BOA. The relationship manager

explained that the communications did not make him suspicious,

because it appeared to him that Cooper had designed a scheme to

make a deposit and convert it into a loan to accommodate a private

banking customer. However these entities were two of the venture

capital corporations that were used to perpetrate the advance-feeVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00365 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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91Fax memo from William Cooper, President, AIB, to Lee Roy King, a BOA relationship manager, October 1994. Although Wulff was the relationship manager for the AIB account, he

worked closely with King, who had worked in the Caribbean region for BOA for a long time.

According to Wulff, sometimes Cooper would communicate with King.

for-loan fraud that eventually operated through CAB, an offshore

bank that had a correspondent account at AIB.

In October 1994, BOA learned that a client of AIBs was a sports

betting company. Gambling proceeds were being moved through

the BOA account, and the AIB client was telling its customers to

wire money through the AIB account at BOA. BOA notified AIB.

AIB told BOA that the account was being terminated and wrote to

BOA that ‘‘It is clearly not our policy to deal with such companies

and we are pursuing as quickly as possible to terminate the entire

relationship.’’ 91

However, AIB maintained other accounts related to sports betting and gambling throughout its existence.

On October 10, 1995, an internal BOA memo from the Vice President of International Deposit Services to the Vice President of Account Administration notes that the AIB account ‘‘has recently seen

a number of returned items for large dollar amounts.’’ The returns

were for forged checks. After providing details of the parties involved, the memo states:

It would seem to me that our customer is dealing with clients

on their side that are unknown to them. The area in which

they are located, St. John’s Antigua W.I. is already well known

to us and has caused us substantial problems in the past.

Therefore, based on our limited knowledge of customers practices I would suggest the following:

1. Contact Tom Wulff and request a background check on this

account.

2. Increase the availability given to this customer from 5 business days to 10 in order to avoid a potential overdraft situation

that will not be covered.

3. Upon review of the background make a logical decision as

to why we should NOT disengage from this customer. [Emphasis in original.]

On October 18, the relationship manager reported to the Vice

President for International Deposit services that he contacted

Cooper, President of AIB and informed him that BOA wanted to

terminate the correspondent relationship with AIB within 60 days.

As a reason he ‘‘reiterated the several transactions below which

has [sic] recently passed through his account and which we considered unacceptable.’’ He later notes some of the unacceptable transactions included: 10/94—apparent gambling proceeds, advertising

leaflets; 4/95—clearing high volumes of small money orders, apparent gambling or money laundering; 10/95—clearing large denomination forged checks. Cash letter activity was terminated 60 days

later, and the account was completely closed in April 1996. The relationship manager said this arrangement was reached in order to

give AIB time to find a new bank and establish a correspondent relationship while still reducing AIB’s ability to move more funds

through the account.

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In July 1996, the relationship manager wrote a memo about a

visit he made to another Antiguan bank. As part of that memo he

included the following:

On a related subject, and although I did not call on American

International Bank for obvious reasons, exiting that relationship (the account is now totally closed) also seems to have been

prudent since although no proof is of course available, their

reputation in the local market is abysmal. Rumors include

money laundering, Russian Mafia, etc., while management of

that bank also now includes the former manager of SAB, again

not a reassuring situation.

The relationship manager told staff that the situation with

Cooper’s reputation changed suddenly and he ‘‘became the poster

boy for bad banking.’’ He stated that he brought the AIB account

in as an exception and he shouldn’t have. It should be noted that

no one else in the BOA system objected to opening the account. He

also told the Minority Staff when informed that other U.S. banks

serviced AIB after BOA closed the account, that it was hard to believe that other banks would accept AIB as a client as late as 1997,

noting that they should have known better by that time.

(b) Toronto Dominion Bank (New York Branch)

AIB maintained a correspondent account at the New York

Branch of Toronto Dominion Bank from January 1996 to January

1997. During that period, $16 million moved through its account.

AIB had previously established a correspondent account with Toronto Dominion Bank in Canada and on January 8, 1996, requested that the Canadian branch establish a U.S. dollar account

at the New York office, which the New York office did on January

10, 1996.

Information on due diligence and account opening activities in

the Canadian branch were not made available to the Subcommittee. The New York branch did not perform any due diligence on AIB before establishing an account, apparently relying on

the due diligence performed by the Toronto office when AIB first

became a customer of the bank. The individual who handled the

AIB account in New York has left the bank, and a box of records

related to the account cannot be located.

Monthly statements which are available show a high level of activity in the account. On November 1, 1996, the account manager

in New York sent the following email to the Toronto office:

To accommodate your request, we opened the above account

last January. However, this is a heavy volume account and we

are not set up for this accommodation. We have therefore, decided to close the account. Since they made their opening arrangements through Corresponding Banking in Toronto, we

now request that you notify the customer.

On the same day, the Toronto office sent a letter to AIB informing the bank that the New York correspondent account was going

to be closed. The letter stated:

As you are aware, this account was opened to accommodate

your request to have a US dollar account in the United States.

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Because of the high volume activity on this account (approx.

2000 per month), special arrangements had to be made with

our Toronto Office to have regular transfers made to the subject account to cover any overdrafts. This account has since

had to be monitored on a daily basis to ensure coverage of

funds.

Clearly this has become a high cost account for us and it is no

longer economically feasible for us to retain this or any other

such accounts.

Toronto Dominion Bank informed AIB that the account would remain open until November 30. The closing date was subsequently

moved. The account was frozen in mid-December and was closed as

of January 9, 1997. In December the Toronto Dominion head office

in Canada also informed AIB that it would no longer provide cash

letter services for U.S. dollar items drawn on U.S. locations; it

would continue to accept cash letters for Canadian dollar and U.S.

dollar items drawn on Canadian locations. In January 1997, the

New York branch transferred the remaining account balance to the

head office in Toronto.

The Vice President and Director for the New York office where

the AIB account had been located informed the Minority Staff that

the bank had not seen any suspicious activity associated with the

account. According to the counsel, the basis for the closure of the

account was what was noted in the letter to AIB—given the volume

of activity, it was too costly for the Toronto Dominion branch in

New York to service the account.

In addition to the activity in AIB’s account in Toronto Dominion’s

New York branch, records of AIB’s other U.S. correspondent accounts suggest that the Toronto Dominion account in Canada was

a major conduit for AIB funds into the U.S. banking system. For

example, between June 1996 and January 1997, $20.9 million was

wired to the AIB correspondent account at Chase Manhattan Bank

from the AIB account at Toronto Dominion Bank in Canada.

From the records available to the Subcommittee, it appears as if

the Toronto Dominion office in Canada maintained AIB’s correspondent account until at least mid-1997.

(c) Chase Manhattan Bank

AIB maintained a correspondent account at Chase Manhattan

Bank (Chase) from April 1996 through June 1997. During that period, $116 million moved through its account. The initial contact

was made through a ‘‘cold’’ or unsolicited call to AIB from a Chase

representative. At the time, AIB had been notified by BOA that its

correspondent relationship would be terminated.

In the mid 1990’s Chase was not promoting credit relationships

with banks in many nations in the Caribbean and South America.

However, it was making a concerted effort to promote service products that would generate fees without exposing the bank to credit

risk. A major product was electronic banking—taking advantage of

the bank’s sophisticated computer equipment and hardware to provide U.S. bank accounts and non-credit related services to offshore

banks. As a result of this focus, Chase’s contact with banks in

those areas was conducted primarily through sales representatives

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rather than a relationship manager that would have a wider range

of responsibilities and functions. The sales team was overseen by

a credit risk manager. At the time, Chase sales representatives

working in the area handled a large number of bank clients. One

representative had more than 75 banks. The salary of the Chase

representatives was tied to revenues and fees generated by the accounts they handled. One representative reported that it could be

a large part of one’s salary.

At the time of Chase’s association with AIB, the account opening

procedures required the sales representative to obtain a letter from

the client requesting to open an account, bank reference letters,

bank financials and a background/justification memo. In addition,

the individual who served as the credit risk manager at the time

stated that the representatives were required to know the nature

of the bank’s business through an on-site visit and have a reasonable understanding of the transactions the bank would initiate.

The initial contact memo for AIB was written on January 23,

1996. The memo states that AIB will provide the copies of audited

figures for the 3 years that AIB had been in existence. Neither the

Chase sales representative nor the risk manager could remember

if the financials were provided. A subsequent memo indicates that

financial statements were received and reviewed during February

or March. However, at that time the only audited financial statement available was the 1993 statement. Financial statements for

1994 and 1995 were not published until June 1996. Although Antiguan regulations require that audited financial statements be produced within 4 or 5 months of the end of the year, Chase did not

question the absence or lateness of the financial audit for 1994.

The memo also describes a primary function of AIB:

As I understand it, his [Greaves’] typical pitch is to ‘‘incorporate’’ individuals into offshore citizenship which then makes

them eligible for a host of products voided to domestic (U.S.)

Nationals. Such set-up typically costs $1,250 and is efficient for

someone with as little as $20M [thousand]–$25M [thousand] to

invest. John elaborated to the effect that to ‘‘take-in’’ deposits

from US nationals is not a transgression. It becomes a transgression if and when these nationals end up not reporting the

investment, which is no legal concern of the offshore depository

institution.

When asked by staff if these comments by Greaves had caused

any concern, the sales representative who is still involved in correspondent banking for Chase replied that they showed that

Greaves knew his craft—that he set up mechanisms to ensure compliance with the law. The representative noted that the whole essence of offshore banking is non-resident accounts, accounts in the

name of corporations with bearer shares, and directors that are

lawyers ‘‘that sit in these tax havens that make up minutes of

board meetings.’’ He noted that the comments in the memo were

intended to be informational and not questioning whether Chase

should be in the field. When asked if part of the sales representative’s job was to make sure the client bank did not go over the line,

the representative responded if that was the case, then the bank

should not be dealing with some of the clients it had and shouldn’t

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be doing business in some of the countries where it was doing business. He added, however, that in the case of AIB, it did not seem

that AIB was doing anything illicit, rather it was in the business

of offshore banking and that is the type of thing AIB needed to do

to attract clients.

In March 1996, the Chase sales representative and the credit

risk manager participated in a conference call with Greaves. The

purpose was to clarify three specific points before establishing a relationship with AIB: the ownership of AIB, AIB’s due diligence and

KYC policies, and Chase’s expectations regarding cash management letters. Both Chase officials admitted that it was rather unusual for the credit risk manager to participate in such a call before approving an account. The credit manager could not remember

if there was something in the AIB material that caused the call.

However, he noted that he generally had developed a heightened

concern about small ‘‘boutique’’ banks and because of the ongoing

Chase-Chemical Bank merger, he was concerned that if his department were eliminated he did not want to admit a bank that might

later create problems for whoever inherited the account. The risk

manager wrote a memo on the phone conversation, and in the section regarding AIB’s due diligence and KYC programs, he included

the sales representative’s characterization that: ‘‘Greaves stated

that AIB exceeds the U.S. Treasury’s guidelines in this area. AIB

takes this issue so seriously that Greaves himself was unable to

‘free up’ any time to see [the Chase sales representative] in Miami

last month while attending a local Treasury-sponsored Anti Money

Laundering Seminar.’’ A Chase representative noted that this characterization of AIB’s commitment to anti-money laundering was

perhaps an ‘‘embellishment.’’ Regarding AIB’s Due Diligence/Know Your Customer policies, the

memo reported that: A 12-page instructional document is sent to,

and acknowledged by all AIB staffers who handle accounts.’’ However, neither the credit manager nor the sales representative can

recall if they ever saw the document. After the March 26 teleconference, the AIB correspondent account was approved and established.

As noted above, Chase representatives were required to know the

nature of the bank’s business through an on-site visit and have a

reasonable understanding of the transactions they would initiate.

The sales representative stated that he believed that AIB’s businesses included offering products to personal corporations, forming

trusts and a ship registry. He told staff that although he was not

told so by AIB, on the basis of his experience, he understood that

since AIB was an offshore bank, its clientele was largely private

banking type clients, individuals with enough discretionary wealth

to form trusts and other products. Neither the sales representative

nor the credit manager was aware of the Forum or the large presence that Forum-related accounts had at AIB.

In addition neither the sales representative or the credit risk

manager were aware that AIB served as a correspondent bank for

a number of other offshore banks such as Caribbean American

Bank, Hanover Bank or Overseas Development and Trust Company. The manager noted that at that time Chase representatives

were not required to ask a client bank if it served as a corVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00370 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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respondent for other banks. He said the issue never came up, but

if it were a regular service offered by AIB it should have been

raised to him. He noted that there was no Chase policy against establishing a correspondent relationship with a bank that served as

a correspondent to other banks, but noted that if he had been

aware that AIB served as a correspondent to other banks, he would

have asked additional questions about that situation.

Chase’s ongoing monitoring efforts were admittedly less rigorous

for non-credit correspondent relationships than the ongoing monitoring for credit relationships. The credit risk manager described

the effort as ‘‘reactive,’’ responding to any suspicious activity or any

other reports that might come to the attention of the bank. According to the credit risk manager, while the general policy was to keep

alert in all areas where Chase conducted business, there was no

annual review of non-credit relationships such as AIB’s and clients

were not required to supply updated financials. Sales representatives did not review monthly statements; they would review billing

statement analyses to get an idea of the activity of the account.

Although a key aspect of ongoing monitoring was maintenance of

direct contact with the client through site visits, smaller revenue

clients were not visited on a regular basis, if at all.

In May 1996, a new sales representative assumed responsibility

for the account. The new representative visited the AIB offices in

September 1996. The report of the meeting indicates that AIB officials advised the representative that BOA had previously handled

AIB’s accounts and that AIB had been unhappy with the support

received from BOA. There was no mention that BOA, not AIB, had

terminated the relationship. The new representative stated that

since she had taken over the account after it was opened up, she

didn’t inquire about the BOA relationship because she assumed

that the matter had been addressed during the opening of the account. The new representative stated there was no information in

the file about the customer base and she had inquired about the

nature of AIB’s clientele. The site visit representative noted that

AIB managed ‘‘three to four thousand offshore customers (trust private banking) and they are not allowed to operate locally in Antigua.’’ The representative was not aware of the large base of Forumrelated IBCs that were part of AIB’s clientele. She noted that while

she obtained an overview of the clientele, she felt that the bank

would not provide information on what the offshore client base

was. The report also noted:

A subsidiary, American International Management Services

(AIMS) provides head office services for other banks. They

manage twelve banks, have dedicated systems, preparing

statements (outsourcing) that have physical presence in Venezuela, Canada, Australia, St. Petersburg, Brazil, England, Antigua due to offshore nature. They are purely international and

wholesale in nature . . . involved in project financing, non discretionary funds only (have branches in Dominica, St. Kitts).

This apparently did not raise concerns with the new representative. She told the Minority Staff that she did not pay attention to

AIB’s respondent banks. When asked by the Minority Staff if she

made further inquiries about the banks serviced by AIB, she noted

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that AIB had told her that the banks it serviced were much smaller

banks and that no money center banks would do business with

them. She noted it was a judgment call as to whether the client

would tell the representative what its customers were doing.

In March 1997, the sales representative was instructed by the

Chase fraud department to terminate the relationship with AIB.

According to the sales representative, the instruction was delivered

shortly after AIB received a sizable stolen check and had recently

completed a questionable wire transfer. On March 12, 1997, Chase

informed AIB that it would close the account in 30 days (April 12).

After two letters of complaint from AIB about the decision and the

difficulty of establishing a new relationship within 30 days, Chase

informed AIB that it would extend the closing date to May 17,

1997, and agreed to accept cash letters until May 2.

On April 7, AIB reiterated a request for an additional 3,000

checks. On May 21, 1997, AIB requested that its remaining balance

be forwarded to Popular Bank in Florida. A June 2 Chase memo

addressed the account:

[W]e concluded that it should be closed, we can’t wait any

more. . . . I tried to get a list of outstanding checks from Syracuse but the list was not only very long but also included pending items from June/96. I do not think the list is accurate. We

have given them over two weeks more from the date the account was supposed to be closed which was May 16/97. You can

go ahead and do what is necessary to close it. . . .

On June 17, 1997, the account was officially closed. After its correspondent account with Chase was terminated, AIB informed its

clients of the closure in the following way:

Due to certain operational considerations, we have decided to

close our account with Chase Manhattan Bank in New York by

May 15, 1997.

(d) Popular Bank of Florida (now BAC Florida Bank)

AIB maintained a correspondent account at Popular Bank from April 1997 through July 1997. During that period, $18 million

moved through its account. Popular Bank had approached AIB

about a correspondent account in early 1997.

Since April 1995, AIB maintained a Visa Credit Card settlement account at Popular Bank, backed by a $100,000 Certificate of Deposit. Credomatic, a credit card payment processing company, was

owned by the same individuals who owned Popular Bank. Some of

the financial institutions that utilized Credomatic’s services established their escrow accounts at Popular Bank. Popular Bank used

that escrow account list to market its correspondent banking services.

In early March the relationship manager for Popular Bank wrote

a letter to AIB describing the correspondent services Popular Bank

could provide and requested the following from AIB: financial

statements for the past 3 years, background on the bank and the

nature of its business, identity of the major shareholders and other

business interests they had, and a list of senior officers. A site visit

was not made before the account was opened. The account manager

was planning a visit to Antigua and Barbuda in the near future

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and planned to make a site visit at that time. In a later communication, the relationship manager requested a list of some of the

correspondent banks used by AIB.

In a letter responding to the request, Greaves pointed out that

AIB operated in Antigua, Barbuda and Dominica. The letter noted

that AMT Trust was a part of the American International Banking

Group, formed and managed corporations, and had over 5,000 corporations on its books that could be incorporated in Antigua and

Barbuda, St. Kitts or Dominica. Greaves also pointed out that

American International Management Services Ltd. provided full

back office services for offshore banks and corporations. The letter

also states that ‘‘the bank does very little lending and is mainly

used as an investment vehicle for our clients.’’ At the same time,

AIB’s balance sheet showed that as of December 1996, AIB had

over $40 million in loans and advances out of a total asset base of

$57 million. The list of correspondent banks provided by AIB

named Toronto Dominion Bank in Canada, Privat Kredit Bank in

Switzerland and Berenberg Bank in Germany. The list did not include any of AIB’s U.S. correspondents.

As part of the due diligence process, the relationship manager

made inquiries about AIB with a European bank with a branch in

Antigua and Barbuda. He was cautioned to be careful about doing

business in Antigua and Barbuda, although no negative information about AIB or its officers was transmitted.

The account became operational on April 1, 1997. Although the

account was quiet during the first month, activity increased dramatically in the month of May. During that month, $7.5 million

was deposited and $2.7 million was withdrawn from the account

(including $1.6 million withdrawn through 488 checks). Also in

May, the relationship manager made an inquiry of AIB about some

of AIB’s customers and, at the end of May, learned that AIB serviced the accounts of sports betting companies. In June, Popular

Bank received a request from a Russian bank to transmit the text

of two loan guarantees ($10 million and $20 million) to AIB, for

further transmittal to Overseas Development Bank and Trust. Popular Bank refused to transmit the guarantees, because it would

have put Popular Bank in the position of guaranteeing the loans

for the Russian banks, which were not clients of Popular Bank.

In early June, the relationship manager visited Antigua and Barbuda. During the trip, he visited the AIB offices and acquired some

AIB brochures that highlighted some services of the group that

raised questions about its vulnerability to money laundering and

the nature of the clientele it was trying to attract. One document

described the various entities that made up the American International Banking Group and the bank formation and management

services offered by the group, including the fact that AIMS provided back office services for some of the offshore banks that had

accounts with AIB. The description of the management services offered by the American International Management Services Ltd.

(‘‘AIMS’’) contained the following:

It has become increasingly important for overseas tax authorities to see that the ‘‘mind and management’’ of a bank is in the

country of origin. Therefore, we are now providing management services for a number of our clients. American InterVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00373 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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national Management Services Ltd. can provide offshore management services for an offshore bank.

. . . In addition to the administrative responsibilities mentioned above, we will also provide full back office services.

These services will include but not be limited to: establishing

an account with American International Bank to make

wire transfers and the issuance of multi-currency drafts; the

operation of a computerized banking and accounting system;

issuance of certificates of deposit and account statements; administrative/clerical functions relating to the purchase and sale

of securities and foreign exchange and the filing of all correspondence/documentation and all other ancillary functions of

an administrative nature. . . . [emphasis added]

Another document describing the corporate and trust services of

the American International Banking Group identified a number of

advantages of incorporating in Antigua and Barbuda, some of

which stressed how, under Antiguan law, it was easy to hide information about account activity and ownership:

—Antigua and Barbuda only has an Exchange of Information

Treaty with the U.S.A and this is only for criminal matters.

—There are no requirements to file any corporate reports with

the government regarding any offshore activities.

—The books of the corporation may be kept in any part of the

world.

—Share [stock] certificates can be issued in registered or bearer

share form.

The manager informed the Minority Staff that he also visited

with governmental officials and became concerned when he learned

that although the government was in the process of collecting a

great deal of information about its offshore banks, it lacked the resources to review and analyze the information it had collected.

On June 13, he filed a report on his visit to AIB. The memo reviewed the various entities that made up the American International Banking group. After noting that one of the entities in the

group provided back office services that included establishing accounts at AIB, he commented: ‘‘The back up services provided by

the group offer a high risk as we do not know either the entities

nor the people behind those banks receiving the service.’’

The memo also noted that information obtained from the Antiguan banking community about Greaves ‘‘leaves me uncomfortable.’’ The memo concluded with the following recommendation:

I recommend that we do cut our banking relationship

with American International Bank for the following reasons:

Antigua has no regulations nor the capacity to enforce them for

offshore banks.

American International Bank offers management services to

offshore banks incorporated in Antigua. We do not know who

are behind those banks. Therefore, the risk of any of those

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banks being involved in unlawful activities (as per US regulations) results extremely high.

John Greaves has not the best prestige among bankers in Antigua. [emphasis in original]

On June 16, the relationship manager sent a facsimile to AIB,

stating the following:

Please be advised that we will be unable to continue servicing

your operating account effective Monday June 23, 1997. Please

do not send any more items for deposit after today June 16,

1997.

We thank you for your business but we must be guided by U.S.

banking regulations which require a disclosure of comprehensive information about our clients and parties involved in our

transactions.

The bank refused to grant an extension to AIB. Two days later,

Popular Bank also terminated AIB’s credit card settlement account,

which had been at the bank since 1995. In the month of June, $7.8

million was deposited into AIB’s account at Popular Bank and $11.6 million was withdrawn (including $3.4 million through 962

checks). All account activity was ceased at the end of June and the

account was closed in early July.

(e) Barnett Bank

AIB maintained a correspondent account at Barnett Bank from

May 1997 through November 1997. During that period, $63 million

moved through its account. AIB President John Greaves contacted

the relationship manager for Barnett’s Caribbean division and said

that AIB was looking for a correspondent bank to provide cash

management activities for the bank in the United States.

Barnett Bank had a small correspondent banking department. It

consisted of four correspondent bankers who covered four geographic regions. They were assisted by one administrative assistant. The bankers reported to the head of International Banking.

The work on correspondent accounts was shared with the Treasury

Management Services Department, which handled the cash management services of the account. The correspondent banker, also

called the relationship manager, would handle both credit and cash

management relationships. The Caribbean Region office in Barnett

had about 25 clients and did a lot of cash letter and wire transfer

business. While financial incentives were not offered to relationship

managers for attracting new accounts, they were related to fee income and loan balances.

To open a correspondent account, a bank was required to supply

financial statements, management organizational charts and bank

references. Barnett Bank said it would not deal with shell banks

that didn’t have a physical presence in the jurisdiction in which

they were licensed. According to the relationship manager of the

AIB account, all of Barnett Bank’s clients had a physical presence.

In fact Barnett Bank said it had only one or two offshore banks as

clients and had no client banks that held bearer share accounts.

The relationship manager did not know if any client banks were

providing correspondent services to other banks, because that was

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not an inquiry made of prospective client banks. One of the offshore banks that was a correspondent of AIB had a number of

bearer share IBC accounts that had been formed by Cooper’s company, AMT Trust.

The relationship manager said that as part of her due diligence

review, she would check with the bank regulator of the jurisdiction

in which the client was located. The regulatory authority of the

bank’s home jurisdiction was assessed as part of a country risk

evaluation. However those assessments were performed for credit

relationships; they were not done for cash management, non-credit

relationships. Similarly, although reports of agencies that rated the

creditworthiness of banks were reviewed, the reports didn’t include

Caribbean banks. Bankers were not required to perform an initial

site visit or write a call memo before the relationship was established. An initial site visit was not made to AIB, because the relationship manager had just returned from a trip to Antigua and

Barbuda when AIB made its request to open an account. The manager made a site visit during the next scheduled trip to Antigua

and Barbuda in August 1997.

Treasury Management would review the account opening documentation for completeness and establish the account. The relationship manager had the authority to approve the opening of a

non-credit relationship. Credit relationships had to be reviewed

and approved by a credit committee.

When Greaves initially contacted the relationship manager, he

explained that the bank serviced private banking clients and

trusts. Information materials supplied to Barnett by AIB indicated

that the bank serviced wealthy individuals. The manager was unaware of Melvin Ford or the Forum and had not heard of Caribbean American Bank and the relationship those entities had with

AIB. The relationship manager was not aware that AIB served as

a correspondent to a number of offshore banks. The relationship

manager was unaware that AIB had licensed a bank in Dominica

in June 1996. The fact that there were other companies in the

American International Banking Group that formed IBCs was not

viewed as relevant to the bank. Barnett did not obtain any information that provided details of AIB’s client base. Because AIB had

a cash management relationship, its loan profile and loan philosophy were not reviewed.

The relationship manager noted that the staff always tried to

perform substantial due diligence but Barnett did not have a presence in the local market and had to rely on the opinions of people

in the market and the regulatory agencies. However, the manager

noted that those entities are reluctant to provide information and

don’t want to say anything negative about another party. Barnett

said that their reluctance to provide information made it difficult

for Barnett to assess the entire situation.

With respect to ongoing monitoring, the relationship manager

would make annual on-site visits to banks that had cash management relationships with Barnett and more frequent visits to clients

with credit relationships. The relationship manager would review

some recent monthly statements and check with Treasury Management on the status of the account before making site visits. Treasury Management would notify the manager if any unusual activity

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92The other offshore bank initially licensed was American International Bank and Trust Company Ltd., owned by Cooper and his wife. According to the manager of the Dominica International Business Unit (the governmental body that regulates offshore banks), American International and ODBT were closely aligned. The banks’ applications were submitted at the same

time, they shared the same agent (AMT Management) and they shared the same office space.

was noticed, and Barnett said it had an Anti-Money Laundering

unit that monitored accounts.

The AIB account at Barnett Bank operated for 5 months. During

that period, the account experienced substantial wire and checking

activity. In June and July, there was a large number of transfers

out of the account valued between 1 and 10 thousand dollars. In

July, there were over 500 checks issued for a total value of $3.2

million. The relationship manager noted that the volume of checks

was unusual and it was also unusual to issue checks in the denomination of 75 to 100 thousand dollars, as AIB was doing. In August, there were $5 million worth of checks written against the account.

The relationship manager was informed by Treasury Management personnel in about July that there was a large volume of wire

transfer activity in the account and it was difficult to keep up with

the volume. When an inquiry was made to AIB, the bank explained

that the activity was related to many payments to trust accounts.

This response didn’t raise the suspicions of the manager.

In late July or early August, prior to a trip to Antigua and Barbuda, the relationship manager noted an incoming wire transfer for

$13 million. It attracted the manager’s attention because it was unusually large. She was unable to reach Greaves, and she received

an unsatisfactory explanation about the wire from AIB’s operations

manager. The following week the relationship manager traveled to

Antigua and Barbuda and met with AIB officials. She was still unable to receive a satisfactory explanation for the $13 million transfer. After returning to Miami, she spoke with the head of the International Banking Department and the Compliance Department and

the decision was made to close the account. Initially, Barnett informed AIB that the account would be closed at the beginning of

October. AIB requested additional time, and Barnett agreed to hold

the account open until November. AIB was able to use wire transfer services throughout that period. The account was closed in November.

(8) AIB’s Relationship with Overseas Development Bank

and Trust Company

In late 1997 AIB was suffering severe liquidity problems largely

because of non-performing loans and the attempt by certain investors to withdraw their funds. As the growing liquidity problem

threatened the solvency of the bank, the owners of Overseas Development Bank and Trust Company Ltd. (‘‘ODBT’’), an offshore bank

licensed in Dominica, attempted to take over AIB. ODBT was licensed in 1995 in Dominica; it was one of the first offshore banks

licensed in Dominica after Dominica passed its law allowing offshore banks in June 1996.92 ODBT’s formation was handled by

AMT Management, the British Virgin Islands corporation owned by

William Cooper and his wife. ODBT’s initial shareholders were

Cooper, his wife and John Greaves. The Coopers disposed of their

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93 In order to comply with Antiguan regulations that prohibit a bank from using the word ‘‘trust’’ in its name, the owners of ODBT applied for, and received, a temporary bank license

for a new Antiguan bank in the name of Overseas Development Bank (‘‘ODB’’). In a December

1997 letter to the counsel in Antigua and Barbuda who was handling the incorporation and licensing for ODBT, John Greaves supplied ‘‘a full name of all shareholders in various companies

that own the Overseas Development Bank & Trust Company Ltd.’’ According to Greaves’ letter,

ODBT was owned 100% by Overseas Development Corporation, an Antiguan Corporation, which

was owned by three companies—Financial Services Group, International Management Services,

Inc., and Overseas Development & Trust Company. The owners of the Financial Services group

were listed John Greaves, Arthur Reynolds and Derek Pinard (General Manager of ODBT).

Greaves was listed as the owner of International Management Services, Inc. The owner of Overseas Development Trust Company was listed as the Honorable Ivan Buchanan (a director of

ODBT). Malcolm West was not listed. 94The owners of ODBT subsequently characterized the relationship with AIB in different

ways. In one instance, the investment in AIB was a ‘‘loan’’ rather than expenditures associated

with the purchase of the bank. In another communication, Greaves stated that ‘‘in order to offer

final assistance to American International Bank and their clients aimed more at perhaps assisting the image of the offshore banking industry than the individual bank, we purchased loans

from the Receiver to the sum of US$4.5 million. All of these loans are active and in good standing although some of them are longer than we would prefer.’’ The receiver of AIB informed the

Minority Staff that many of the loans assumed by ODBT were non-performing and the current

owner of ODBT concurred, stating that the bank was planning to initiate legal proceeding to

recover the funds. ODBT officials estimated that approximately one half of the $4.5 million in

loans were related to interest associated with the former owner of AIB, Cooper.

In December 1999, the Supervisor of International Banks of the Antiguan International Financial Sector Authority (the immediate predecessor to the International Financial Sector Regulatory Authority, the current regulator of offshore banks in Antigua and Barbuda) wrote to ODB

and informed the bank that its tentative license was to be revoked on January 14, 2000, due

to lack of activity and assets.

After ODBT abandoned its takeover of AIB, a second takeover effort was mounted. In May,

another Antiguan bank, called Overseas Development Bank, Antigua was formed. The bank was

granted a license in 1 day. According to filings that accompanied the license application, that

leadership of the bank was closely connected to the Forum operations. The major shareholder

(owning 3 million of 5 million shares of the capital stock) was Wilshire Trust Limited, which

was one of the trusts that controlled many of the Forum-related investments. Some board members of the new Overseas Development Bank, Antigua, also had ties with the Forum. David Jarvis had run the Forum office in Antigua and Barbuda. Earl Coley of Clinton, Maryland, was

a frequent speaker at Forum meetings and is reported to be a relative of Gwendolyn Ford

Moody, who handled much of the financial activity for Melvin Ford and the Forum. A number

of individuals familiar with the formation of Overseas Development Bank, Antigua told the Minority Staff that backers of the new bank were two Antiguan banks, Antigua Overseas Bank

and World Wide International Bank. Both of those banks serviced accounts of Forum-related

investors. However, the staff saw no written record of their involvement. Within a month or two,

shares and the owners of ODBT, each with an equal share, became

John Greaves, Arthur Reynolds and Malcolm West.

On December 30, 1997, AIB and ODBT signed an agreement for

the sale of all of AIB’s assets and liabilities to ODBT. At the same

time, officers of both AIB and ODBT wrote to a former U.S. correspondent bank of AIB and informed it that ODBT was taking

over the assets of AIB.93 In January 1998, the counsel for ODBT

issued an opinion certifying that he had examined the documents

associated with the purchase (purchase agreement, deed of assignment, absolute bill of sale, assumption of liabilities) and that the

documents were ‘‘duly executed and legally binding and enforceable.’’ On January 6, 1998, the Board of Directors of ODBT published a public notice stating that the bank had purchased the assets and liabilities of AIB, that it had applied to the Government

of Antigua and Barbuda for a banking license and that if the license was granted it hoped to employ 50 people in its bank in Antigua and Barbuda. However over the next 4 months, the financial

problems of AIB did not abate and by April, after ODBT had invested nearly $4.5 million in AIB, the purchase agreement was dissolved. The owners of ODBT subsequently worked out an arrangement with the receiver of AIB to assume $4.5 million worth of

loans payable to AIB as repayment for the funds it had invested

into AIB.94 In the second half of 1999, Greaves and Reynolds sold

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after investing a few million dollars, Overseas Development Bank, Antigua abandoned its efforts

to takeover AIB. The Minority Staff has acquired records that show that at the same time that

Overseas Development Bank, Antigua was formed, Corporate and Accounting Services Ltd., one

of the accounting firms that administered accounts of the Forum-related IBCs, sent out a letter

to IBC members offering them the opportunity to buy shares of Overseas Development Bank,

Antigua.

In August 2000, the Antiguan International Financial Sector Regulatory Authority informed

the Minority Staff that Overseas Development Bank, Antigua had not been in operation since

August 1998 and the bank had been put on notice that its license was to be revoked. 95 AIMS changed its name to Overseas Management Services (‘‘OMS’’) before closing in August

1999. Greaves also informed the Minority Staff that AIMS was also known as International

Management Services (‘‘IMS’’) before its name was changed to Overseas Management Services

(‘‘OMS’’). 96They included: Pat Randall Diedrick, Assistant Manager, ODBT (Corporate Secretary and

Director, AIB), Danley Philip, Assistant Manager, ODBT (Assistant Manager/Accountant, AIB)

Sharon Weeks, Accounts Manager, ODBT (AIMS employee), Anne Marie Athill, Office Manager,

ODBT (AIMS employee). 97 Economic citizenship is conferred when an individual makes the investment of a certain

amount of money in, and/or pays a fee to, a country and in return receives a citizenship in that

country. The required level of investment and/or fee is set by the country offering the citizenship. As with IBCs, economic citizenship is generally offered by jurisdictions that also have little

or no taxation and bank secrecy and corporate secrecy statutes. Individuals who obtain the economic citizenship can then enjoy the economic benefits of those policies and obtain second passports.

their shares to West, who told the Minority Staff that he is currently the sole shareholder of ODBT.

Like AIB, ODBT was one of a group of companies within an umbrella group; ODBT’s umbrella group was called Overseas Development Banking Group. In addition to ODBT, the group contained

companies for corporate and trust formation and bank management.

ODBT shared a number of common elements with AIB. Although

licensed in Dominica, the bank was operated out of Antigua and

Barbuda by AIMS, the bank management service owned by

Greaves and closely tied with AIB.95 A number of officers and employees of AIB and the management service became employees of

ODBT and were authorized signators for the correspondent accounts established for ODBT.96 From the time that ODBT commenced operations as an offshore bank through the end of 1997, it

used AIB as its correspondent bank to access the U.S. financial system. ODBT also issued Visa cards to its clients through AIB.

Promotional literature of ODBT touted the secrecy and anonymity the bank used to attract clients:

Numbered accounts—are available and are particularly useful;

not only in providing anonymity but, as further security

against unauthorized access to accounts. . . . Bank secrecy

regulations do not permit the release of any information without specific written permission from the account holder. . . .

Annual bank audits required by government do not reflect individual accounts. . . . Account information is otherwise only

available by order from the high Court. . . . Formation of

‘‘International Business ‘offshore’ companies’’ can be arranged

in a variety of Caribbean jurisdictions. Such companies can be

comprised of Registered, or Bearer shares, or a combination of

both, at the discretion of the client. . . . In the case of Bearer

Share companies, where the client is concerned about anonymity, our trust company can function as the Sole Director.

Another brochure on the Overseas Development Banking Group

offered clients economic citizenship in other jurisdictions.97

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98For more information, see the explanation of the Koop fraud in the appendix.

As a result of these policies, ODBT had numerous accounts

where the true owners were unknown to the bank. In an interview

with the Minority Staff, ODBT officials said that because of the

wide use of bearer share accounts in the bank, they could not determine the beneficial owners of almost half of ODBT’s accounts.

So, for example, when asked how many of their clients were from

the United States, they were unable to answer. Bank personnel

knew who the signators on the accounts were, but they had no way

of identifying the beneficial owner of the accounts. The bank personnel told the Minority Staff that when ownership of ODBT was

shifted to West in July 1999, the bank had roughly 3,000 accounts

and nearly 45% of those accounts did not contain sufficient information to establish ownership and were closed. West told the Minority Staff that the bank currently had approximately 100 accounts.

At the same time, ODBT’s due diligence policy told a different

story. In an August 1996 publication, which was sent to one of its

U.S. correspondent banks, ODBT stated that its policy for International Business Corporation (IBC) accounts was to require its

employees to obtain, among other things: ‘‘Full details of beneficial

owner, including address, work and home telephone number and

relationships with employer and social security number of U.S. citizen,’’ a copy of the beneficial owner’s passport; and a banker’s reference. For individual accounts, the policy directed that ‘‘personal

identification must be taken and retained on file, i.e. a copy of the

front page of the passport with photographs, drivers license, etc.,’’ and that employees should ‘‘obtain a home address and telephone

number and verify that by calling after the interview if there is no

acceptable supporting information.’’ Of those clients who were actually identifiable, several raise serious concerns.

(a) The Koop Fraud

ODBT was a key offshore vehicle used in the Koop fraud.98 William H. Koop, a U.S. citizen from New Jersey, was the central figure in a financial fraud which, in 2 years from 1997 to 1998, bilked

hundreds of U.S. investors out of millions of dollars through a

fraudulent high yield investment program. Koop carried out this

fraud in part by using three offshore banks, ODBT, Hanover Bank,

and British Trade and Commerce Bank (BTCB). In February 2000,

Koop pleaded guilty to conspiracy to commit money laundering. As

part of his plea agreement to cooperate with government investigations into his crimes, Koop provided the Minority Staff investigation with a lengthy interview as well as documents related to his

use of offshore banks.

ODBT was the first offshore bank Koop used in his fraud and

seemed to set a pattern for how he used the other two. First, ODBT

established Koop’s initial offshore corporation, International Financial Solutions, Ltd., a Dominican company that would become one

of Koop’s primary corporate vehicles for the fraud. Second, over

time, ODBT opened five accounts for Koop and allowed him to

move millions of dollars in illicit proceeds through them. Third,

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99ODBT also appears to have kept the Koop-related accounts after it terminated its association with AIB in the spring of 1998, possibly because Koop was one of the few AIB depositors

with substantial assets. 100See the appendix for more details on the corporations and accounts. 101These account entries were:

—$7,500 on 11/7/97 for 25 accounts; —$4,500 on 11/12/97 for 15 accounts;

—$4,500 on 1/16/98 for 15 accounts; and

—$1,800 on 2/13/98 for 6 accounts.

ODBT itself began to feature in the fraud after Koop offered, for

a fee, to open an offshore account for any investor wishing to keep

funds offshore. Documentation suggests that Koop opened at least

60 ODBT accounts for fraud victims, before ODBT liquidity problems caused Koop to switch his operations to Hanover Bank and

BTCB.

The documentation indicates that Koop had accounts at ODBT

for almost 2 years, from August 1997 until April 1999, which was

also the key time period for his fraudulent activity.99 ODBT documentation indicates that the bank established at least five Dominican corporations for Koop and opened bank accounts in their

names.100

The statements for one of the accounts established by Koop include four entries showing that Koop paid $300 per account to open

60 additional accounts at ODBT, apparently for fraud victims who

wished to open their own offshore accounts.101 When asked, West

indicated during his interview that he had been unaware of the 60

accounts opened by Koop for third parties. He said that, in 1999,

ODBT had closed numerous accounts with small balances due to a

lack of information about the beneficial owners of the funds, and

guessed that the 60 accounts were among the closed accounts.

While he promised to research the 60 accounts, he did not provide

any additional information about them.

Koop directed his co-conspirators and fraud victims to send funds

to his ODBT accounts through various U.S. correspondent accounts. For example, account statements for Jamaica Citizens

Bank Ltd. (now Union Bank of Jamaica, Miami Agency) show numerous Koop-related transactions from October 1997 into early

1998. Wire transfer documentation shows repeated transfers

through Barnett Bank in Jacksonville. In both cases, the funds

went through a U.S. account belonging to AIB, and from there were

credited to ODBT and then to Koop. In January 1998, Koop also

issued wire transfer instructions directing funds to be sent to Bank

of America in New York, for credit to Antigua Overseas Bank, for

further credit to Overseas Development Bank, and then to one of

his five accounts at ODBT.

Given the millions of dollars that went through his ODBT accounts, it is likely that Koop was one of ODBT’s larger clients. The

documentation indicates that Koop was in frequent contact with

West and ODBT administrative personnel at AIMS, in part due to

his establishment of new corporations and frequent wire transfers.

West said that he recognized the name but professed not to remember Koop. There is also no documentation indicating that ODBT expressed any concerns about the nature of Koop’s business, the deposits made to his account from so many sources, the source of the

funds, or their rapid turnover.

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102 Both of these banks are the subject of case studies in this report.

Koop might have remained at ODBT, except that in the spring

of 1998, ODBT began experiencing liquidity problems due to its efforts to prop up the solvency of AIB, and it began failing to complete Koop’s wire transfer requests. Koop materials from this time

period state:

We are currently transacting our banking business with the

Overseas Development Bank and Trust Company, which is

domiciled in the island of Dominic[a] in the West Indies. We

have witnessed a slowness in doing business with this bank as

far as deposit transfers and wire transfers are concerned. Because of these delays, we have made arrangements with the

Hanover Bank to open accounts for each of our clients that are

currently with ODB, without any charge to you. If you are interested in doing so, please send a duplicate copy of your bank

reference letter . . . passport picture . . . [and] drivers license.

. . . IFS [one of Koop’s companies] will then open an account

for you in the Hanover Bank, in the name of your trust.

By April 1998, Koop began directing his co-conspirators and

fraud victims to deposit funds in U.S. correspondent accounts being

used by Hanover Bank or British Trade and Commerce Bank, and

generally stopped using his ODBT accounts.102

(b) Financial Statements

The audited financial statements of ODBT also raised some

issues. The 1996 audit, due in the spring of 1997, was not produced

until July 1997. In the 1998 audit, produced in July 1999, the auditor noted:

[W]e were unable to verify the accuracy and collectability of

the amount of $1,365,089 due from American International

Bank (In Receivership) since we have not yet received a third

party confirmation and there were no practical alternative

audit procedures to enable us to substantiate the collectability

of the amount. No provision has been made in the Financial

Statements in the event of any uncollectable amounts.

The same report also noted that:

Our examination of the US Dollar bank reconciliation revealed

that there were numerous reconciling items totaling

$2,198,181.72 for which management was unable to obtain the

supporting information from American International Bank to

substantiate their entries on the bank statement. Management

is of the view that although the balance is in its favor, it arose

as a result of errors on the path of American International

Bank.

In January 1999 three default judgments totaling $1.2 million

had been entered against ODBT in Dominica. Two of the judgments (one for $487,000 and another for $350,000) involved unauthorized use of client funds and failure to return client funds. The

third judgment was for $400,000 and involved a complaint by

Western Union that ODBT failed to repay Western Union for wires

sent through and paid by Western Union.

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(c) ODBT’s Correspondent Relationships

First National Bank of Commerce (now Bank One International Corporation). ODBT maintained a correspondent account at First National Bank of Commerce (‘‘FNBC’’) from January

1998 through October 1998. One of the owners of ODBT contacted

an attorney associated with FNBC about opening a correspondent

account with the bank.

In late 1997, shortly after ODBT and AIB reached an agreement

on the sale of AIB to ODBT, Arthur Reynolds, one of the owners

and Board members of ODBT, wrote a letter to a New Orleans attorney, Joseph Kavanaugh, asking for assistance in setting up a

correspondent account. Reynolds noted that ODBT was acquiring

AIB and that ODBT had previously utilized AIB’s correspondent

banking network and Visa card services. However, he said, those

services had been withdrawn from AIB, and ODBT would not be

able to use those services ‘‘pending a complete new due diligence

and reviewing an audited statement on the expanded ODBT operation.’’ Reynolds also noted that one U.S. bank that had been processing over 1,000 checks per week for AIB and ODBT was expected

to terminate the relationship because it could not handle the volume. Reynolds concluded the letter by noting that ‘‘time is of the

essence in this situation.’’ Reynolds forwarded his business card, a copy of ODBT’s banking

license, a one page consolidated balance sheet covering the period

up to December 11, 1998, and resumes and reference letters for

himself and Greaves. Kavanaugh then sent this material to a correspondent banker at FNBC on January 2, 1998. By January 29,

1998, FNBC had established a correspondent account for ODBT.

None of the documents related to the ODBT account that were supplied by FNBC in response to a Subcommittee subpoena indicate

what, if any, additional information was collected or due diligence

was performed.

Over the course of the relationship, two additional accounts at

FNBC were opened for ODBT, one in March 1998 and another in

May 1998. Other than communications regarding the updating of

signatures on signature cards and the return of a few checks, there

are no records to indicate there was any contact between the relationship manager at FNBC and ODBT between the time the accounts were opened and late August 1998.

There were two communications which raise questions about how

well FNBC representatives understood the operations of their client, ODBT. On July 27, 1998, the FNBC relationship manager

wrote a letter to Eddie St. Clair Smith, the receiver of AIB in Antigua and Barbuda, enclosing the signature cards and resolutions for

the three ODBT accounts at FNBC and asking Smith to sign and

return them. On August 31, the FNBC Regional Manager for Latin

America also wrote to Smith to inform him that Bank One had acquired FNBC (‘‘your correspondent in New Orleans’’). The regional

manager informed Smith that he would try to contact Smith within

the next day or so and looked forward ‘‘to, continuing and developing the correspondent banking relationship that your institution

has maintained with First National Bank of Commerce.’’

Smith was, and continues to be, the receiver for AIB. As far as

the Minority Staff can tell, Smith had no affiliation with ODBT

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other than as receiver for AIB negotiating the settlement of accounts and money owed with respect to ODBT’s former dealings

with AIB. ODBT wasn’t in receivership, and if it had been, that

should have raised questions for FNBC. Yet, FNBC communicated

with an individual identified as such, and there is nothing in the

FNBC records to indicate that FNBC had any concerns or made

any inquiry about the fact that its correspondent appeared to be in

receivership, even though it was the wrong bank.

On September 22, 1998, nearly 9 months after FNBC established

a correspondent relationship with ODBT, the FNBC Latin America

Regional Manager wrote the following to Greaves of ODBT:

. . . the following information is required in order to document

and evaluate the correspondent banking relationship with

Overseas Development Bank & Trust Company, Ltd.:

Annual reports for the last 3 years including the auditor’s

statement of opinion.

The most recent 1998 interim financial statement.

A brief explanation of significant changes in the balance

sheet and income statement over the last 3 years.

Number of years in business.

Management discussion of the bank’s activities such as overall strategy, targeted business segments, resources to carry

out the strategy, and strategy accomplishments that need to

be consistent with the financial information provided.

Bank’s market share in terms of total assets, deposit, capitalization, number of branches (include locations if outside

Antigua) and number of deposit accounts.

Peer comparison in terms of capitalization, asset quality,

earnings, and liquidity/funding. Also list of main competitors.

Information on the main stockholders/investors and resumes

of the banks’s executive management.

At least three bank references from existing correspondents

outside Antigua.

The following day, Greaves responded with a letter that answered some of the questions posed by the manager and included

some of the requested documents. He promised to supply the rest

of the requested materials and wrote, ‘‘The Certificate of Good

Standing will be included but will, of course, come from the Dominican banking regulators.’’ On August 9, 2000, the manager of the

International Business Unit for Dominica informed the Subcommittee that a Certificate of Good Standing had never been

issued to ODBT.

On October 2, 1998, the FNBC relationship manager received a

letter from the President of a U.S. company requesting FNBC to

confirm that a large quantity of oil was available for sale by a client of ODBT’s and asking FNBC to issue a 2% performance bond

as guarantee of delivery.

On October 5, 1998, the bank informed ODBT that the correspondent relationship would be terminated on October 15, 1998.

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The reason given for terminating the relationship was lack of ‘‘strategic fit’’ between FNBC and ODBT. It was subsequently agreed

that FNBC would move the closure date back to November 2, 1998,

and ODBT would discontinue sending cash letters for processing on

October 28, 1998. Two of the three ODBT accounts were closed on

November 2, 1998. A third account remained open solely for the

payment of pending drafts. That account was closed on December

16, 1998.

AmTrade International Bank. ODBT maintained a correspondent account at AmTrade International Bank from June

1999 through August 2000. ODBT reached out to AmTrade through

an ODBT Board member who had an acquaintance with the majority owner of AmTrade International who also served on AmTrade’s

advisory board. ODBT had already been using AmTrade’s services

indirectly. Antigua Overseas Bank, with whom ODBT had a correspondent relationship, had a correspondent account at AmTrade.

Therefore, by nesting within AOB, ODBT was able to utilize the

correspondent relationship that AOB had with AmTrade to gain access to the U.S. financial system.

At the time, according to the Senior Vice President for correspondent banking, AmTrade had a very small correspondent

banking business, with a focus on Latin/South America and the

Caribbean. The staff consisted of a Senior Vice President, who reported to the President of the bank, another correspondent banker

and some assistants. The Senior Vice President handled credit relationships and the other banker was responsible for depository, or

cash management, relationships. The bank had about 40–45 credit

relationships and 20 depository relationships on the Caribbean/

Latin American area. The Senior Vice President and the compliance officer were responsible for approving new accounts. According

to the Senior Vice President, in principle the bank had a policy of

visiting correspondent clients once a year at the client’s bank site,

but he added that bank representatives also met with clients at

meetings outside the bank’s jurisdiction, such as banking conferences.

In March 1999 Malcolm West, a shareholder of ODBT, met with

AmTrade officials and discussed establishing a correspondent relationship. Later in March, the President of AmTrade Bank, Herbert

Espinosa, asked the Senior Vice President to meet with West to

discuss the opening of a correspondent account. According to the

Senior Vice President, ODBT was referred to AmTrade by its majority owner, Lord Sandberg, who had an acquaintance with a

board member of ODBT, Lord Razzle. Espinosa asked the Senior

Vice President to be the account manager and have the primary relationship with West because of the Sandberg/Razzle connection.

The Senior Vice President had little connection with the day to day

operation of the account, which was assigned to another account

manager.

The Senior Vice President understood that ODBT did a fair

amount of private banking and served businesses and individuals

in the area. It was expected that the bank would require cash management services such as wire transfers, possibly check clearances

and a pass though checking account. No site visit was made before

opening the account. The Senior Vice President said he understood

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that the President was traveling and would meet with the client

on site during his trip (sometime between April and August). There

is no site visit or call report in the client file. However, the Vice

President stated that he met with West four or five times between

March and August, when he left the bank.

Significant details of ODBT’s ownership, its background, practices and current status, which may have affected the decision to

open the account were unknown to AmTrade. The government investigation and prosecution of the fee-for-loan fraud that was operated through Caribbean American Bank and American International Bank occurred in Florida. Significant national and local

publicity had been focused on the case as indictments and prosecutions were initiated from mid-1997 and continued through the time

that AmTrade was conducting its due diligence review of ODBT.

The Senior Vice President was not aware of the role of AIB, where

Greaves served as President, in the fraud, but said he would have

raised it as an issue had he known.

Although AmTrade did not have a policy against accepting banks

that offered bearer share account, the Senior Vice President said

he typically did not like to deal with them because of the problems

they present. However, he was not aware that a significant portion

of ODBT’s accounts were bearer share accounts.

AmTrade received ODBT’s internal financials for 1998 and was

aware that ODBT resources had been committed to the takeover of

AIB and resulted in the assumption of loans from AIB. The Vice

President was not sure if AmTrade had received the audited financial statements for previous years and was not aware of the issues

raised in the audited financial statements for FY97, such as the

auditor’s finding that ODBT management could not find supporting

information to substantiate over $2 million worth of entries into its

balance sheet. He stated that the issue would have raised concerns

with respect of the adequacy of assets and questions as to the

strength of the balance sheets. The auditor’s finding that it could

not verify the accuracy and collectibility of $1.3 million due from

AIB, and that ODBT had made no provision to address uncollectible amounts, raised issues as to the quality of the asset base

and the impact on the balance sheet and the capital base.

The official was unaware that in early 1999 three judgments totaling $1.2 million had been entered against ODBT in Dominica.

He mentioned that it would have been an issue that needed to be

resolved. Similarly, he was unaware that in April 1999, shortly before the due diligence review on ODBT was initiated, the President

of the bank received a subpoena for OBDT records from a governmental enforcement agency investigating financial crimes. The Senior Vice President stated that he was never informed of the subpoena and thought it was strange that he was not informed. He

stated that had he known about the subpoena he would have held

up opening the account until he knew how the investigation was

resolved.

The Senior Vice President left AmTrade in August 1999. There

are no documents in the records supplied to the Subcommittee that

indicate that there was any additional contact or interaction between AmTrade representatives and ODBT after that period (other

377

than monthly statements) until AmTrade sent a letter to ODBT

terminating the relationship on August 8, 2000.

The Senior Vice President observed that some additional oversight probably should have been performed and AmTrade could

have done more with respect to the background check on the bank

itself He also noted it would have been helpful if he or the other

account manager had visited the site earlier.

B. THE ISSUES

AIB was a troubled bank from the beginning. It was licensed and

operated in a jurisdiction, Antigua and Barbuda, which did not effectively regulate its banks during the time that the bank existed.

There were a number of warning signs that certain policies and

practices of AIB posed serious money laundering vulnerabilities:

the servicing of correspondent accounts, Internet gambling, and

bearer share accounts, and AIB’s related business activities such as

arranging economic citizenship and promoting IBCs.

Relationship managers of a number of banks acknowledged that

some of these practices would have raised concerns or caused them

to ask additional questions, but they were not aware of, or had not

inquired about, them during the account opening/due diligence

process.

Moreover, even as troubles for AIB mounted, activities of its clients came under law enforcement attention and its reputation diminished in the local banking community, U.S. correspondents did

not seem to pick up on those developments. As a Bank of America

representative wrote of AIB in 1996, ‘‘their reputation in the local

market is abysmal.’’ Yet, even after that assessment, a number of

new correspondent accounts for AIB was established. No one appeared to question why AIB moved from bank to bank. As one

manager noted it was difficult to receive candid appraisals from

other banks who serviced the account. This enabled AIB to continue opening new correspondent banking accounts and maintain

its access into the U.S. financial system.

The nature of the correspondent relationship that most banks

had with AIB also resulted in a weakened degree of scrutiny. Noncredit, cash management relationships were viewed as opportunities to generate fees without putting the correspondent bank at

risk. Since the basic investment in the cash management systems

had already been made and the incremental costs of handling additional accounts were generally nominal, the cash management accounts provided a risk-free, solid rate of return. Because of the low

level of risk, the banks that established relationships with AIB performed a lower level of scrutiny during both the account opening

and monitoring stages than if they had established a credit relationship where their own funds were at risk. Most of the banks

interviewed by staff noted that certain reviews or assessments

were only applied to banks that were attempting to establish credit

relationships and therefore would put the correspondents’ funds at

risk. In the case of ODBT, fundamental due diligence questions

were never asked until almost 9 months after the correspondent relationship was established.

The fact that a certain type of correspondent relationship poses

a lower level of financial risk to the correspondent bank does not

378

mean that it poses a lower risk of money laundering. In fact, it

could be quite the opposite. The lower level of scrutiny applied to

non-credit relationships plays into the hands of money launderers

who require only a system to move funds back into the U.S. financial system. The less scrutiny that system receives, the greater the

money laundering opportunities and greater the chances for success.

Although some of the banks reviewed in this section reacted

quickly after problems and issues surfaced during the operation of

the AIB account, initial due diligence was often lacking. This enabled AIB to move from one correspondent relationship to another,

opening a new account at one bank while an existing account at

another bank was being terminated, even as its problems accumulated and its reputation diminished. Then, as its access to U.S. correspondents began to diminish, AIB was able to utilize the services

of U.S. banks through a correspondent account it established at

Antigua Overseas Bank, which itself had correspondent relationships with U.S. banks. Through its relationship with Antigua Overseas Bank, AIB received banking services from some of the same

banks that had said they no longer wanted to provide those services to AIB. All of these factors allowed AIB and the clients it

served to maintain their gateway into the U.S. banking system.

379

380

AIB MONTHLY ACTIVITY AT BANK OF AMERICA

INTERNATIONAL

June 1993–March 1996

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

June 1993 $0 $20,000 $0 $20,000

July 1993 $20,000 $73,153 $11,367 $81,786

August 1993 $81,786 $136,586 $96,940 $121,431

September 1993 $121,431 $346,127 $287,884 $179,674

October 1993 $179,674 $4,695,780 $1,774,703 $3,100,751

November 1993 $3,100,751 $3,098,838 $6,057,870 $141,719

December 1993 $141,719 $1,073,867 $1,024,258 $191,329

January 1994 $191,329 $1,237,299 $1,401,875 $26,753

February 1994 $26,753 $1,433,432 $1,255,310 $204,875

March 1994 $204,875 $2,422,740 $2,018,959 $608,656

April 1994 $608,656 $3,594,492 $2,975,453 $1,227,695

May 1994 $1,227,695 $3,080,657 $4,298,991 $9,361

June 1994 $9,361 $2,779,597 $1,861,106 $927,851

July 1994 $927,851 $2,847,385 $3,694,989 $80,247

August 1994 $80,247 $6,687,074 $6,546,953 $220,369

September 1994 $220,369 $2,494,651 $2,401,337 $313,683

October 1994 $313,683 $2,404,374 $2,128,733 $589,324

November 1994 $589,324 $2,181,186 $2,714,179 $56,331

December 1994 $56,331 $3,221,380 $3,181,498 $96,213

January 1995 $96,213 $6,624,614 $5,586,309 $134,519

February 1995 $134,519 $5,649,710 $5,803,829 $130,400

March 1995 $130,400 $5,443,313 $5,316,281 $109,708

April 1995 $109,708 $3,589,229 $3,934,975 $13,962

May 1995 $13,962 $3,932,691 $3,806,137 $140,516

June 1995 $140,516 $2,788,443 $3,014,974 $63,986

July 1995 $63,986 $5,067,879 $5,191,144 $90,721

August 1995 $90,721 $14,574,482 $12,588,704 $126,499

September 1995 $126,499 $7,002,374 $8,363,786 $115,087

October 1995 $115,087 $9,088,930 $9,961,814 $105,202

November 1995 $105,202 $8,932,140 $10,682,259 $85,083

381

AIB MONTHLY ACTIVITY AT BANK OF AMERICA

INTERNATIONAL—Continued

June 1993–March 1996

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

December 1995 $85,083 $5,097,470 $4,690,992 $141,560

January 1996 $141,560 $4,742,504 $4,470,813 $113,251

February 1996 $113,251 $540,586 $409,628 $144,129

March 1996 $144,129 $456,529 $941,711 $8,947

TOTALS $127,359,432 $128,498,761

Prepared by the U.S. Senate Permanent Subcommittee of Investigations, Minority Staff, December 2000.

AIB MONTHLY ACTIVITY AT TORONTO-DOMINION BANK

(New York Branch)

January 1996–January 1997

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

January 1996 $0 $0 $0 $0

February 1996 $0 $200,000 $105,121 $94,878

March 1996 $94,878 $1,250,000 $1,394,805 -$49,928

April 1996 -$49,928 $2,000,000 $1,948,056 $2,013

May 1996 $2,013 $2,599,454 $2,601,308 $156

June 1996 $156 $2,000,000 $1,986,688 $13,467

July 1996 $13,467 $3,552,100 $3,542,127 $23,437

August 1996 $23,437 $2,300,000 $2,405,157 -$81,722

September 1996 -$81,722 $1,850,000 $1,721,878 $46,396

October 1996 $46,396 $300,000 $328,420 $17,975

November 1996 $17,975 $50,000 $22,231 $45,743

December 1996 $45,743 $0 $6,069 $39,674

January 1997 $39,674 $0 $39,674 $0

TOTAL $16,101,554 $16,101,534

Prepared by the U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, December 2000.

382

AIB-CHASE ACCOUNT

TORONTO-DOMINION BANK TRANSACTIONS

April 1996–June 1997

DATE DEBIT CREDIT ORDER PARTY

June 26, 1996 $300,000 AIB

July 11, 1996 $300,000 AIB

August 2, 1996 $400,000 AIB

August 15, 1996 $500 ???

Sept. 10, 1996 $500,000 AIB

Sept. 13, 1996 $400,000 AIB

Sept. 18, 1996 $700,000 AIB

Sept. 23, 1996 $700,000 AIB

Sept. 25, 1996 $650,000 AIB

Sept. 26, 1996 $500,000 Stanford Intl Bank Ltd.

Oct. 1, 1996 $450,000 AIB

Oct. 3, 1996 $400,000 AIB

Oct. 7, 1996 $400,000 AIB

Oct. 9, 1996 $100,000 AIB

Oct. 10, 1996 $400,000 B/O Toronto-Dominion Bank

Oct. 16, 1996 $500,000 B/O AIB

Oct. 17, 1996 $25,000 ????

Oct. 18, 1996 $800,000 B/O AIB

Oct. 21, 1996 $500,000 AIB

Oct. 22, 1996 $500,000 AIB

Oct. 24, 1996 $600,000 B/O AIB

Oct. 25, 1996 $500,000 AIB

Oct. 29, 1996 $700,000 AIB

Oct. 31, 1996 $500,000 AIB

Nov. 4, 1996 $800,000 B/O AIB

Nov. 5, 1996 $500,000 AIB

Nov. 12, 1996 $500,000 AIB

Nov. 12, 1996 $500,000 B/O AIB

Nov. 19, 1996 $500,000 AIB

Nov. 26, 1996 $1,000,000 AIB

Dec. 2, 1996 $700,000 AIB

383

AIB-CHASE ACCOUNT—Continued

TORONTO-DOMINION BANK TRANSACTIONS

April 1996–June 1997

DATE DEBIT CREDIT ORDER PARTY

Dec. 5, 1996 $900,000 AIB

Dec. 6, 1996 $700,000 AIB

Dec. 9, 1996 $1,000,000 AIB

Dec. 12, 1996 $300,000 AIB

Jan. 15, 1997 $1,000,000 AIB

Jan. 17, 1997 $100,000 AIB

Jan. 21, 1997 $100,000 B/O AIB

Jan. 22, 1997 $400,000 AIB

Jan. 23, 1997 $95,000 B/O AIB

Jan. 24, 1997 $60,000 AIB

Jan. 28, 1997 $700,000 AIB

Jan. 30, 1997 $250,000 AIB

May 2, 1997 $15,000 ????

TOTAL $40,500 $20,905,000

Prepared by the U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, December 2000.

384

AIB MONTHLY ACTIVITY AT CHASE

May 1996–June 1997

MONTH OPENING

BALANCE DEPOSITS

WITHDRAWALS

CLOSING

BALANCE OTHER

CHECKS

AMOUNT No.

May 1996 $0 $2,025,000 $1,500,000 $0 0 $525,000

June 1996 $525,000 $327,355 $754,678 $0 0 $99,723

July 1996 $99,723 $814,535 $570,730 $0 0 $343,704

August

1996 $343,704 $9,069,808 $8,746,338 $0 0 $667,600

September

1996 $667,600 $5,241,279 $5,234,400 $454,276 110 $222,162

October

1996 $222,162 $11,320,529 $10,327,642 $1,163,742 331 $51,666

November

1996 $51,666 $12,059,520 $11,649,928 $88,875 15 $372,355

December

1996 $372,355 $11,667,993 $10,676,801 $873,885 112 $490,501

January

1997 $490,501 $13,209,330 $10,907,526 $1,159,973 327 $1,632,906

February

1997 $1,632,906 $9,821,060 $9,613,906 $1,313,950 273 $526,632

March

1997 $526,632 $14,434,982 $8,311,270 $2,983,634 861 $3,667,529

April 1997 $3,667,529 $18,626,782 $14,703,004 $3,082,215 686 $4,511,912

May 1997 $4,511,912 $7,062,740 $11,249,950 $205,579 50 $151,315

June 1997 $151,315 $482,088 $692,823 $9,902 10 $0

TOTAL $116,162,830 $104,938,996 $11,336,031

$116,275,027

Prepared by the U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, December 2000.

385

AIB MONTHLY ACTIVITY AT POPULAR BANK

April 1997–June 1997

MONTH OPENING

BALANCE DEPOSITS

WITHDRAWALS

CLOSING

BALANCE OTHER

CHECKS

AMOUNT NUMBER

April $0 $2,446,265 $0 $79,760 8 $2,368,099

May $2,368,099 $7,514,083 $1,129,247 $1,634,090 488 $7,135,558

June $7,135,558 $7,854,094 $11,603,700 $3,488,219 962 -$88,291

July $0 $122,906 $289 $121,620 17 $0

TOTALS $17,937,348 $12,733,236 $5,323,689

$18,056,925

Prepared by the U.S. Senate Permanent Subcommittee of Investigations, Minority Staff, December 2000.

AIB MONTHLY ACTIVITY AT BARNETT BANK

May 1997–November 1997

MONTH OPENING

BALANCE DEPOSITS

WITHDRAWALS

CLOSING

BALANCE OTHER

CHECKS

AMOUNT NUMBER

May $0 $220,000 $0 $0 0 $.66

June $.66 $2,419,588 $1,877,551 $26,457 12 $7,243

July $7,243 $18,783,934 $14,027,641 $3,200,766 858 $37,390

August $37,390 $21,310,634 $18,525,032 $5,625,795 1001 $70,959

September $70,959 $16,406,311 $13,899,129 $2,974,534 863 $.79

October $.79 $3,625,040 $3,320,245 $396,434 89 $50,473

November $50,473 $0 $50,473 $0 0 $0

TOTALS $62,765,507 $51,700,071 $12,223,986

$63,924,057

Prepared by the U.S. Senate Permanent Subcommittee of Investigations, Minority Staff, December 2000.

386

103Dominica is one of 15 countries named in the Financial Action Task Force’s ‘‘Review to

Identify Non-Cooperative Countries or Territories’’ (6/22/00), at paragraph (64). See also Chapter

IV(B) of this report.

Case History No. 4

BRITISH TRADE AND COMMERCE BANK

British Trade and Commerce Bank (BTCB) is a small offshore

bank licensed in Dominica, a Caribbean island nation that has

been identified as non-cooperative with international anti-money

laundering efforts.103 This case history examines the failure of U.S.

banks to exercise adequate anti-money laundering oversight in

their correspondent relationships with this offshore bank, which is

managed by persons with dubious credentials, abusive of its U.S.

correspondent relationships, and surrounded by mounting evidence

of deceptive practices and financial fraud. Although each of the

U.S. banks examined in this case history ended its relationship

with BTCB in less than 2 years, the end result was that BTCB succeeded in using U.S. bank accounts to engage in numerous questionable transactions and move millions of dollars in suspect funds.

BTCB was among the least cooperative of the foreign banks contacted during the Minority Staff investigation. The bank declined

to be interviewed, took 4 months to answer a letter requesting

basic information, and refused to disclose or discuss important aspects of its operations and activities. The following information was

obtained from BTCB’s written submission to the Subcommittee

dated September 18, 2000; BTCB’s website and other websites; documents subpoenaed from U.S. banks; court pleadings; interviews in

Dominica, Antigua, Canada and the United States; and documents

provided by persons who transacted business with the bank. The

investigation also benefited from assistance provided by the Governments of Dominica and the Bahamas.

A. THE FACTS

(1) BTCB Ownership and Management

Although BTCB refused to identify its owners and Dominican

bank secrecy laws prohibit government disclosure of bank ownership, evidence obtained by the Minority Staff investigation indicates that this offshore bank was formed and directed for much of

its existence by a U.S. citizen, John G. Long IV of Oklahoma. The

bank’s other owners and senior management have ties to Dominica,

Venezuela, the United States and Canada. BTCB is very active

within the United States, through its affiliation with a U.S. securities firm, solicitation of U.S. clients, and preference for transacting

business in U.S. dollars.

BTCB’s Formation. BTCB was established as a Dominican corporation on February 26, 1997, and received its offshore banking

license 1 month later, on March 27, 1997. BTCB’s banking license

was issued about 6 months after enactment of Dominica’s 1996 Offshore Banking Act, the country’s first offshore banking law. BTCB

is one of the first offshore banks approved by the government and,

387

104 A Dominican Ministry of Finance official told the investigation that, as of September 6,

2000, the government had issued licenses to seven offshore banks, of which three were actually

operating. The official said the three operating banks were BTCB, Overseas Development Bank

and Trust, and Banc Caribe. The official listed four other banks which held licenses but were

not yet operating because they were still raising required capital: Euro Bank, First International

Bank, Global Fidelity Bank and Griffon Bank. The official said that one bank, American International Bank and Trust, had its offshore license revoked in 1999. The official noted that Dominica also had two onshore banks: National Commercial Bank of Dominica and Dominica Agricultural Industrial and Development Bank. One bank that was not mentioned by the official but

also operates in Dominica is Banque Francaise Commerciale, which is a branch of a wholly

owned subsidiary of a French bank, Credit Agricole-Indosuez. 105Documentation indicates that Requena and Butler were the original ‘‘subscribers’’ to the

‘‘Memorandum of Association’’ that established ‘‘British Trade and Commerce Ltd.,’’ before it received its banking license.

to date, is one of only a handful of offshore banks actually operating in Dominica.104

BTCB’s 1998 financial statement indicates that BTCB began actual banking operations in October 1997, about 7 months after receiving its license. If accurate, BTCB has been in operation for a

little more than 3 years. BTCB has one office in Roseau, the capital

city of Dominica. It refused to disclose the total number of its employees, but appears to employ less than ten people. The bank refused to disclose the total number of its clients and accounts. The

bank’s 1998 financial statement claimed total assets of approxi- mately $370 million, but the evidence suggests the bank is, in fact,

suffering severe liquidity problems.

BTCB Ownership. BTCB refused a request by the Minority

Staff investigation to identify its owners. However, when applying

for correspondent relationships at U.S. banks, BTCB provided the

following specific ownership information.

In 1997, when applying for its first U.S. correspondent relationship at the Miami office of Banco Industrial de Venezuela, BTCB

stated in a September 17, 1997 letter that it had two owners,

Rodolfo Requena Perez and Clarence A. Butler.105 Requena, a citizen of Venezuela, has been associated with BTCB from its inception and serves as BTCB’s chairman of the board and president.

BTCB materials state that he has extensive banking experience, including past positions with major financial institutions in Venezuela. Requena, spends considerable time in Florida, maintaining

a Florida office, residence and drivers license. Butler is a citizen of

Dominica and, according to BTCB materials, his credentials include

heading the Dominican Chamber of Commerce and Tourism, and

helping to form and operate The Ross Medical University in Dominica. He does not appear to be involved with the daily management

of the bank.

In 1998, when applying for correspondent relationships at two

other U.S. banks, Security Bank N.A. and First Union National

Bank BTCB provided new ownership information indicating that it

had seven shareholders, with the largest shareholder controlling

50% of its stock. BTCB provided both banks with the same onepage ‘‘confidential’’ document listing the following ‘‘Shareholders of

British Trade & Commerce Bank’’:

British Trade & Commerce Bank Bancorp Trust represented

by Rodolfo Requena, Trustee, beneficial interests are held by

John Long—15,000 [shares]

Rodolfo Requena—3,000 [shares]

388

106 Baillett International Ltd. was apparently a Bahamian corporation. Bahamian Government

officials informed the investigation that its records show this company was incorporated in the

Bahamas on 1/17/95, but ‘‘struck’’ on 10/31/97, and is no longer a recognized corporation in the

jurisdiction. BTCB materials provided by the Dominican Government to the investigation describe Dana Bailey as a medical doctor and ‘‘the Canadian representative for Bail[l]ett International Ltd., a consulting firm specializ[ing] in Trust and Fund Management activities.’’ Evidence obtained by the investigation indicates that Scott Brett is a U.S. citizen who has resided

in Texas, transacted business with John Long and BTCB, and served on BTCB’s advisory committee. 107The BTCB shareholder list and other information indicate that the beneficial owner of

Bayfront Investment Trust, Pablo Urbano Torres, is a Venezuelan citizen. The trust is described

in BTCB documentation as a ‘‘Dominica corporation,’’ and U.S. bank records reference what appears to be a related company, ‘‘Bayfront Ltd.’’ 108 BTCB documents indicate that Diran Sarkissian Ramos is a citizen of Venezuela. 109 Herry Calvin Royer, a citizen of Dominica, serves as BTCB’s corporate secretary. Documentation and interviews indicate he is involved with BTCB’s activities on a daily basis. According to BTCB’s Subcommittee submission, Royer is also a director of International Corporate

Services, Ltd., a wholly owned BTCB subsidiary. 110 BTCB’s 1998 balance sheet indicates that, sometime during the bank’s first 15 months of

operation, it paid $1.1 million for ‘‘Treasury stock.’’ It is unclear whether the Treasury stock

referenced in the balance sheet is the 6,000 shares referenced in the BTCB shareholder list. It

is also unclear who, if anyone, was the original owner of this stock and why BTCB expended

over $1 million to repurchase its stock at such an early stage of its existence. 111 BTCB materials include various descriptions of Long’s background. For example, BTCB

materials provided by the Dominican Government state the following:

‘‘John G[.] Long, Chairman of the [BTCB] Advisory Committee. JD, MBA, CPA

(USA), with extensive experience in banking originating with his family which has been in

banking for over 100 years. His family was the founders of the Farmers Exchange Bank

in Oklahoma and co-owners of the First State Bank McKinney in Dallas[,] Texas. . . . He

has also served as Senior Financial Analyst for projects in Central America for US AID

(United States Agency for International Development); Special Attache of the United States

Justice Department based in Geneva, with contacts with all major Western European

Banks. Serves as consultant to financial projects and to managing trust operations in the

Bahamas.’’

Minority Staff investigators were unable to confirm much of this biographical information.

Sources in Antlers, Oklahoma confirmed that the Long family had been in banking for decades

and once owned the two listed banks, but denied that Long had acquired extensive banking experience through the family businesses. Antlers sources also denied that Long held a law degree

or accounting certification. The U.S. Justice Department and U.S. Agency for International Development each sent letters denying any record of Long’s employment with them over the past

25 and 30 years respectively. Since Long and BTCB declined to be interviewed, neither was

available to provide additional information or answer questions about Long’s credentials, past

experience or current employment.

Baillet[t] International Ltd.[,] beneficial interests held by Dr.

Dana Bailey and Scott Brett 106—3,000 [shares]

Bayfront Investment Trust[,] beneficial owner Pablo

Urbano 107—750 [shares]

Diran Sarkissian 108—750 [shares]

Herry Royer 109—750 [shares]

Clarence Butler—750 [shares]

Treasury shares held for officer and employee profit sharing 110—6,000 [shares]

Total shares authorized and outstanding—30,000[.]

This BTCB shareholder list indicates that BTCB’s controlling

shareholder is a trust beneficially owned by John Long. Other

BTCB materials describe Long as chairman of the bank’s ‘‘advisory

committee,’’ a two-person committee that apparently consisted of

himself and Brett.’’ 111 John G. Long IV is a U.S. citizen residing

in Antlers, Oklahoma. In a telephone conversation on July 11,

2000, initiated by a Minority Staff investigator, Long stated that

he had helped form BTCB and assisted it in purchasing a securities firm in Florida. However, Long vigorously denied being a

389

112Long’s characterization of his ownership interest, while misleading, could be seen as consistent with BTCB’s shareholder list if, in fact, Long has held his BTCB shares through a trust

or corporation. There is also some evidence that the trust’s official beneficiaries may be Long’s

two minor children. 113 BTCB’s submission describes Rodriguez as having 20 years of experience ‘‘in Venezuelan

banking and credit card institutions.’’

shareholder, insisting, ‘‘I have never owned one share of stock in

the bank.’’ 112

Besides his own admission of involvement with the bank, the investigation found considerable evidence of Long’s continuing association with BTCB. The evidence includes monthly account statements at U.S. banks showing BTCB transactions involving Long,

his companies Republic Products Corporation and Templier Caisse

S.A., and companies such as Nelson Brothers Construction involved

with building a new house in Oklahoma for the Long family. One

U.S. correspondent banker described meeting Long, and sources in

Antlers spoke of Long’s association with a Dominican bank. The investigation also has reason to believe that Long and his son attended a BTCB board meeting in the spring of 2000 in Dominica.

Dominican Government officials, when asked whether BTCB was

correct in telling U.S. banks that Long was the bank’s majority

owner, indicated that, while they could not disclose BTCB’s ownership, they were ‘‘not unfamiliar’’ with Long’s name.

The evidence suggests that Long formed and has been actively

involved in the bank’s affairs, but chose to conceal from the investigation his majority ownership of the bank.

BTCB Management. In its September submission to the Subcommittee, BTCB asserted that a list of its ‘‘Officers, Consultants,

and Directors . . . shows the breadth, depth and integrity of the

[bank’s] senior management. . . . Unlike some ‘offshore’ banks,

this is no haven for misfits; rather BTCB is composed of officers

whose backgrounds compare to those at high levels in the United

States.’’ BTCB lists four directors in its September 2000 submission:

Royer, Butler, Urbano, and Oscar Rodriguez Gondelles.113 However, a list of BTCB directors provided by the Dominican Government in August 2000, identifies seven directors. The governmentsupplied BTCB director list names three persons mentioned in

BTCB’s submission—Royer, Butler and Urbano—as well as

Requena, Sarkissian, Bailey, and George E. Betts. The discrepancies between the two director lists has not been explained.

BTCB’s chief executive officer is Requena. Documentation and

interviews indicate that Requena is actively involved in the day-today business of BTCB, including its correspondent relationships.

Requena is also president of BTC Financial Services, a U.S. holding

company whose primary subsidiary is First Equity Corporation of

Florida (‘‘FECF’’), an SEC-regulated broker-dealer. He is also the

president of FECF. When Minority Staff attempted to reach

Requena by telephone in Dominica, BTCB personnel suggested calling him at BTC Financial Services in Miami, where he maintains

another office. Requena, did not, however, return calls placed to

him and never spoke with any Minority Staff.

George Elwood Betts, who like Requena has been associated with

BTCB from its inception, is listed in BTCB’s submission to the Subcommittee as a key management official. His job title is Executive

390

114See United States v. Betts, (Criminal Case No. 97–011–S–BLW, U.S. District Court for the

District of Idaho), plea agreement dated 11/13/97, and judgment dated 5/29/98. 115Deposition of Brazie at 13. 116Deposition of Brazie at 11.

Vice President and Chief Financial Officer of BTCB. Documentation and interviews indicate that he is actively involved in the dayto-day operations of the bank. Betts has also served as the treasurer of BTC Financial Services.

The background provided by BTCB for Betts highlights his accounting degree and experience with Deloitte & Touche in Asia,

which Minority Staff investigators were able to confirm. Further

investigation indicates that Betts is a U.S. citizen who formerly resided in Idaho and whose wife apparently still resides there. In November 1997, after beginning work at BTCB, Betts pleaded guilty

in U.S. criminal proceedings 114 to one count of illegally transporting hazardous waste materials from a wood laminating company, Lam Pine, Inc., which he owned and operated in Oregon, to

the site of another company he owned in Idaho, North Point Milling Company. In 1998, in connection with his guilty plea, Betts

served 2 weeks in Federal prison and agreed to pay a $163,000

fine. He was also placed on criminal probation for 5 years ending

in 2003. Dominican Government officials told the investigation that

they were unaware of this criminal conviction and that BTCB

should have but did not report it to the Dominican Government.

A third key BTCB management official listed in BTCB’s submission is Charles L. (‘‘Chuck’’) Brazie, Vice President of Managed Accounts. Documentation and interviews indicate Brazie is actively

involved with BTCB clients and investment activities. Brazie is a

U.S. citizen who has resided in various U.S. States, including Florida, Missouri, Nebraska and Virginia. Minority Staff investigators

located documentation supporting some of his past employment

and education credentials. Information was also located regarding

a key credential listed in the BTCB submission to the Subcommittee, Brazie’s service as a ‘‘Special Consultant to the Executive Office of the President.’’ Brazie discussed this experience in a

sworn deposition he provided to the Securities and Exchange Commission (SEC) on November 7, 1994, in connection with SEC v.

Fulcrum Holding Co. (Civil Case No. 1:94:CV02352, DDC) and

United States v. Andrews (Criminal Case No. 96–139 (RCL), DDC).

These cases involved fraud investigations which were examining, in

part, Brazie’s work for Fulcrum Holding Company. In his deposition, Brazie indicated that his association with the Executive Office

of the President occurred in 1973, more than 25 years ago, when

as part of his work for a ‘‘think tank,’’ he was ‘‘assigned to a project

in the White House and spent a year and a half-plus on a temporary assignment at a remote location.’’ 115 Brazie also disclosed

during his deposition that, in 1992, he declared bankruptcy in St.

Louis, Missouri.116 His deposition presents additional disturbing

information about his conduct at Fulcrum Holding Co. and involvement with individuals such as Arthur Andrews, later convicted of

securities fraud.

BTCB’s submission to the Subcommittee was noticeably silent

with respect to Long. It also failed to mention Ralph Glen Hines,

a U.S. citizen who resides in Florida and North Carolina, has hanVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00400 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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117Moreau, Winston & Co. stated in a covering letter:

‘‘These financial statements are the responsibility of management of British Trade and

Commerce Bank Limited; our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit . . . in accordance with generally accepted auditing standards . . . to obtain reasonable assurance as to whether the financial

statements are free of material misstatement. An audit includes examining, on a test basis,

evidence supporting the amounts and disclosures in the financial statements. . . . In our

opinion, these financial statements present fairly, in all material respects, the financial position of the Bank as at December 31, 1998.’’

dled some of BTCB’s administrative and computer operations, and

served as the contact person for BTCB’s account at First Union National Bank. Hines has a criminal record which includes serving

more than a year in prison for obtaining goods and property under

false pretenses, more than 6 months in prison for unauthorized use

of state equipment, and 60 days of probation for misappropriation

of an insurance refund check. The BTCB submission also stated

that BTCB has ‘‘no managing agents’’ in other countries, despite

U.S. bank records showing 3 years of regular transactions with

Stuart K. Moss, a London resident identified in some interviews as

working for BTCB. The management list provided by BTCB to the

Subcommittee is marred by these omissions, the discrepancies over

BTCB’s directors, the questionable credentials of some BTCB officials which include past criminal convictions, a bankruptcy and an

SEC fraud investigation, and BTCB’s refusal to answer questions

about its staff.

(2) BTCB Financial Information

Dominican law requires its offshore banks to submit annual audited financial statements which are then published in the country’s official gazette. These audited financial statements are intended to provide the public with reliable information regarding

the solvency and business activities of Dominica’s offshore banks.

BTCB’s 1999 audited financial statement was required to be submitted in April 2000, but as of October 2000, had not been filed.

BTCB has filed only one, publicly available audited financial statement. This financial statement covers a 15-month period, from October 1, 1997 until December 31, 1998, which BTCB presents as

covering the first 15 months of its operations. Although the 1998

audited financial statement is a public document, BTCB declined

to provide a copy. The Dominican Government, however, did provide it.

BTCB’s 1998 financial statement was audited by Moreau, Winston & Co., an accounting firm located in Dominica.117 On August

22, 2000, after speaking by telephone with Austin Winston who requested all inquiries to be placed in writing, Minority Staff investigators sent a letter requesting the firm’s assistance in understanding BTCB’s 1998 financial statement. The firm’s legal counsel

responded the next day with a letter stating that the auditors

would be unable to provide any information. The legal counsel

wrote:

[BTCB] is a private bank chartered under the Offshore Banking Act of the Commonwealth of Dominica. Our clients are

constrained by the provisions of the governing statute. All information might better be provided by [BTCB] itself or as otherwise allowed under the said statute.

392

On September 22, 2000, the Minority Staff asked BTCB to authorize its auditors to answer questions about the 1998 financial

statement, but BTCB never responded. Accordingly, neither the

bank nor its auditors have provided any information about the

1998 audited statement.

In the absence of obtaining first hand information from the bank

or its auditors, inquiries were directed to Dominican Government

officials and U.S. bankers for their analysis of BTCB’s 1998 financial statement. Without exception, those reviewing BTCB’s 1998 financial statement said it contained questionable entries. The questionable entries included the following:

—$300 Million Assets. The two largest entries on BTCBs

1998 balance sheet cite over $300 million in ‘‘[s]ecurities held

for investment and financing’’ and a $300 million ‘‘reserve for

project financing.’’ Dominican Government officials informed

the investigation that, when they asked BTCB about these

entries during the summer of 2000, BTCB refused to provide

any concrete information or support for them, claiming they

involved ‘‘secret’’ transactions which the U.S. and U.K. Governments prohibited them from disclosing. The Dominican

officials indicated that they considered this explanation unsubstantiated and insufficient. The Minority Staff investigation obtained an earlier version of the 1998 financial statement, which BTCB had given to First Union National Bank

when applying for a correspondent account. That version reported BTCB’s finances as of June 30, 1998, and cited over

$400 million in ‘‘securities held for investment and financing.’’ This figure is $100 million, or 25% larger than the comparable entry in the financial statement dated just 6 months

later. Note 4 in the June 1998 statement provides a breakdown of the $400 million figure into four constituent elements: $130 million in ‘‘Government of Grenada Guarantees’’; over $76 million in ‘‘Bolivian Municipal Bonds’’; $140

million in ‘‘Russian Government Guarantees’’ and $55 million attributed to ‘‘Other.’’ When asked about these items,

the First Union correspondent banker who analyzed BTCB’s

financial statement said they were ‘‘not credible,’’ and were

part of the reason First Union had rejected a correspondent

relationship with BTCB. A Dominican Government official

stated that Grenadian Government officials, when asked

about the alleged $130 million in ‘‘Government of Grenada

Guarantees,’’ had refused to confirm their existence.

—$51 Million in Receivables. The next largest entry in

BTCB’s balance sheet is $51 million in ‘‘[l]oans, debentures

and other receivables,’’ which Note 5 in the audited statement attributes primarily to $49.4 million in ‘‘fees receivable.’’ Both Dominican Government officials and U.S. bankers expressed skepticism about a new bank’s generating $50

million in fees in the first 15 months of operation. When

asked, neither could offer a banking scenario which would

explain the nature of the fees or who would be expected to

pay them.

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118See Gold Chance International Ltd. v. Daigle & Hancock (Ontario Superior Court of Justice, Case No. 00–CV–188866). BTCB’s role in this litigation is discussed in the appendix. 119OffshoreAlert newsletter (11/30/00) at 9. See also ‘‘British Trade & Commerce Bank answers questions about its liquidity,’’ OffshoreAlert newsletter (7/31/00) at 8. Both are available

at www.offshorebusiness.com.

—$16 Million in Investment Fees. Another BTCB balance

sheet entry reports that, as of the end of 1998, BTCB had

over $27 million in ‘‘customers’ deposits.’’ Note 10 states

that, as of December 31, 1998, BTCB ‘‘held $27,100,000 of

such funds and had earned an investment transaction fee of

$16,330,000 from the management of those funds and execution of such transactions during the year.’’ Both Dominican

Government officials and U.S. bankers expressed doubt that

any bank could have earned $16 million in fees on $27 million in deposits, especially in a 15-month period.

—$1.1 Million For Treasury Stock. Under stockholders’ equity, the BTCB balance sheet records a $1.1 million reduction due to ‘‘Treasury stock.’’ Both Dominican Government

officials and U.S. bankers questioned why a new bank, in operation for only 15 months, would have re-purchased its

stock and paid such a substantial price for it. It is also unclear from the financial statement whether the stock repurchase was paid in cash.

The Minority Staff investigation was unable to obtain any BTCB

financial statements for 1999 or 2000. Evidence obtained through

documents and interviews indicates, however, that BTCB experienced severe liquidity problems throughout the latter half of 2000,

including nonpayment of bills and a failure to honor a $3 million

letter of credit posted with a Canadian bank.118 On November 30,

2000, a publication that tracks offshore business developments carried an article entitled, ‘‘British Trade & Commerce Bank: Financial troubles deepen.’’ 119 It published the text of a November 9,

2000 letter allegedly sent by BTCB to its clients in which the bank

essentially admitted that it was temporarily insolvent. The letter,

by BTCB president Rodolfo Requena, begins:

You may be aware our bank has been suffering from a temporary liquidity situation. This situation has continued to the

point that the bank is unable to meet its obligations with its

depositors and creditors.

The letter provides several explanations for the bank’s liquidity

problems, including citing ‘‘a large withdrawal of deposits from the

bank’’ after the retirement of the bank’s ‘‘major shareholder’’ in

May 2000. It also described steps the bank was taking ‘‘to re-capitalize the bank, rebuild its liquidity, and meet its obligations with

its depositors and creditors,’’ including ‘‘holding conversations with

three different investor groups . . . to bring fresh capital to the

bank.’’ The letter asked the bank’s clients to consider converting their

existing accounts to ‘‘a one-year Certificate of Deposit earning interest at a 15% per annum’’ or to purchase ‘‘convertible preferred

stock of the bank’’ with one share for ‘‘every $500 of bank deposit

you have.’’ The letter stated, ‘‘Customers requesting withdrawals

from their accounts must wait for new investors or wait until the

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120Pacific National Bank is a subsidiary of Banco del Pacifico of Ecuador. 121These non-U.S. banks include National Commercial Bank of Dominica and Banco Cypress.

bank works its way out of the liquidity problem,’’ an arrangement

characterized by the newsletter as equivalent to an admission by

the bank ‘‘to running a Ponzi scheme.’’

(3) BTCB Correspondents

When asked about its correspondent banks, BTCB indicated that

it kept 100% of its funds in correspondent accounts. BTCB stated

the following in its September 2000 submission to the Subcommittee:

It is very important to note that all of BTCB’s deposits are

held in the bank’s regulated accounts, inside the United States.

. . . Moreover, with rare exceptions, all our transactions are

denominated in United States dollars and . . . all transfers to

BTCB’s accounts flow through the United States Federal Wire

System or the SWIFT (Society for Worldwide Interbank Financial Telecommunications). . . . BTCB is very protective of its

U.S. correspondent banking relations, since this is our only

way to transfer and move funds.

BTCB stated that it had no ‘‘formal correspondent relationships

with any other banks,’’ but had maintained ‘‘customary commercial

banking accounts with a few reputable institutions as needed.’’

BTCB specified accounts at three U.S. banks: (1) First Union National Bank; (2) Security Bank N.A. of Miami; and (3) Banco International de Costa Rica (Miami).

The list provided by BTCB is incomplete, omitting BTCB accounts at the Miami office of Banco Industrial de Venezuela, the

Miami office of Pacific National Bank,120 U.S. Bank, and the New

York office of Bank of Nova Scotia. In addition, the Minority Staff

investigation uncovered three U.S. correspondent accounts belonging to other foreign banks through which BTCB transacted business on a regular basis: a Citibank correspondent account for

Suisse Security Bank and Trust; a First Union correspondent account for Banque Francaise Commercial; and a Bank of America

correspondent account for St. Kitts-Nevis-Anguilla National Bank.

The evidence indicates that BTCB also had correspondent accounts

at several banks located outside the United States.121

(4) BTCB Anti-Money Laundering Controls

BTCB provided one page of information in response to a request

to describe its anti-money laundering efforts. Without providing a

copy of any written anti-money laundering policies or procedures,

BTCB’s September 2000 submission to the Subcommittee provided

the following description of its anti-money laundering efforts:

It is very important to note that all of BTCB’s deposits are

held in the bank’s regulated accounts inside the United States.

. . . [I]ndeed, all transfers to BTCB’s accounts flow through

the United States Federal Wire System or the SWIFT (Society

for Worldwide Interbank Financial Telecommunications). As

you are aware, any transaction approved and flowing through

the U.S. Fed Wire System via SWIFT is already deemed or apVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00404 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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proved to be ‘‘good, clean, legitimately earned funds of noncriminal origin.’’ Thus BTCB’s Know Your Customer Policies

are the same as all U.S. banks’ policies, since we must satisfy

the regulated U.S. banks with respect to any deposit BTCB receives in our corporate banking account at their institution.

BTCB also stated:

Our bank’s Know Your Customer Policies require, among other

things, that a senior bank officer conduct an interview with

each new customer. This interview covers such things as the

nature of the customer’s business, how their profits are earned

and where those profits are earned. In many cases, we require

audited financial statements . . . or in the case of individuals,

we require bank reference letters. . . . We require copies of

their passports, and if warranted, BTCB will have a security

check conducted in their home country.

BTCB stated further that it ‘‘employs a full-time staff person who

monitors for suspicious activity in customer accounts, and reports

weekly to the Chief Financial Officer.’’ It also stated that ‘‘BTCB

has a special compliance consultant who had a long and distinguished career with the Florida Department of Banking Regulation

and advises on our regulatory policies and compliance issues.’’

BTCB’s description of its anti-money laundering efforts suggests

a fundamental misunderstanding of U.S. banking law. BTCB seems

to suggest that as long as it uses U.S. correspondent accounts and

U.S. wire transfer systems, its funds automatically qualify as

‘‘good, clean, legitimately earned funds of non-criminal origin.’’

BTCB also seems to suggest that if a U.S. bank accepts its funds,

the U.S. bank has reached a judgment about the funds’ legitimacy

and BTCB has met the U.S. bank’s due diligence standards. In

fact, the opposite is true. U.S. correspondent banks rely in large

part upon their respondent banks to ensure the legitimacy of funds

transferred into their U.S. correspondent accounts. U.S. law does

not require and U.S. banks do not routinely undertake to examine

a foreign bank’s individual clients or the source of funds involved

individual client transactions. Nor do U.S. banks certify the legitimacy of a foreign bank’s funds simply by accepting them.

Because BTCB did not agree to an interview, the Minority Staff

investigation was unable to clarify its policies or obtain additional

information about its anti-money laundering efforts. It is still unclear, for example, whether BTCB has written anti-money laundering procedures. None of the U.S. banks with BTCB accounts requested or received materials documenting BTCB’s anti-money

laundering efforts. Minority Staff investigators were unable to

learn which BTCB employee is assigned to monitoring client accounts for suspicious activity. The compliance consultant BTCB

mentioned appears to be Dr. Wilbert O. Bascom, who is also listed

in BTCB’s description of its senior management team as the bank’s

‘‘Consultant on Compliance Issues.’’ When a Minority Staff investigator contacted Bascom at the suggestion of Long, however,

Bascom said that he works for BTC Financial Services, has ‘‘no direct connection’’ to BTCB, ‘‘did not get involved with the bank’s acVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00405 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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122Memorandum of telephone conversation with Bascom on 8/22/00. 123 In its September 2000 submission to the Subcommittee, BTCB described ICS as a ‘‘separate, corporate services company affiliated with BTCB to incorporate [international business corporations] in Dominica and provide routine nominee, director, and shareholder services to various [corporations] in Dominica.’’ BTCB stated that Herry Royer was a director of both ICS and

BTCB, and in another document BTCB indicated that it owned 100% of ICS. 124 BTCB stated in its September 2000 submission that it owns 55% of InSatCom Ltd., a

telecommunications company which holds a Dominican license ‘‘to provide data transmission

services to customers and web hosting services’’ and which operates a satellite earth station ‘‘in

conjunction with Cable & Wireless of Dominica.’’ InSatCom also provides services to companies

involved with Internet gambling. Requena is the president of InSatCom. 125 BTCB stated that it held a 20% ownership interest in Dominica Unit Trust Corporation,

an investment company that is also partly owned by ‘‘Dominican Government entities.’’ 126 BTCB described Generale International Assurance as an ‘‘inactive’’ Dominican corporation

that it may someday use to offer insurance products.

tivities,’’ and could not provide any information or assistance regarding the bank.122

It is also important to note that, despite more than three years

of operation, BTCB has never been the subject of an on-site examination by any bank regulator. In July 2000, the United States

issued a bank advisory warning U.S. banks that offshore banks licensed by Dominica ‘‘are subject to no effective supervision.’’ In

June 2000, Dominica was named by the Financial Action Task

Force as non-cooperative with international anti-money laundering

efforts. Dominica is attempting to strengthen its anti-money laundering oversight by, for example, authorizing the East Caribbean

Central Bank (ECCB), a respected regional financial institution, to

audit its offshore banks, but the ECCB has never actually audited

BTCB.

(5) BTCB Affiliates

BTCB was asked to identify its subsidiaries and affiliates. In its

September 2000 submission to the Subcommittee, BTCB stated

that, while it had no affiliations with other banks, it did have affiliations with a number of companies. These affiliations depict the

bank’s participation in a network of inter-related companies in

Dominica, as well as BTCB’s increasing business activities in the

United States.

(1) Dominican Affiliates—BTCB identified four Dominican

companies as affiliates. One was International Corporate Services, Ltd. (‘‘ICS’’) which plays an active role in BTCB’s operations, primarily by forming the Dominican trusts and corporations that serve as BTCB’s accountholders.123 Two of the affiliates, InSatCom Ltd.124 and Dominica Unit Trust Corporation,125 are active in the Dominican telecommunications and

investment industries, while the fourth, Generale International

Assurance,126 is currently dormant.

(2) U.S. Affiliates—BTCB also acknowledged a relationship

with two U.S. corporations, First Equity Corporation of Florida

(FECF) and BTC Financial Services, but attempted to hide its

ongoing, close association with them. BTCB stated in its September 2000 submission to the Subcommittee that, ‘‘in-mid

1998, BTCB acquired the stock of First Equity Corporation, a

licensed broker-dealer in Miami, Florida’’ and ‘‘legally held

First Equity’s stock for approximately 8 months, when the

stock was transferred into a U.S. publicly traded company’’ called BTC Financial Services (Inc.). BTCB stated that, curVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00406 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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127 BTC Financial owns FECF, which has a number of subsidiaries and affiliates. See, for example, affiliates listed in FECF’s website, www.lsteguity.com/directory.html including a ‘‘Ft.

Lauderdale Affiliate,’’ First Equity Properties, Inc. and Swiss Atlantic Mortgage Corp. Another

possible FECF affiliate, listed in the SEC Edgar database, is First Equity Group, Inc. 128For example, Betts is the financial controller of BTCB and the treasurer of BTC Financial.

Wilbert Bascom is described as a consultant to both BTCB and BTC Financial. Ralph Hines has

performed work for BTCB, BTC Financial, FECF and FEC Financial Holdings. Robert Garner,

an attorney, is listed on FECF’s website as its general counsel and has also signed letters as

general counsel to BTCB. Long was also, until recently, the chairman of BTC Financial and the

chairman of BTCB’s advisory committee. 129See www.ibcnow.com/service.html.

rently, it ‘‘has no ownership, management, nor any other affiliation with [FECF] except for a routine corporate account, line

of credit and loan as would be the case for any other corporate

client.’’

This description does not accurately depict the ongoing, close

relationships among BTCB, FECF, BTC Financial, and related

affiliates.127 Long, Requena and Brett are major shareholders

of both BTCB and BTC Financial. Requena is the president of

BTCB, BTC Financial and FECF. BTCB’s website prominently

lists FECF as an affiliated company. FECF used to be owned

by FEC Financial Holdings, Inc., a U.S. holding company

which BTCB acquired when it took control of FECF and with

which it still does business. BTC Financial, FECF, FEC Financial Holdings and other affiliates operate out of the same

Miami address, 444 Brickell Avenue. They also share personnel.128 Bank records reflect ongoing transactions and the

regular movement of funds among the various companies. One

U.S. bank, First Union, mailed BTCB’s monthly account statements to 444 Brickell, ‘‘c/o FEC Financial Holdings.’’ In short,

BTCB is closely intertwined with the BTC Financial and FECF

group of companies, it regularly uses FECF to transact business in the United States, and its declaration that it has no

FECF affiliation beyond ‘‘any other corporate client’’ is both inaccurate and misleading.

(3) Website Affiliates—BTCB’s September 2000 submission

also addressed its apparent affiliation with three entities listed

in BTCB’s websites. BTCB stated that ‘‘[t]o avoid confusion’’ it

wanted to make clear that certain names appearing on its

websites, ‘‘WorldWideAsset Protection,’’ ‘‘IBC Now, Limited’’

and ‘‘EZ WebHosting,’’ were ‘‘merely websites’’ and not companies or subsidiaries of the bank. This clarification by BTCB

was helpful, because the websites do imply the existence of

companies separate from the bank. For example, a WorldWide

Assets Protection website lists six ‘‘corporate members’’ who

have ‘‘joined’’ its organization, including BTCB. The WorldWide

website contains no indication that WorldWide itself is simply

a BTCB-operated website with no independent corporate existence. The IBC Now website 129 encourages individuals to consider becoming a paid representative of a variety of companies

offering ‘‘Internet banking, brokerage, web hosting, confidential

e-mail, and on-line casino’s.’’ IBC Now lists BTCB as one option, again, without ever indicating that IBC Now is itself a

BTCB creation with no independent corporate existence.

398

130For example, Lugano Synergy Global Services, S.A. has used as its address the same postal

box as BTCB, Box 2042 in Roseau, Dominica. This company is associated with the Lugano Synergy Investment Group, Ltd., a company which claims in its website to have a contract with

BTCB to provide financial services. See http:lsynergy.com/investmentbanking/high—yield— investment.html. U.S. bank records show a number of transactions between BTCB and the

Lugano Synergy companies. Another possible affiliate is Global Medical Technologies, Inc., a

Florida corporation which changed its name in 1999, to Vector Medical Technologies, Inc. BTCB

held the right to over 1 million unissued shares in the company and provided it with substantial

funding, as described in the appendix. A third possible affiliate is British Trade and Commerce

Securities, Ltd. (Bahamas), which was listed in a BTCB document supplied by the Dominican

Government. When asked about this company, the Bahamas Government indicated that it found

no record of its existence; however, corporate licensing records did show a company called British Trade and Securities Ltd., which was incorporated on 9/15/97, and ‘‘struck off the record’’ on 1/1/00.

More disturbing is BTCB’s failure to provide clarification with respect to other entities that may be its subsidiaries or affiliates.

BTCB’s 1998 audited financial statement, for example, records over $4 million in ‘‘[i]nvestments and advances to subsidiaries,’’ which

Note 8 states represented ‘‘the cost of acquisition and advances to

First Equity Corporation of Florida, International Corporate Services S.A., Generale International Assurance Inc., InSatCom Ltd.,

Global Investment Fund S.A., FEC Holdings Inc. and Swiss Atlantic Inc.’’ The latter three ‘‘subsidiaries’’ are not mentioned in

BTCB’s September 2000 submission to the Subcommittee. Yet

Global Investment Fund appears repeatedly in BTCB documentation and U.S. bank records; in 1998, it was the recipient of millions

of dollars transferred from BTCB accounts. A September 15, 1998

letter by Brazie describes Global Investment Fund as ‘‘wholly

owned by ICS/BTCB.’’ FEC Holdings Inc. is listed on BTCB’s

website as an affiliated company. It is unclear whether it is a separate company from FEC Financial Holdings Inc., which BTCB purchased in 1998. Swiss Atlantic Inc. is presumably the same company as Swiss Atlantic Corporation, which is also listed on BTCB’s

website as an affiliated company and cites 444 Brickell as its address. It may also be related to Swiss Atlantic Mortgage Company,

a Florida corporation which is an FECF affiliate, lists 444 Brickell

as its principal address, and lists Robert Garner as its registered

agent. The Minority Staff investigation uncovered evidence of other

possible BTCB affiliates as well.130

BTCB’s subsidiaries and affiliates bespeak a bank that is fluent

in international corporate structures; functions through a complex

network of related companies and contractual relationships; and is

willing to use website names to suggest nonexistent corporate

structures. Together, BTCB’s subsidiaries and affiliates depict a sophisticated corporate operation, active in both Dominica and the

United States.

(6) BTCB Major Lines of Business

In its September 2000 submission to the Subcommittee, BTCB

provided the following description of its major lines of business:

BTCB is a full service bank that provides standard services in

the areas of private banking, investment banking, and securities trading. Our private banking services include money management services and financial planning, as well as investment

accounts of securities for long-term appreciation, global investment funds, and Certificates of Deposit (CD’s) with competitive

interest rates. . . . Our investment banking activities include:

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131 A civil suit filed in New York, for example, involves a BTCB certificate of deposit for $10 million whose funds would allegedly be invested and produce returns in excess of $50 million.

See Correspondent Services Corp. v. J.V.W. Investment Ltd. (U.S. District Court for the Southern

District of New York Civil Case No. 99–CIV–8934 (RWS))(9/23/98 letter from Waggoner to his investment advisor, Kelleher, referencing $50 million return; 4/13/99 letter from Kelleher to

BTCB referencing $58 million return). A civil suit before a Canadian court complains that a

BTCB investor wrongly took possession of the plaintiffs’ $3 million and placed it in the BTCB

high yield program, after which BTCB wrongly refused to refund the funds. Gold Chance International Ltd. v. Daigle & Hancock (Ontario Superior Court of Justice, Case No. 00–CV–

188866)(hereinafter ‘‘Gold Chance’’). A civil suit in New Jersey includes sworn deposition testimony from a U.S. citizen regarding an alleged $1.3 million payment into BTCB’s high yield program that has yet to produce any return. See Schmidt v. Koop (U.S. District Court for the District of New Jersey Civil Case No. 98–4305)(Koop deposition (3/2/99) at 433). Each of these suits

is discussed in more detail in the appendix.

debt financing for both private and public companies in the

form of senior, mezzanine, subordinated or convertible debt;

bridge loans for leveraged and management buyouts; and recapitalization transactions. BTCB assists in the establishment

and administration of trusts, international business corporations, limited liability companies, and bank accounts. Finally,

the securities trading services include foreign securities trading on behalf of our clients. . . . BTCB offers credit card services as a principal MasterCard Member.

This description of BTCB’s major activities, while consistent with

evidence collected during the investigation, is incomplete and fails

to address two of BTCB’s major activities: high yield investments

and Internet gambling.

High Yield Investments. BTCB is known for offering high yield

investments. Dominican Government officials, U.S. and Dominican

bankers, and BTCB clients all confirmed this activity by the bank.

Numerous documents obtained by the Minority Staff provide vivid

details regarding BTCB’s efforts in this area.

BTCB’s statement to the Subcommittee that it offers CDs with

‘‘competitive interest rates’’ does not begin to provide meaningful

disclosure about the investment returns promised to clients. Two

documents on BTCB letterhead, for example, offer to pay annual

rates of return on BTCB certificates of deposit in amounts as high

as 46% and 79%. Higher yields are promised for ‘‘amounts exceeding US$5,000,000.’’ When asked about these rates of return, Dominican Government officials indicated that they did not understand how any bank could produce them. Every U.S. banker contacted by the Minority Staff investigation expressed the opinion

that such large returns were impossible for a bank to achieve, either for itself or its clients. Several described the offers as fraudulent.

Civil suits have been commenced in the United States and Canada over BTCB’s high yield investment program.131 Documents associated with these cases, as well as other evidence collected by the

investigation, indicate that the key personnel administering

BTCB’s high yield investment program are Brazie and Betts.

Brazie advises potential investors on how to set up an investment

structure, enter into agreements with BTCB and related companies

to invest funds, and use BTCB bank accounts to make investments

and obtain promised profits. A two-page document on BTCB letterhead, signed by Brazie and provided to investors in the high yield

program, includes the following advice:

400

132Similar advice has appeared in a BTCB-related website, under a subsection called ‘‘The

Wall Structure.’’ The website states, ‘‘This structure was submitted by the Managed Account Division for British Trade and Commerce Bank—for further information, please contact them.’’ See

www.worldwideassets.org/structure2.html. 133See, for example, in the Gold Chance case, a 9/7/00 affidavit by BTCB president Requena,

with copies of the ‘‘standard form agreements’’ used by BTCB in its ‘‘Managed Accounts’’ program, including a standard ‘‘Cooperative Venture Agreement, a Management Account Custody

Agreement, a Specific Transaction Instructions Agreement and a Residual Distribution Instructions Agreement.’’ The Requena affidavit also provides copies of completed forms signed by a

In order to protect assets properly, whether in BTCB or elsewhere you should consider setting-up a specific structure to assure privacy and avoid unnecessary reporting and taxation

issues. . . . (1) Immediately, establish an [International Business Corporation or IBC] in Dominica (if necessary, in the

same name as the one in which you have contractual identity.

. . . This will allow an orderly and mostly invisible transition.

This IBC should have an Account at BTCB in order to receive

the proceeds of Programs and to disburse them as instructed.

This IBC should be 100% owned by bearer shares to be held

by the Business Trust. . . . (2) Simultaneously, you could establish a Business Trust . . . in Dominica. This trust would

not hold . . . any assets except the bearer shares of [the] IBC.

. . . (3) You should select an ‘‘Organizer’’ of the IBC and Business Trust, and could designate International Corporate Services Ltd. (an IBC owned 100% by BTCB) as the Director-Designee for the IBC and BTCB as Trustee of the Business Trust.

. . . (4) The IBC’s Accounts should be set-up with dual signatures required, including an officer of ICS Ltd. and an officer

of BTCB (usually myself as Vice President over all managed

accounts). . . . (7) The IBC held under the Business Trust

would be the entity that would enter into subsequent Trading

Programs on a 50/50 cooperative venture with BTCB and

would receive all resulting ‘‘Investor’’ earnings. . . . Such IBC

Account would operate under a Cooperative Venture Agreement. . . . (10) The choice of structure is of course yours, however any client entity that is not domiciled in Dominica is prohibited by our Board from participating in our High Yield Income Programs, so that we may protect the bank and its clients against ‘‘cross-jurisdiction’’ exposure/penetration.

Brazie closed the document by providing telephone, fax and cellular numbers to contact him, including cellular numbers in Dominica and Virginia.

The Brazie proposals involve BTCB in every aspect of a client’s

investment program, from establishing the client’s IBC and trust,

to providing dual signatory authority over the IBC’s account at

BTCB, to joining the IBC in a ‘‘cooperative venture agreement.’’ In

fact, by encouraging clients to name BTCB as the trustee of their

trust and giving the trust full ownership of the client’s IBC, Brazie

was, in effect, encouraging BTCB clients to cede control over their

entire investment structure to the bank. The Brazie document also

states that only Dominican entities are allowed to participate in

BTCB’s high yield programs and urges clients to use the bank’s

wholly-owned subsidiary, ICS, to establish them.132 Numerous documents collected by the investigation establish that the suggested

structure was, in fact, used by BTCB clients.133 One key feature of

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particular BTCB client, Free Trade Bureau S.A. Similar forms appear in other civil proceedings,

as explained in the appendix. 134See Gold Chance, Requena affidavit (9/7/00), Exhibit H. 135For more information on the many complaints associated with the BTCB high yield investment program, see the appendix.

the standard investment contract used by BTCB in its high yield

program is its insistence on secrecy. BTCB’s standard cooperative

venture agreement 134 essentially prohibits participants in its high

yield investment program from disclosing any information related

to their dealings with BTCB. A section entitled, ‘‘Confidentiality,’’ states in paragraph 4.1:

The Parties agree: that any and all information disclosed, or

to be disclosed, by any other party hereto, or by legal counsel

or other associate; and, that any and all documents and procedures transmitted to each other for and in execution of this

AGREEMENT are privileged and confidential and are to be

accorded the highest secrecy. . . . [T]he Parties specifically:

A) . . . undertake . . . not to disclose to any third party, directly or indirectly, or to use any such information for any purpose other than for accomplishment of the objectives of the

business undertaken herein without the express written prior

consent of the party supplying that . . . information[; and] B)

[a]cknowledge that any unauthorized . . . disclosures . . .

shall constitute a breach of confidence and shall form the basis

of an action for damages by the injured party. . . . [Emphasis

in original text.]

A later paragraph 5.7 states:

No unauthorized communications by either party with any

bank outside of these procedures is allowed without the prior

written consent of the other party. Failure to observe this consideration will immediately cause this AGREEMENT to be

deemed to have been breached. [Emphasis in original text.]

Together, documentation and interviews demonstrate that BTCB

aggressively marketed its high yield investment program, induced

its clients to establish investment structures under similar agreements including secrecy requirements, promised extravagant rates

of return, and obtained millions of dollars. The evidence also demonstrates that BTCB repeatedly failed to return invested funds or

pay promised profits and is the subject of client complaints and law

suits.135

Internet Gambling. BTCB’s September 2000 submission to the

Subcommittee omits a second major activity of the bank—its involvement in multiple aspects of Internet gambling.

Internet gambling is legal in Dominica, which began issuing

Internet gambling licenses to offshore companies as early as 1996.

Documentation establishes that BTCB has opened a number of accounts for companies providing Internet gambling services, handled

millions of dollars in Internet gambling proceeds, and in the case

of Vegas Book, Ltd., assumed an integral role in the day-to-day operations of an Internet gambling enterprise.

One of the first signs of BTCB’s involvement in Internet gambling occurred in May 2000, when one of its U.S. correspondents,

Security Bank N.A. in Miami, discovered that ten Internet gamVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00411 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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136The websites were www.astrobet.com; www.atlantisstar.com; www.aztecgoldcasino.com;

www.bingotops.com; www.fairplaycasino.com; www.magic-carpetcasino.com; www.casinooldglory.com; www.casinoorientexpress.com; www.casinoiceberg.com; and www.flyingdragoncasino.com. 137See Survey of Electronic Cash, Electronic Banking and Internet Gaming, Financial Crimes

Enforcement Network (FinCEN), U.S. Department of Treasury (2000) at 76, 88. 138 BTCB’s website, www.btcb.com/group.html, on a screen entitled, ‘‘Worldwide Group,’’ lists ‘‘independent subsidiaries’’ that provide ‘‘related financial services’’ to BTCB clients. Included are ‘‘WorldWide Asset Protection’’ and ‘‘IBCNOW.com,’’ which BTCB has disclosed to the Subcommittee are simply BTCB-controlled websites. Both provide direct electronic links to ‘‘Vegas

Book.’’ See www.worldwideassets.com/membership.html; www.ibcnow.com/link.html and

www.ibcnow.com/service.html. 139The website, www.vegasbook.com/sportsbook/index2.html, explains:

‘‘Dominica-based Vegas Book, a state-of-the-art Las Vegas-style sports book takes action via

toll-free phones and the Internet, and trumps every other shop in the industry with its

unique method of payment. . . . Proceeds from every winning wager are credited to your

betting account within three minutes of the conclusion of the event. . . . Your account at

Vegas Book is totally secure from all outside enquiries due to [Dominica’s] Off Shore Privacy

Act of 1996. This statute sets sever[e] penalties for any release of information including

identity, revenues and profits. . . . All Vegas Book members are given, or purchase . . .

an International Business Corporation bank account. Acting on your wishes, the IBC wagers

directly with Vegas Book, thus avoiding conflict with U.S. anti-gaming laws. Funds in the

account . . . are available to the account holder 24 hours a day. Simply take the money

bling websites were directing gamblers to transfer their funds to

Security Bank, for further credit to BTCB.136 Security Bank sent

a May 16, 2000 letter to BTCB demanding removal of its name

from the websites and announcing its intention to close the BTCB

account. BTCB responded in a May 17th letter that it had been unaware of and had not authorized Online Commerce, Inc.—a South

African corporation that BTCB described as the ‘‘owner’’ of the offending Internet gambling sites—to use Security Bank’s name.

BTCB apologized and provided a copy of its letter to Online Commerce, at a Dominican address, requesting removal of the wire

transfer information from the Internet gambling websites. U.S.

bank records at Security Bank indicate that, from 1998 into 2000,

hundreds of thousands of dollars in the BTCB correspondent account were transferred to persons and entities associated with Online Commerce.

U.S. bank records show numerous other BTCB transactions involving persons or entities associated with Internet gambling. For

example, $525,000 in deposits into BTCB’s account over 5 months

in 1999 and 2000, were directed to Cyberbetz, Inc., a known Internet gambling company that is a Dominican subsidiary of another

Internet gambling enterprise, Global Intertainment Inc.137 In December 1999, Security Bank records show over $100,000 was deposited into the BTCB account for International Gaming Ltd.

BTCB’s involvement with Internet gambling did not stop with

opening accounts and handling gambling related proceeds. In the

case of Vegas Book, Ltd., BTCB appears to have gone farther and

become a direct participant in the day-to-day operations of an

Internet gambling enterprise. Vegas Book is the only Internet gambling website that is directly referenced in BTCB websites and to

which BTCB-related websites have provided a direct electronic

link.138 The Vegas Book website trumpets as a key selling point its ‘‘unique’’ arrangement with a bank, identified elsewhere as BTCB,

which enables its gamblers to deposit their funds into a bank account (instead of a casino account); to gain instant access to their

funds through a bank-issued credit card; and to place their bets

through a Dominican international business corporation to circumvent U.S. prohibitions on Internet gambling.139 The Vegas

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out of the account at any ATM, or use secured card wherever credit cards are accepted.

Your money is protected because it remains in your control, escrowed in your account at

the Bank—not at Vegas Book.’’ 140See www.vegasbook.com/sportsbook/help.html, answer to ‘‘Can I use my IBC to protect my

house and car?’’ 141The Vegas Book website also allows clients to send certified checks to deposit funds in their

account. The checks are directed to be sent to BTCB. See ‘‘Sending Funds,’’ rule (1) at

www.vegasbook.com/sportsbook/rule.html. 142SKNANB’s monthly account statements do not indicate what percentage of the Internet

gambling funds are attributable to SKNANB clients and what percentage to BTCB clients. 143See www.vegasbook.com/sportsbook/help.html, answer to ‘‘Who are we?’’ 144The Vegas Book website reproduces a copy of the license at www.vegasbook.com/

sportsbook/lisc.html. 145The following pitch appears in the IBC Now website’s ‘‘representative marketing program’’:

‘‘Casino del Sol offers the savvy marketer the opportunity to open an Internet business with

worldwide appeal. Daily, millions of dollars are wagered by gamblers hoping that lady luck

will grant them a fortune. With our casino program you eliminate chance by becoming the

house. It is easy . . . we host your custom designed site from a high speed, state of the

art secure server in the Commonwealth of Dominica with proprietary casino software proven as the industry’s best. After designing the look for your casino, choose your games including Black Jack, Slots, Poker or Lil Baccarat. Each time one of your members logs in and

plays, we track his/her winnings and losses and deposit the difference in your BTCB bank

account.’’ See www.ibcnow.com/service.html. 146See Virtual Gaming Enterprises, Inc. 10–KSB report to the SEC (9/14/00), Item 3 on ‘‘Legal

Proceedings’’; SEC v. Virtual Gaming Enterprises, Inc. (USDC SDCA Civil Case No. 99–MC–

336); ‘‘Gaming firm faces long odds in shaking shady ties,’’ San Diego Union-Tribune (9/19/99); ‘‘For Virtual Gaming, life is like a house of cards,’’ San Diego Union-Tribune (5/5/00).

Book website helpfully points out that Vegas Book customers can

use their Dominican bank ‘‘account for asset protection’’ as well as

for gambling, directing them to BTCB’s WorldWide Asset Protection website.140

The Vegas Book website provides a detailed form for opening a

Vegas Book account. This form identifies BTCB as the bank opening the accounts for Vegas Book clients. The form also provides

wire transfer instructions for Vegas Book gamblers wishing to deposit funds into their BTCB account. The instructions direct funds

to be sent to the Bank of America, for further credit to St. KittsNevis-Anguilla National Bank (‘‘SKNANB’’), for further credit to

BTCB.141 Bank of America informed the investigation that it had

been unaware that BTCB was using the SKNANB correspondent

account and unaware that the SKNANB account was handling

Internet gambling proceeds. A review of the SKNANB account

records indicates that, during 2000, millions of dollars moving

through the account each month were related to Internet gambling,

including over $115 million in August 2000 alone.142

According to its website, Vegas Book, Ltd. is ‘‘a partnership between Virtual Gaming Enterprises, Casino del Sol, Ltd. and

Chinnok West, Ltd.,’’ 143 and apparently operates under a 5/6/99

Dominican gaming license issued to Casino del Sol.144 BTCB and

U.S. bank records suggest the existence of additional ties among

BTCB, Casino del Sol and Virtual Gaming Enterprises. For example, in addition to directing Internet gamblers to the Vegas Book

website, BTCB-related websites encourage individuals to consider

opening their own Internet gambling website using Casino del Sol

software.145 U.S. bank records also show over a million dollars in

transactions involving Virtual Gaming Enterprises since 1999.

Virtual Gaming Enterprises is a publicly traded Nevada corporation that was incorporated in June 1998, and is the subject of an

ongoing SEC investigation into possible stock fraud.146 Brenda Williams and her husband Virgil Williams are the company’s controlVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00413 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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147See Virtual Gaining Enterprises, Inc. 10–KSB report to the SEC (9/14/00), Item 9. 148 Id., Item 1. 149See, for example, www.penyprofits.com/profiles/vgain.shtml. 150See Chapter IV(D) of this report.

ling stockholders and senior management.147 In 1995, Virgil Williams was found liable for securities fraud and ordered to pay a $27

million judgment. In 1997, he and Mrs. Williams filed for bankruptcy. The company’s latest SEC filing states that Virtual Gaming

Enterprises was ‘‘formed to purchase, manage, develop, market,

and resell casino style Internet games that will allow players to

wager,’’ and operates out of Dominica.148 The filings describe the

company’s involvement in several Internet gambling efforts, including holding a 20% interest in Vegas Book. Virtual Gaming Enterprises is apparently soliciting funds from small investors across the

United States to buy its shares.149 Security Bank records show a

total of about $1.2 million deposited into BTCB’s account over a 6-

month period, from August 1999 until March 2000, for ‘‘Brenda J.

Williams DBA-Virtual Gambling Enterprises.’’ When contacted,

SEC staff indicated that they had been unaware that Virtual Gambling Enterprises had a BTCB account and was making these deposits.

Internet gambling, as explained earlier in this report,150 is illegal

in the United States. Evidence suggests that BTCB has attempted

to conceal its role in Internet gambling, not only from the Minority

Staff investigation, but also from its U.S. correspondent banks. For

example, BTCB moved hundreds of thousands of dollars in Internet

gambling related proceeds through its Security Bank account without informing the bank of this activity. After Security Bank found

out, BTCB’s president Requena wrote in a May 17, 2000 letter, ‘‘We

are aware of the position that U.S. Banks maintain on this regards,

and we do not encourage at all the use of your good bank for

[these] matters.’’ Betts sent a May 19, 2000 fax stating, ‘‘I have

made arrangements with another of our correspondent banks to

take their wire transfers. . . . The customer did not consult with

us before using Security Bank’s name. We certainly would not have

allowed them to use it.’’ It is unclear what correspondent bank

BTCB turned to next and whether it informed that bank of its

Internet gambling activities; Bank of America states that it never

knew it was handling BTCB funds related to Internet gambling.

(7) Money Laundering and Fraud Involving BTCB

The Minority Staff investigation found evidence indicating the

BTCB was involved in a number of financial frauds and suspicious

transactions moving millions of dollars through its U.S. accounts.

In each instance, the bank’s U.S. correspondent relationships

played a critical role in enabling BTCB to conduct its activities.

BTCB’s refusal to be interviewed prevented the Minority Staff from

obtaining any clarification or explanation that the bank might have

provided with respect to the following matters, which are summarized below and described in more detail in the appendix to this report.

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151For more information, see the description of the Koop fraud in the appendix. 152Koop’s activities at the other two banks, Hanover Bank and Overseas Development Bank

and Trust, are discussed in the case histories on those banks.

(a) Koop Fraud

William H. Koop, a U.S. citizen from New Jersey, pleaded guilty

in February 2000 to conspiracy to commit money laundering in violation of 18 U.S.C. 1957.151 Using BTCB, two other offshore

banks,152 and their U.S. correspondent accounts, Koop bilked hundreds of U.S. investors out of millions of dollars over a 2-year period by falsely promising high yield investment opportunities. In

just 6 months during 1998, Koop moved almost $4 million from his

self-confessed frauds through BTCB’s U.S. correspondent accounts.

In 1997, Koop began promoting ‘‘prime bank notes,’’ which he admitted are fictitious financial instruments, as well as other fraudulent investments, promising rates of return as high as 489%. Koop

falsely promoted the investments as secure and touted the fact that

the investment profits would be reported to no one. Over 200 U.S.

investors placed their funds with him; with few exceptions, none

recovered either their principal or any profit.

Koop began his relationship with BTCB in mid-1998 after a

chance meeting with Brazie who told him about BTCB’s own high

yield investment program and other services. Koop used BTCB to

establish Dominican corporations and bank accounts for use in his

fraudulent activities. Koop instructed his co-conspirators and some

of the investors in his program to send funds to him at BTCB’s

U.S. accounts. He then laundered the funds by instructing BTCB

to wire them to other bank accounts around the world or by using

them for other purposes such as purchasing a house in New Jersey.

Koop’s largest single investor, for example, wire transferred $2.5

million to BTCB’s correspondent account at the Miami office of

Banco Industrial de Venezuela for further credit to Koop’s company. Koop used the money to pay his co-conspirators, open new

accounts at BTCB, and advance his fraud. When the investor sued

to recover the $2.5 million, BTCB at first denied having any accounts for Koop or his company. It was only after Koop pleaded

guilty, began cooperating with prosecutors, and directed BTCB in

writing to disclose information about his accounts, that BTCB acknowledged having five Koop-related accounts.

The evidence reviewed by the Minority Staff indicates that BTCB

did more than establish corporations, open bank accounts and

transfer funds for Koop; it also convinced Koop to place $1.3 million

in fraud proceeds into BTCB’s own high yield investment program.

Koop indicated that BTCB repeatedly solicited him to place funds

in various investments offered by the bank. Koop said he finally

provided $1.3 million to BTCB’s subsidiary, Global Investment

Fund. In an ironic twist, Global had promised to pay Koop a 100%

return on the funds each week for 40 weeks. After 2 years, Koop

said he had yet to receive a single payment or the return of his

principal. If true, BTCB retains possession of over $1 million in illicit proceeds taken from Koop’s defrauded investors.

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153For more information, see the description of the Cook fraud in the appendix. 154For more information, see the description of the Gold Chance fraud in the appendix.

(b) Cook Fraud

Benjamin Franklin Cook III, a U.S. citizen from Arizona, was

named in March 1999 pleadings filed by the Securities and Exchange Commission (SEC) as the central figure in a fraudulent

high yield investment program which, in the course of less than

one year, bilked over 300 investors out of more than $40 million.153

In August 2000, a criminal indictment in Arizona charged Cook

with 37 counts of racketeering, fraud and theft. U.S. bank records

indicate that at least $4 million associated with this fraud passed

through U.S. correspondent accounts belonging to BTCB, and

BTCB was directly involved in investment activities undertaken by

persons and companies associated with the Cook fraud.

An analysis of BTCB’s U.S. correspondent bank records by Minority Staff investigators uncovered documentary evidence linking

100 wire transfers to defrauded investors or entities associated

with the Cook fraud. These transactions, which made up a substantial portion of BTCB’s account activity at the time, moved over $4

million through the bank in a 2-year period, from 1998 to 2000,

demonstrating that BTCB was an active conduit for illicit proceeds

from the Cook fraud.

As in the Koop fraud, documentation and interviews indicate

that BTCB did not stop at providing deposit accounts and wire

transfers to persons and companies associated with the Cook fraud;

the bank also worked with them to invest funds in its own high

yield investment program. One Canadian investor told the Minority

Staff that he invested $30,000 in the BTCB high yield program on

the advice of a friend associated with several companies involved

in the Cook fraud. He also convinced other persons to invest their

funds. He indicated that the funds were wire transferred to BTCB’s

U.S. correspondent account at Security Bank in several installments. He stated that, despite repeated inquiries, neither he nor

his associates have recovered any of their investments, much less

any of the promised returns. The documentation suggests that

BTCB may still have possession of substantial funds taken from

Cook’s defrauded investors.

(c) Gold Chance Fraud

In April 2000, two brothers who are Canadian citizens filed suit

in Ontario alleging that their company, Gold Chance International

Ltd. (‘‘Gold Chance’’) was the victim of a loan fraud involving $3

million.154 They alleged that Gold Chance had been fraudulently

induced to deposit $3 million as supposed loan collateral into an attorney trust account in Canada, waited months for a loan that

never materialized, and then learned that the company’s funds had

been secretly transferred to an offshore account at BTCB.

An Ontario court granted them immediate emergency relief, including appointing a receiver to take control of the attorney trust

account and ordering BTCB and others to cooperate with discovery

requests. Although the court proceedings have yet to reach a conclusion, a preliminary court decision, pleadings in the case, bank

records and other information indicate that the $3 million was deVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00416 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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posited into BTCB’s U.S. account at First Union on December 15,

1999, and within a week, the funds were divided up and wired to

multiple bank accounts around the world. On the day the funds

were deposited, BTCBs account balance at First Union was only

about $14,000. During December 1999, the $3 million in Gold

Chance funds were the primary source of funds in the BTCB account and were used to make payments to the bank’s creditors, clients, and other correspondent accounts.

BTCB maintained in court pleadings that the $3 million had

been sent to the bank by a longtime bank client for immediate

placement in its high yield investment program. The bank said

that the money had been locked into a year-long program on December 15, 1999, and could not be removed before December 15,

2000. In a June 12, 2000 order, the Ontario court expressed skepticism regarding BTCB’s claim that the $3 million was still safely

on deposit with the bank. The court wrote, ‘‘The prepared statement of [BTCB] that the funds are in BTCB is not to be believed,

against either the tracing evidence or [BTCB’s] failure to deliver

the funds.’’ BTCB later posted with the court a $3 million letter of

credit which matured on December 15, 2000. When that date came,

BTCB failed to pay the court the required $3 million. Gold Chance

is still seeking recovery of its funds.

Other Troubling Incidents. The investigation obtained additional evidence of other suspicious transactions and questionable

conduct at BTCB, most of which involved BTCB’s high yield investment program. Discussed in more detail in the appendix, they include the following:

—A dispute over the ownership of a $10 million certificate of

deposit (‘‘CD’’) issued by BTCB in bearer form resulted in extensive litigation in a New York court. In August 2000, the

U.S. district court resolved the CD’s ownership in favor of a

wealthy Texan, while disclosing troubling information about

BTCB’s operations. The legal dispute and other information

disclosed, for example, inconsistent and ambiguous documentation regarding the disputed CD and a Dominican corporation established at BTCB’s direction; BTCB’s questionable dealings with a small Bahamian bank having a poor

reputation and limited assets, including BTCB’s use of the

Bahamian bank’s correspondent account at Citibank without

Citibank’s knowledge; and BTCB’s apparent representations

that its high yield investment program could quickly turn a

$10 million investment into a $50 million return. U.S. bank

records also show that, as with the Gold Chance funds,

BTCB may have used $6 million of the CD funds to pay

creditors and clients, rather than make investments as

promised.

—An investor from Malaysia has complained to Dominican,

U.K. and U.S. authorities about his continuing inability to

recover a $1 million investment which he wired to BTCB’s

U.S. account at Security Bank in September 1998, for placement in its high yield program. The investor claims he was

induced to send the money by KPJ Trust, a BTCB client.

Documents supplied by the investor contain repeated broken

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promises by BTCB to return the funds. U.S. bank records

show his incoming deposit to BTCB as well as several outgoing payments to persons associated with the KPJ Trust.

—Investors in Texas, California and Canada have made similar complaints about funds they invested in BTCB’s high

yield program allegedly at the direction of Scott Brett, a part

owner of BTCB through his company Baillett International

Ltd. U.S. bank records show incoming wire transfers to

BTCB’s U.S. accounts from these investors, as well as outgoing wires to companies associated with Brett. A criminal

investigation of these complaints may be underway in the

United States.

—U.S. bank records and other documents demonstrate BTCB’s

involvement with a company headed by an individual suspected of past securities fraud, including a BTCB payment of

$500,000 to the company followed over the next year by $1

million in payments from the company. The company explained the $1 million payment by saying it was repaying a

BTCB ‘‘loan’’ and obtaining a release of BTCB’s right to over

1 million in ‘‘unissued shares’’ in the company. Documents

indicate that, during 1999 and 2000, the company obtained

over $16 million from hundreds of small investors across the

United States. Civil and criminal investigations into the

company’s possible involvement in securities fraud may be

underway.

BTCB has been in operation for only about 3 years. In that time,

it has become entangled in three multi-million dollar financial

fraud investigations in the United States and Canada, as well as

numerous client complaints in multiple jurisdictions. The emergent

picture is of a bank surrounded by mounting evidence of questionable transactions, deceptive practices and suspect funds related to

Internet gambling, fraudulent investments, and criminal activity.

(8) Correspondent Accounts at U.S. Banks

BTCB stated in its September 2000 submission to the Subcommittee that virtually all of its deposits and fund transfers go

through U.S. banks, and it is ‘‘very protective of its U.S. correspondent banking relations, since this is our only way to transfer

and move funds.’’

The Minority Staff investigation subpoenaed documents and

interviewed personnel at three U.S. banks that operated accounts

for BTCB. The banks are: (1) the Miami office of Banco Industrial

de Venezuela which operated a correspondent account for BTCB

from October 1997 until June 1998; (2) Security Bank N.A. which

operated a correspondent account for BTCB from June 1998 until

July 2000; and (3) First Union National Bank, whose securities affiliate operated a money market account for BTCB from September

1998 until February 2000. While none of the banks was fully aware

of BTCB’s activities or the financial frauds that moved funds

through BTCB accounts, all three indicated that BTCB had, at

times, engaged in unusual or suspicious activity, had made unauthorized use of the U.S. bank’s name in questionable transactions,

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and had abused its relationship with the U.S. bank. All three initiated the closing of BTCB’s accounts.

(a) Banco Industrial de Venezuela (Miami Office)

Banco Industrial de Venezuela (BIV) is a large, governmentowned bank in Venezuela. BIV has two offices in the United States,

one in New York and one in Miami, each with about 20 employees.

The Miami office has about $85 million in assets. BIV’s Miami office opened BTCB’s first U.S. correspondent account, one of only

three correspondent bank accounts at that office. BIV closed the

BTCB account 7 months later due to evidence of suspicious transactions that, in the words of the bank, involved possible ‘‘money

laundering’’ and ‘‘self-dealing.’’ Interviews were conducted with BIV employees involved in the

opening, administration and closing of the BTCB account and in

BIV’s anti-money laundering program. Some BIV personnel who

made key decisions with respect to the BTCB account were not

interviewed, because they are no longer with the bank. Documentation in BIV files, account statements, and other materials and information were collected and reviewed.

Due Diligence Prior to Opening the Account. Prior to opening an account for BTCB, BIV conducted a due diligence inquiry

into the bank’s ownership and operations. BIV documentation and

interviews suggest, however, that because BTCB was newly licensed and not yet in operation, BIV relaxed some of its documentation requirements and collected only limited information

about the bank.

According to the BIV account officer who helped open and administer the account, BTCB was referred to BIV by a former BIV client. It is possible that BTCB selected BIV because BTCB’s president, Requena, was from Venezuela and was familiar with this

Venezuelan bank’s operations. Requena apparently telephoned BIV

in 1997, and spoke with BIV’s credit manager, Pierre Loubeau, who

was then responsible for correspondent banking. BTCB followed

with a letter dated July 28, 1997, providing initial information

about the bank and requesting ‘‘a correspondent relationship.’’ On

September 15, 1997, BTCB provided another letter, signed by

Requena, answering inquiries about the bank’s ownership and

main sources of income. The BTCB letter stated that the bank ‘‘was

formed and is owned by Clarence Butler of Dominica, and Rodolfa

Requena of Venezuela.’’ The letter said that the bank’s ‘‘main income’’ derived from ‘‘Trust related activities’’ and ‘‘investments in

Financial instruments,’’ and that it was developing ‘‘a Program for

Insured Credit Cards.’’ The letter also stated that, ‘‘as soon as we

have a positive answer from your [fine] bank we are ready to transfer up to US $40 million to open the account.’’

Because the BIV personnel currently at the bank did not have

first hand information about the credit manager’s due diligence efforts, the investigation was unable to determine whether he made

inquiries in Venezuela about Requena or in Dominica about BTCB.

The BIV account officer noted that BIV’s comptroller at the time,

Louis Robinson, was originally from Dominica, knew Dominican

government officials, and was a distant relative of one of the BTCB

owners, Clarence Butler, and may have made inquiries in the counVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00419 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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155 BIV’s Customer Service Handbook in place at the time, in Chapter 6, required ‘‘[p]hysical

inspections’’ of a client’s domicile within a year of an account opening and issuance of a ‘‘written

visitation report to be kept in Agency’s customer file.’’

try at the time. There was no documentation recording such inquires in the BIV file for BTCB. The BIV account officer stated

that she personally checked the U.S. Office of Foreign Asset Control list of designated persons, and determined at the time that neither Requena nor Butler was designated as a person barred from

holding assets in U.S. financial institutions. She also indicated

that, because the bank was so new, she thought BIV had been unable to acquire much information about BTCBs reputation or past

performance.

The BIV account officer said that the preliminary decision to

open the BTCB account was made by two of her superiors,

Loubeau, the credit manager, and Esperanza de Saad, the head of

BIV’s Miami office, neither of whom are still with BIV. She said

their decision was made dependent upon BTCB’s successfully submitting required account opening forms and documentation, which

she requested in a letter dated September 19, 1997. The BIV account officer said that she was then responsible for collecting the

required information for BTCB’s client file.

Despite language in the BIV account opening application stating

that the ‘‘following documents MUST be submitted’’ and a ‘‘new account shall not be opened without the receipt of these documents,’’ the BIV account officer said that accounts were sometimes opened

before all of the required documentation was obtained. She indicated that several exceptions had apparently been made for BTCB.

For example, she said that BTCB was allowed to submit an

unaudited financial statement in place of the required audited

statement. She indicated that she thought BTCB had been allowed

to submit an unaudited statement because it was still too new a

bank to have undergone an audit. The BTCB financial statement

on file at BIV indicated that, as of June 30, 1997, total BTCB assets were about $7.2 million. The BIV account officer said that

BTCB was also apparently allowed to submit one, instead of the required two, bank references. Although she could not recall whether

someone had specifically waived the requirement for a second bank

reference, she speculated that, because BTCB was so new, it may

have had only one bank account at the time. She noted that the

bank reference provided was for an account that had been opened

only 2 months earlier at another Dominican bank, Banque

Francaise Commerciale.

BIV’s account opening documentation did not require and the

BIV file did not contain a copy of any written anti-money laundering policies or procedures in place at BTCB. Nor was the issue

of BTCB’s anti-money laundering efforts discussed in any BIV documentation. There was also no documentation indicating the extent

to which BIV may have inquired into Dominica’s reputation for

banking regulation or anti-money laundering controls.

In response to a question about a site visit.155 the BIV account

officer said that no visit was made to BTCB prior to opening the

account, but one was made in the first few months after the account was opened. She indicated that BIV’s comptroller, Louis Robinson, who was from Dominica, had traveled to the island on vacaVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00420 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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156For example, in February 1998, multiple deposits totaling in excess of $1 million and multiple withdrawals totaling about $650,000, led to a closing balance of about $350,000. March saw

more deposits and withdrawals, including a single deposit on 3/30/98 of about $2 million and

a closing account balance of about $2.5 million. April account activity increased still further,

with multiple transactions throughout the month including deposits of $2.5 million, $634,982,

$500,000 and $406,000 that, together, increased the account balance to $6.5 million. May witnessed similar account activity, including deposits of $1 million; $450,000; $220,000; $200,000;

$199,980; $150,000; $101,850; and $100,000, followed by a $5 million withdrawal on 5/27/98 to

a BTCB securities account at PaineWebber’s clearing firm, Correspondent Services Corporation.

Even after the $5 million withdrawal, the account held almost $3.5 million. On June 5, 1998,

BIV closed the account. 157Koop received deposits totaling about $3.1 million during this period, including a $2.5 million deposit from a defrauded investor. International Business Consultants, Ltd., named by the

SEC as a key participant in the Cook fraud, received 34 deposits totaling about $1.4 million.

One deposit for $2 million was made by ‘‘Inter Trade and Commerce Ltd.,’’ a company otherwise

unidentified. Transactions traceable to persons associated with BTCB provided two deposits totaling $113,000, and numerous withdrawals totaling about $700,000.

tion and, during his vacation, had visited the BTCB office, which

was not yet open to the public. She said that he met with Butler

and brought back additional information about the bank. While no

report on his visit was in the client file as required by BIV procedures, the file did contain key due diligence information about the

bank that was apparently obtained during this site visit.

BIV’s account opening form, entitled ‘‘New Customer and Account Input Information Sheet,’’ shows that BIV’s senior official,

Ms. de Saad, approved opening the BTCB account on September

29, 1997. Other documentation indicates that the official opening

date for the BTCB account was October 1st. The three account signatories were Requena, Betts and Royer.

Monitoring the Account Activity. The evidence indicates that,

once the BTCB account was opened, BIV failed adequately to monitor the account activity or inquire about unusual transactions, despite repeated signs of suspicious activity.

BIV provided primarily three services to BTCB: A deposit account, an overnight sweep account which increased the interest

paid on BTCB deposits, and use of BIV’s wire transfer services.

BIV did not provide BTCB with any loans or extensions of credit.

BTCB’s initial deposit was a wire transfer on October 20, 1997,

for approximately $1 million. On October 21, 1997, according to a

BIV call report, the BIV account officer contacted BTCB to confirm

the transfer. She was told that BTCB was holding its official ‘‘inauguration’’ on November 15, 1997, and BTCB would be transferring

another $25 million to the BIV account during the week.

The BIV account officer indicated that she did not recall inquiring into or being told the source of the initial $1 million deposit.

She said that she would have asked about the source of a $25 million or $40 million deposit by BTCB, but no such deposit was ever

made. In fact, BIV account statements show that, after the initial

deposit, the BTCB account experienced little activity for 4 months,

with few deposits and a steady withdrawal of funds until the end

of January 1998, when the closing account balance was about

$45,000.

The next 3 months, however, reversed course, and each month

showed increased account activity.156 The bulk of the funds in the

final three months appear to have come from three sources: The

Koop fraud, the Cook fraud, and BTCB itself.157 Overall, about $17

412

million moved through the account, most of it in the last 3 months

the account was open.

When asked about the increased account activity in the spring of

1998, the BIV account officer indicated that she did not recall noticing it at the time but thought, if she had, she would have attributed it to the normal growth of a new bank. She also did not recall

asking or being told about the source of funds for the three largest

deposits of $1 million, $2 million and $2.5 million. She indicated

that she had assumed a correspondent bank account would include

large transactions. However, another BIV employee told Minority

Staff investigators that, when he reviewed the BTCB account in

May, he immediately noticed and had concerns about the increased

account activity, large transactions, and BTCB-related transactions, all of which contributed to BIV’s decision in May to close

the BTCB account.

By the spring of 1998, BTCB’s account had become one of the

largest accounts at the BIV Miami office. The BIV account officer

indicated that she began to spend considerable time working with

BTCB personnel on matters related to the account. She indicated

that she spoke with the bank several times per week, usually dealing with BTCB’s chief financial officer, Betts, and sent the bank

weekly account statements, a service BIV provided upon request to

large accounts.

The BIV account officer recalled three activities in particular

that occupied her time on the BTCB account, involving letters, wire

transfers and SWIFT telexes. She said that BTCB had made several requests for letters providing either a bank reference or confirmation of funds on deposit. She said these letters were intended

for other financial institutions or for investors considering placing

money with BTCB. BIV files contained four letters written on behalf of BTCB. The first was a letter of reference which BIV provided in March 1998, but which is undated, addressed ‘‘TO WHOM

IT MAY CONCERN,’’ and signed by the Miami office head,

Esperanza de Saad. The BIV account officer said that similar reference letters had been prepared for other customers. BIV indicated that it had no knowledge of how BTCB had used this reference letter.

The BIV account officer recalled BTCB’s engaging in lengthy negotiations over the wording of another letter requested in April

1998. She said that BTCB had asked BIV to provide a ‘‘proof of

funds’’ letter, addressed to BTCB itself, confirming a certain

amount of funds in the BTCB account. BTCB wanted the letter to

confirm the ‘‘non-criminal origin’’ of the funds, and to state that

BIV was prepared to block these funds . . . or to place these funds’’

upon BTCB’s instruction. When asked what she thought of the requested wording, the BIV account officer said that she did not understand what BTCB wanted, but the requested language had

made her superiors uncomfortable. She said that BIV had refused

to provide the wording, despite BTCB’s insistence. When asked

why, she indicated that her superiors had made the final decision

and she could not recall their reasoning. She indicated that she

had no familiarity with fraud schemes using prime bank guarantees or U.S. bank confirmations, and had never thought that BTCB

might be engaging in suspicious conduct. She said the letter finally

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158 BIV bank records show 11 occasions in 7 months on which funds were wire transferred

to Requena and may have been paid to him in cash. These payments included:

—12/15/97 wire transfer for $16,849.57; —12/16/97 wire transfer for $6,000; —12/19/97 wire transfer for $6,000; —2/17/98 wire transfer for $6,000; —2/20/98 wire transfer for $826; —3/25/98 wire transfer for $6,000; —4/3/98 wire transfer for $7,384; —4/27/98 wire transfer for $6,000; —4/28/98 wire transfer for $6,000; and —5/11/98 wire transfer for $6,000. In addition, $10,000 was wire transferred to Requena on 5/26/98, to a U.S. office of Banco Venezuela, an unrelated bank. When shown these 11 transactions totaling $77,000, the BIV account officer could not recall whether all of them resulted in cash payments to Requena, or just

the ones involving $6,000. She also could not recall the purpose of the wire transfers in amounts

other than $6,000, or why Requena occasionally received two ‘‘salary’’ payments in the same

month. She was also unable to explain her handwritten notation that Requena had received

funds on 1/6/98, a date not included in the BIV account statements. She therefore was unable

to say whether other payments had also been made to Requena. 159These transactions included:

—$470,000 in payments to John Long, his companies Republic Products Corporation and

Templier Caisse S.A., and companies involved with constructing a new residence for the

Long family in Antlers, Oklahoma, such as Nelson Brothers Construction; —$113,000 in payments to Mavis Betts, the wife of BTCB’s chief financial officer George

Betts, or to Lavern Erspan, a woman associated with Mrs. Betts; —$100,000 deposit to the credit of Bayfront Ltd., a company apparently associated with

Pablo Urbano Torres who was a BTCB director, and $16,800 in payments directed to him;

and —$25,000 in payments to Mary Brazie, the wife of Charles Brazie, the BTCB vice president

in charge of managed accounts.

The BIV account officer indicated that the only BTCB officials she knew at the time were

Requena, Betts and Butler; and she was not aware that so many of the bank’s transactions had

involved persons affiliated with BTCB.

provided on May 5, 1998, did not contain any of the contested language.

The BIV account officer said that, on a number of occasions,

BTCB’s president, Requena, had instructed the BIV Miami office to

wire transfer funds to a BIV branch in Caracas, Venezuela, which

he would then pick up in cash. The BIV account officer explained

that this arrangement, which BIV no longer allows, was used because Requena did not have a personal bank account at BIV to

which the funds could be sent, so he was instead allowed to pick

up the funds in cash. She said that the amount was typically

$6,000, which Requena had described as his salary payment. She

said that, on one occasion in December 1998, Betts had telephoned

from BTCB and indicated that Requena had not received the

$6,000 wired to him in Venezuela, and she had made inquiries

about the funds transfer. She said that Requena later confirmed receipt of the funds ‘‘on 12/18/97 and Jan. 6/98.’’ 158 The BIV account

officer stated that similar cash payments may have been made to

BTCB personnel other than Requena, although she was unable to

state with certainty that they were. BIV account statements show

numerous transactions with BTCB employees and other persons associated with the bank.159 Some of these transactions may have involved cash; others were wire transfers to accounts. Together, they

and the Requena transactions involved more than $800,000 in deposits and withdrawals over a 7-month period.

The BIV account officer said that a third BTCB account activity

requiring her attention had been the re-transmission of SWIFT

telexes to and from BTCB. She explained that BTCB’s staff had

been unable to operate BTCB’s telex equipment, and had instead

routinely faxed telexes to BIV and asked BIV to re-transmit them.

414

She said they had also directed their clients to send telexes to BIV

for re-transmission to BTCB. The BIV account officer said the

SWIFT traffic for BTCB had increased so rapidly that BIV’s operations department had begun complaining about the additional

work.

The BIV account officer described events related to one particular April 1998 telex involving a Mexican credit union called

‘‘Union de Credito de Fornento Integral de Naucalpan SA.’’ This

telex had been sent to BIV, and the credit union had asked BIV

to re-transmit the message to BTCB in Dominica. The text of the

message, addressed to BTCB, stated that the credit union was

going to send a telex to Metropolitan Bank and Trust Co. in Chicago confirming ten ‘‘letters of guarantee’’ at $10 million apiece for

a total of $100 million, and promising to honor these letters of

guarantee ‘‘irrevocably and unconditionally.’’ The BIV officer said

that, in this instance, BIV had refused to re-transmit the message.

When asked why, the BIV account officer said her superiors had

made that decision and she was unsure of the reason. She indicated that she was unfamiliar with ‘‘letters of guarantee’’ or their

use in financial frauds, and it had never occurred to her that BTCB

might have been attempting to include BIV’s name on the telex to

lend credibility to what may have been a fraudulent transaction.

She could not provide any other information about the transaction.

She said that, with hindsight, it was surprising that such a new

bank, with only $7 million in assets, would have been engaged in

a $100 million transaction.

BIV’s anti-money laundering officer while the BTCB account was

open was Louis Robinson, the comptroller who originated from

Dominica. The investigation did not interview him since he had left

the bank, so his efforts in reviewing the BTCB account while it was

open are unclear. The BIV account officer recalled informing him

on several occasions of troubling incidents involving BTCB, including the contested proof of funds letter and the $100 million telex.

She said that Mr. Robinson was one of her supervisors who had refused to go along with BTCB’s requests. At the same time, he apparently never warned her about the account or instructed her to

pay special attention to it. BIV’s anti-money laundering procedures

at the time, a copy of which were provided to the investigation, explicitly called for heightened scrutiny of accounts opened by foreign

corporations domiciled in ‘‘an ‘Offshore’ Tax haven,’’ stating that

the corporation’s ‘‘beneficial owner(s) must be identified and their

source of wealth verified.’’ While the section did not reference foreign banks or bank secrecy jurisdictions, the analogy could have

been made to apply the heightened scrutiny standard to BTCB.

There is no evidence, however, that Mr. Robinson or other BIV employees exercised heightened scrutiny of the BTCB account.

Closing the BTCB Account. The BIV account officer told Minority Staff investigators that she never suspected BTCB of wrongdoing and never recommended closing the account. The investigation learned that the closure decision was a consequence, instead,

of the sudden arrest of the head of the Miami office, Esperanza de

Saad, on May 15, 1998, for alleged misconduct in connection with

a U.S. Customs money laundering sting known as Operation CasaVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00424 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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160 United States v. de Saad (U.S. District Court for the Central District of California Criminal

Case No. 98–504(B)). De Saad was convicted by a jury on ten counts of laundering narcotics

proceeds, but a district court judge overturned the jury verdict and acquitted her on all counts.

See ‘‘Opinion and Order Granting Defendant Esperanza de Saad’s Motion for Judgment of Acquittal’’ by Judge Friedman (7/13/00). The United States is appealing the judge’s decision. 161 BIV personnel indicated, when asked, that the bank had not been aware of the Koop fraud

at the time the BTCB account was open, although bank documents were later requested in connection with a related civil lawsuit, Schmidt v. Koop. BIV was also unaware, until informed by

Minority Staff, that a company frequently named in BTCB wire transfer documentation, International Business Consultants Ltd., had been named in SEC pleadings related to the Cook

fraud.

blanca.160 After de Saad’s arrest, a team of senior bank officials

flew in from BIV’s New York office to assume control of the Miami

office and review all accounts. The BTCB account was one of more

than a dozen accounts closed during the review process.

The Minority Staff investigation interviewed the key BIV employee from New York involved in closing the BTCB account. He

explained that, after de Saad’s arrest, as a precautionary measure,

BIV had placed the remaining three senior officers in the Miami

office on leave, although none were accused of wrongdoing. He said

that the New York BIV team then began reviewing all of the

Miami accounts, looking for suspicious activity. He said that the

New York team purposely conducted this review without consulting

the Miami staff, due to uncertainty over the extent of the problems

in the Miami office. He said that, due to the de Saad arrest, U.S.

bank regulators and law enforcement personnel were also reviewing BIV records.

The BIV employee said that the BTCB account was one of the

largest in the Miami office. He said that when he reviewed it, he

immediately became concerned about wire transfers making payments to BTCB officers, which he considered signs of ‘‘self-dealing.’’ He indicated that when he reviewed the BTCB file, he also became

concerned about missing documentation, including the absence of

an audited financial statement. He said his immediate reaction

was, ‘‘I didn’t like what I saw.’’ On May 28, 1998, BIV sent a letter to BTCB requesting additional due diligence documentation including picture identifications, reference letters, the bank’s articles of incorporation, and a

current financial statement. BIV sent another letter the next day

requesting the name of BTCB’s accountant and law firm. BTCB responded on the same day, May 29, 1998, providing most of the requested information.

After reviewing this information and additional account transactions, the decision was made by the New York BIV team, in consultation with legal counsel, to close the account. In interviews,

BIV personnel indicated that the decision to close the account was

made due to a number of concerns about the account, including the

increased account activity, rapid turnover of funds, large transactions, transactions involving the same payer and payee, and the

transactions involving BTCB officers and employees. A memorandum dated May 29, 1998 instructed BIV operational staff to

close the BTCB account ‘‘[e]ffective immediately.’’ 161

The BIV employee said that at the time the closure decision was

made, BTCB’s president Rodolfo Requena was in Miami. He stated

that, on June 1, 1998, BTCB had sent BIV a letter requesting that

BIV prepare letters of reference for BTCB to be given to four U.S.

416

banks, and that Requena would pick up the letters in person. The

BIV employee said that none of these letters was prepared. Instead, he said, a meeting was held in the conference room of the

BIV Miami office in which BIV discussed with Requena the bank’s

decision to close the BTCB account. He said that the reasons BIV

gave for closing the account were the restructuring of the Miami

office and the need to reduce the customer service portfolio, because BIV had no proof of misconduct, such as a criminal indictment against BTCB. He said that Requena became angry, claimed

to know the president of BIV in Venezuela, and threatened to have

him fired for improperly closing the BTCB account.

The following week, a two-page internal BIV memorandum,

dated June 11, 1998, was sent by the BIV Miami office to BIV

headquarters in Venezuela with information about the closing of

the BTCB account. It is unclear whether this memorandum was

prepared in response to a complaint by BTCB. One part of the

memorandum described the surge in account activity in April, noting that it had increased the account balance to $6 million, included wire transfers in large amounts, and included wire transfers

in which the payer and payee were the same individual or corporation, such as International Business Consultants. In other documents, BIV described the transactions as indicative of ‘‘money

laundering’’ and ‘‘self-dealing,’’ and stated that BTCB appeared to

have been using the account to provide ‘‘payment orders to its own

officers’’ and ‘‘trying to use our institution as a pass through (window to USA) account.’’ On June 5, 1998, BIV formally closed the account and sent BTCB a check for about $3.5 million. On June 8, 1998, BTCB opened a

new account at Security Bank N.A. in Miami.

(b) Security Bank N.A.

Security Bank N.A. is a small Florida bank with several offices across the State and about $90 million in assets. Its Miami office

is located in the lobby of 444 Brickell, the same building occupied

by First Equity Corporation of Florida (FECF), BTC Financial and

related companies. Security Bank operated a correspondent account

for BTCB for about 2 years, from June 1998 until July 2000. It

closed the BTCB account after discovering that BTCB was handling Internet gambling proceeds and Security Bank was being referenced in Internet gambling websites.

Interviews were conducted with Security Bank employees involved in the opening, administration and closing of the BTCB account and in Security Bank’s anti-money laundering program. Documentation in Security Bank files, account statements, and other

materials and information were collected and reviewed.

Due Diligence Prior to Opening the Account. The evidence

indicates that Security Bank opened a correspondent account for

BTCB prior to conducting any due diligence on the bank, but on

the understanding that the account would be closed if negative information surfaced. Security Bank followed the account opening

with a due diligence effort that failed to uncover any problems with

BTCB, which by then had been in operation for about 6 months.

According to Security Bank interviews and a June 10, 1998

memorandum describing the opening of the account, shortly after

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162 According to Security Bank, it was because this deposit was so large that it prepared a

memorandum documenting the circumstances related to the opening of the account. It said that

it did not normally prepare an account opening memorandum.

FECF first moved into 444 Brickell Avenue, Security Bank approached FECF about opening an account, given the convenience of

the bank’s office in the lobby of the building. FECFs then owner,

Steven Weil, introduced BTCB president Requena to Security Bank

personnel, indicating that BTCB was then in the process of purchasing FECF. Requena expressed interest in opening an account

at Security Bank for BTCB. Requena indicated that BTCB was

then closing its ‘‘main account’’ at BIV’s Miami office due to, in the

words of the Security Bank memorandum, ‘‘bad publicity that [BIV]

was receiving . . . as a result of laundering money charges against

one of its principal officers.’’ Security Bank agreed to open an account for BTCB immediately, on the understanding that it would

conduct subsequent inquiries into the bank. The account was

opened on June 8th, with a BIV cashiers check for $3.5 million,

which Security Bank personnel considered a very large deposit.162

The head of Security Bank’s international department, who assisted in the opening, administration and closing of the BTCB account, said that at the time the account was opened Security Bank

had 25 to 30 foreign bank clients, primarily from Latin America.

He said that it was not uncommon for Security Bank to open an

account for a bank subject to later due diligence research. He said

we ‘‘usually open and then investigate,’’ due to the time required

to obtain due diligence information and documentation.

The international department head described a number of steps

that the bank took to investigate BTCB. First, BTCB supplied requested information about the bank’s ownership, lines of business

and financial status. Bank files included copies of BTCB’s banking

license, articles of incorporation, website information, a BTCB

shareholder list, an unaudited financial statement, and other documentation about the bank. The international department head stated that, because Security Bank was not familiar with Dominica, it

had decided not to initiate a credit relationship with BTCB and to

provide only limited correspondent banking services such as a deposit account and wire transfer services. For that reason, he said,

no financial analysis was performed of BTCB, nor did he or his

staff take a detailed look at BTCB’s major lines of business. He

said that he did not recall even seeing BTCB’s financial statement

at the time and thought no one had examined it.

The international department head said that Security Bank undertook several efforts to check BTCB’s reputation. He said the

bank required BTCB to provide two written, personal references for

each account signatory, copies of which were in the file. In addition, he said, inquiries were directed to banking personnel in Venezuela about Requena, who received favorable reports. He said another due diligence factor in BTCB’s favor was its purchase of

FECF, which was completed within a month of opening the account. He said the purchase had given Security Bank ‘‘comfort’’ because they knew the SEC investigated potential securities firm

owners, and BTCB had apparently received SEC approval.

He said that Security Bank had also obtained two written bank

references for BTCB, one from Banque Francaise Commerciale and

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163 In June 2000, Dominica was named by the Financial Action Task Force on Money Laundering, the leading international anti-money laundering organization, as one of 15 countries that

failed to cooperate with international anti-money laundering efforts.

one from BIV’s Miami office. Security Bank provided a copy of the

BIV reference letter, which was undated and signed by Esperanza

de Saad. The international department head indicated that the letter had been provided in July 1998. When told that, in July 1998,

de Saad was in jail awaiting trial on money laundering charges

and the BIV account officer who handled the BTCB account was

absent from the bank on maternity leave, the Security Bank employee indicated he had been unaware of those facts. When told

that it was actually BIV that had closed the BTCB account, he said

that he had also been unaware, until informed by Minority Staff

investigators, that BIV had initiated the closing of the BTCB account. He expressed surprise and concern at that information.

When asked how the letter of reference was delivered to Security

Bank, and shown the BTCB fax line at the top of the letter, he indicated that he could not recall whether the letter had come directly from BIV or whether it had been supplied by BTCB. When

shown the BTCB reference letter prepared by de Saad in March

1998, he agreed that it looked like the same letter given to Security

Bank in July 1998.

When asked about a site visit, the international department head

said that, while Security Bank normally did visit its foreign bank

clients, no on-site visit was made to BTCB. He said that BTCB was

less than a year old when the account was opened and Dominica

was unfamiliar territory, which meant that an on-site evaluation

was unlikely to provide meaningful information. He said that he

had met with BTCB senior personnel in Miami, including John

Long, and was comfortable with the bank’s leadership. He noted

that BTCB had a limited correspondent relationship that imposed

no credit risk to the bank. He said that, because BTCB was their

only client on Dominica, he had made the decision that it was not

‘‘cost effective’’ to fly there.

The international department head said that he was unaware, in

1998, that Dominica had a reputation for weak banking regulation

and anti-money laundering controls. He indicated that he had recently read press reports about Dominica’s anti-money laundering

deficiencies.163 The documentation suggests that no inquiry was

made into BTCBs anti-money laundering efforts either. The Security Bank file for BTCB did not contain copies of written antimoney laundering policies or procedures in place at BTCB nor is

the issue of BTCB’s anti-money laundering efforts ever mentioned

or analyzed.

Security Bank’s internal account opening documentation indicates that the BTCB account was opened in June 1998, with three

account signatories, Requena, Betts and Royer. Over the next 2

years, Security Bank provided primarily three services to BTCB: a

checking account, a ‘‘supernow account’’ which functioned as a savings account and increased the interest paid on BTCB deposits, and

access to Security Bank’s wire transfer services.

Monitoring the Account Activity. The evidence indicates that,

once the BTCB account was opened, Security Bank failed adeVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00428 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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164These transactions included the following:

—$3.8 million in deposits and $3 million in withdrawals involving the Koop fraud (see explanation of Koop fraud in the appendix);

—$2.3 million in deposits and $2 million in withdrawals involving companies or persons associated with the Cook fraud (see explanation of Cook fraud in the appendix);

—$770,000 in deposits and $10,000 in withdrawals involving Zhernakov, Chatterpaul or

Free Trade (see explanation of the Gold Chance fraud in the appendix);

—$10 million in deposits and withdrawals involving McKellar, Garner and possibly the

JVW high yield investment funds (see explanation of the JVW interpleader action in the

appendix);

—$1 million deposit by Tiong, and $30,000 in withdrawals and an attempted $200,000 withdrawal involving companies or persons associated with the KPJ Trust (see explanation

of the Tiong $1 million investment in the appendix);

—$443,000 in deposits and $320,000 in withdrawals involving companies associated with

Scott Brett (see explanation of Brett investors in the appendix); and —$600,000 in deposits and $500,000 in transfers involving Global/Vector Medical Technology (see explanation in the appendix).

165These transactions included:

—$2 million in deposits and withdrawals involving Global Investment Fund, S.A., a BTCB

affiliate;

—$1.3 million in payments to John Long or his companies Republic Products Corporation

and Templier Caisse S.A.;

—$950,000 in deposits and withdrawals involving FEC Financial Holdings;

—$239,000 in payments to Requena, BTCB’s president;

—$134,000 in payments to Mavis or Anthony Betts, relatives of George Betts, BTCB’s chief

financial officer, or to Lavern Erspan, a woman associated with Mavis Betts;

—$110,000 in payments to Mary Brazie, wife of Charles Brazie, a BTCB vice president; or

to Brazie’s apparent landlord, Clifford Shillingford;

—$105,000 in payments to Stuart K. Moss, a U.K. resident who works with BTCB; and

—$56,000 in payments to Ralph Hines, who performed work for BTCB.

quately to monitor the account activity and failed to provide effective responses to repeated signs of suspicious activity.

The international department head said that BTCB was ‘‘a very

big account’’ for Security Bank, and BTCB was its largest foreign

bank client. An analysis of the BTCB account transactions shows

that, over the course of 2 years, more than $50 million moved

through its Security Bank account. The initial deposit of $3.5 million was followed 2 days later by a wire transfer of $3.6 million

from BTCB’s account at PaineWebber’s clearing firm, Correspondent Services Corporation. Over the next two years, the account saw 16 transactions involving $1 million or more, with the

largest involving $6.5 million. Many of the transactions appear associated with matters under civil or criminal investigation or otherwise open to question.164 In addition, Security Bank account statements and wire transfer documentation show numerous transactions over two years involving persons or companies closely associated with BTCB and collectively involving more than $3.5 million.165 Although BIV personnel considered similar transactions

signs of possible ‘‘self-dealing,’’ Security Bank personnel indicated

that they had felt no concern nor asked any questions about BTCB

transactions involving affiliated parties.

When asked about BTCB’s account activity, Security Bank personnel told Minority Staff investigators that they had never witnessed evidence of actual illegal activity in the account and had not

been concerned about particular transactions. One Security Bank

employee said that they had expected a correspondent account to

show large movements of funds, particularly when, in the case of

BTCB, the bank also owned a securities firm.

Security Bank personnel also described a number of troubling incidents over the 2 years the account was open, involving law enforcement inquiries, BTCB attempts to include Security Bank’s

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166The three incidents were described in Security Bank documentation as follows:

—A 10/21/98 Security Bank memorandum stated that BTCB had telephoned to request the

bank’s approval of a $6 million CD for ‘‘The Northfield Trust,’’ which included language stating that the $6 million ‘‘will be paid by the issuing Bank or at the counters of Security

Bank.’’ The memorandum stated that Security Bank would not honor the CD and its name ‘‘must not appear’’ on the paperwork. —A 11/5/98 Security Bank memorandum stated that 2 weeks later, BTCB sought approval

of a $20 million draft CD for ‘‘Heller Securities’’ which an accompanying letter stated was ‘‘payable upon presentation at our counter as the Issuing Bank, or upon three (3) banking

days advance notice . . . at the counter of our U.S. correspondent bank, Security Bank.’’ The memorandum stated that Security Bank ‘‘will not make any commitment like that

one, as . . . discussed before.’’ Security Bank’s international department head indicated

that he considered this CD ‘‘very similar’’ to the rejected CD, and was ‘‘concerned’’ that

BTCB was not familiar with or did not understand U.S. banking rules regarding CDs.

He said that he personally spoke with Betts of BTCB and told him that the wording created a possible liability for Security Bank. He said that Betts told him that he was

‘‘wrong’’ and Security Bank would have ‘‘no responsibility’’ for the transaction. He said

Security Bank had nevertheless insisted on removing its name from the letter. —A Security Bank memorandum dated about 1 month later, on 12/10/98, stated that a draft

$1 million CD containing the same wording as the rejected CD from October, had been

faxed by Banco Solidario de Costa Rica which was attempting to verify it. The memorandum said that Security Bank informed the Costa Rican bank that it ‘‘did not accept

name on documents associated with multi-million dollar transactions, BTCB’s high yield investment program, and BTCB’s involvement with Internet gambling.

The first incident occurred in July 1998, 2 months after the account was opened, when the bank received inquiries from U.S. law

enforcement about BTCB account transactions involving William

Koop. In response, a July 27, 1998 Security Bank memorandum

shows that the bank contacted two U.S. banking agencies, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, to request information about BTCB. The

banking regulators advised Security Bank to be ‘‘cautious’’ due to

concerns that BTCB was possibly involved with ‘‘bogus

guarantee[s]’’ known as the ‘‘Grenada Guarantees,’’ but ‘‘there were

no prohibitions [on] doing business’’ with BTCB. The memorandum

noted that a Secret Service agent had also checked but found ‘‘no

adverse information’’ on BTCB.

A month later, Security Bank sent a letter dated August 27,

1998, to the Federal prosecutor handling indictments related to the

Koop fraud and included the following request:

If there comes a time that your office feels that information

should be given to us concerning British Trade and Commerce

Bank that indicates that we should not do business with British Trade and Commerce Bank, it would be appreciated if you

would so advise.

Security Bank personnel said that the prosecutor advised calling

U.S. banking regulators, but never suggested closing the BTCB account. That Security Bank made inquiries to four different government agencies shows it had concerns about BTCB and made reasonable due diligence inquiries about the bank, but received no adverse information indicating the account should be closed.

Additional troubling incidents, however, followed. Security Bank

memoranda describe three separate occasions, for example, on

which it had to insist on BTCB’s removing its name from documentation related to multi-million-dollar certificates of deposit

(‘‘CDs’’). The incidents, which took place over a two month period in late 1998, involved BTCB-prepared CDs for $1 million, $6 million and $20 million.166

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any responsibility and that the document had no validity for us.’’ The international department head said that he had, again, become worried. He said that he had thought

BTCB either was acting in good faith but did not understand U.S. banking law, or that

it was trying to take advantage of Security Bank. 167This company is also discussed in the case history on American International Bank. 168This matter is described in more detail in the appendix.

Another troubling incident, in November 1998, involved a sudden

influx of over 300 checks, primarily from U.S. residents in amounts

ranging from $100 to $10,000, which BTCB presented to Security

Bank for clearing. All of the checks were made out to LBM Accounting, a Bahamian firm that allegedly provided accounting services to international business corporations.167 Security Bank personnel indicated to BTCB that the bank ‘‘didn’t like that type of deposit,’’ and would not clear similar checks in the future. The bank

records contain no evidence that BTCB attempted to deposit those

types of checks again. Another incident, which began with a $1 million wire transfer by

an individual from Malaysia named Tiong to BTCB’s account in

September 1998, escalated after a February 1999 letter from Tiong

demanded that Security Bank return his funds.168 The letter stated

that the wire transfer documentation had instructed Security Bank

not to accept the funds unless it agreed to return them a year later.

The Tiong letter stated that, because Security Bank had not acknowledged that condition prior to accepting the $1 million, he

wanted his money back. Telephone conversations and correspondence followed involving Security Bank, BTCB and Tiong. Security

Bank sent Tiong a letter denying any liability in the matter. Security Bank’s international department head indicated that this incident had raised concern that BTCB might be, again, misusing Security Bank’s name in dealing with its clients.

Still another incident took place during the summer of 1999,

when Security Bank received a fax dated August 19, 1999, from a

company called Actrade Capital asking it to confirm a $1 million

‘‘Standby Letter of Credit.’’ The standby letter of credit by BTCB

was accompanied by a document stating that the ‘‘Confirm and

Paying Bank’’ was Security Bank. Security Bank sent a fax the

next day to Actrade Capital stating that it ‘‘has not and will not

confirm this letter of credit[.] [T]he name of Security Bank, N.A.

has been used without our authorization and we do not have or accept any liability on this matter.’’ The international department

head indicated that he personally told Betts at BTCB ‘‘don’t do this

anymore,’’ because BTCB had no credit relationship with Security

Bank and would not confirm its letters of credit. He said this incident had caused additional concern about BTCB.

Security Bank reported that it later received, on three occasions,

civil subpoenas or law enforcement inquiries about these and other

incidents involving BTCB clients.

In addition to these incidents, at some point during 1998 or 1999,

according to the international department head, BTCB asked Security Bank to consider providing them with a line of credit. He said

that Requena talked to him personally on several occasions about

obtaining credit from Security Bank. He said that he did not support extending credit, however, because of the bank’s ‘‘unusual’’ activities. He indicated, for example, that BTCB was not engaged in

the typical international trade or lending activities engaged in by

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their other foreign bank clients. He said that Requena had explained that BTCB was instead an ‘‘investment bank’’ engaged in

investing in ‘‘high yield paper.’’ He said that Requena had indicated BTCB would, for example, invest client funds, earn a 20% return, pay 15% to their clients, and keep 5% for the bank. Security

Bank’s international department head said that he had ‘‘never

heard’’ of investments with such high rates of return, and did not

understand ‘‘how it is done.’’ He said that BTCB was also involved

in unusually large credit transactions—involving $1 million, $6 million, even $20 million—that Security Bank itself did not have

the capital to handle. He said, ‘‘I couldn’t understand their activities.’’ He said that, because he could not understand BTCB’s high

yield investment activities or its multi-million-dollar letters of credit, he had declined to recommend extending BTCB a credit relationship.

The international department head stated, however, that while

he did not support extending BTCB credit, he did not support ending the relationship either. He said that, while some of the BTCB

transactions were worrying, Security Bank had a ‘‘good relation’’ with BTCB, the BTCB account had ‘‘good balances,’’ and the transactions were ones that Security Bank felt it had ‘‘under control.’’ He said that the inquiries made about the bank with U.S. banking

regulators and the Secret Service had also reassured them about

BTCB, so the account was allowed to continue into 2000.

Anti-Money Laundering Controls and Oversight. Discussions with Security Bank’s anti-money laundering personnel and

review of its anti-money laundering manual disclosed a number of

deficiencies in Security Bank’s written materials and day-to-day

monitoring of accounts for suspicious activity, which were illustrated by the bank’s failure to conduct adequate monitoring of the

BTCB account.

One key deficiency was that Security Bank’s Bank Secrecy Act

(‘‘BSA’’) Manual did not direct either the BSA officer for the bank

or individual account officers to monitor accounts for suspicious

activity. While the BSA Manual provided detailed guidance and

procedures for identifying and reporting cash transactions, it contained virtually no guidance or procedures for identifying and reporting suspicious activity. No provisions directed bank employees

to report suspicious activity to the BSA officer. No provisions required the BSA officer to examine bank transactions for suspicious

activity. No provisions discussed the filing of Suspicious Activity

Reports. No provisions even mentioned correspondent banking.

When Security Bank’s BSA officer was asked about his antimoney laundering duties, he did not mention monitoring accounts

or transactions for suspicious activity. When asked whether he had

ever reviewed the BTCB account, he indicated that he had not because the account had rarely involved cash transactions. He indicated that it was his responsibility to monitor cash transactions,

while it was the responsibility of another Security Bank official to

monitor wire transfer and other non-cash transactions. The Security Bank official responsible for monitoring non-cash transactions

had not reviewed the BTCB account either. He explained that, because bank policy prohibited wire transactions by non-customers,

and all customers underwent a due diligence review prior to openVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00432 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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169The Security Bank monthly account statements also contained much less wire transfer information than other statements reviewed in the investigation. A bank official explained that,

in 1999, due to increased wire traffic, the bank had purchased a new software system which

identified individual wire transfers primarily by providing a unique identification number for

each transaction. For example, an outgoing wire transfer might be designated on the monthly

account statement as: ‘‘OT906020010,’’ without any origination or beneficiary information. An

incoming wire transfer might be designated ‘‘IN905060020.’’ He said that this software had been

selected because, among other features, it enabled the bank’s electronic database to process wire

transfers more quickly, in part by making more rapid OFAC checks. When the new system was

implemented in May 2000, however, it also eliminated the names of wire transfer originators

and beneficiaries from the monthly account statements, significantly increasing the difficulty of

money laundering analysis. The analysis was more difficult because instead of analyzing wire

traffic simply by looking at an account’s monthly statement, a second set of documents—the

original wire transfer documentation with origination and beneficiary information—would have

to be collected and compared to the information in the account statement. Making the work even

more difficult was the absence of any Security Bank software capable of analyzing wire traffic

data for patterns or unusual transactions. These obstacles to effective anti-money laundering

oversight continue today.

ing an account, bank policy did not require reviewing wire transfers for suspicious activity, beyond an automatic OFAC screening

when a wire transfer was first recorded.169

In short, Security Bank’s policies failed to require any monitoring

of wire transfers for suspicious activity and, even if it had required

this monitoring, its software made anti-money laundering analysis

difficult. The result was that no Security Bank employee, in 2

years, had reviewed or analyzed the nearly $50 million in incoming

and outgoing wire transfers in BTCB’s account.

But even if Security Bank had adequate policies, procedures and

automated systems in place and its BSA officer had reviewed the

BTCB account, it is unclear whether the bank would have identified or reported any suspicious activity. In the words of one Security Bank official, correspondent bank accounts were expected to

show ‘‘lots of money going in and out.’’ The bank had no procedures

calling for heightened scrutiny of correspondent accounts, offshore

banks or transactions in bank secrecy jurisdictions.

Closing the Account. Security Bank personnel said the incident that ‘‘spilled the cup’’ with respect to the BTCB account and

led to its closure occurred in May 2000, when it discovered BTCB

was involving Security Bank in Internet gambling. One Security

Bank employee explained that the bank simply did not want to be

associated with gambling; another said that all of the other BTCB

incidents causing concern had involved single transactions which

Security Bank had felt could be controlled, but Internet gambling

involved multiple transactions by multiple parties that were beyond its control. In a letter dated May 16, 2000, Security Bank informed BTCB that it objected to use of its name in gambling

websites and advised that the BTCB account would be closed

‘‘within 30 days of this communication.’’ The account was closed, in

fact, about 60 days later in July 2000.

Security Bank personnel indicated that, overall, Security Bank

had been careful not to go along with questionable transactions requested by BTCB and had closed the account once Internet gambling problems were uncovered. The personnel stressed that they

felt they had never seen any direct evidence of illegal activity by

the bank and were not convinced that the bank had been engaged

in any wrongdoing. One pointed out that when all of the questionable events involving BTCB were discussed in the same interview,

they conveyed a much stronger impression than when the account

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was open and each problem occurred and was resolved weeks

apart. The international department head said that he felt that Security Bank could not be faulted in its handling of the BTCB account except for ‘‘maybe delaying the closing of the account.’’

(c) First Union National Bank

First Union National Bank is a major U.S. bank, with over 72,000 employees, $250 billion in assets, and one of the larger correspondent banking portfolios in the United States. Although First

Union’s correspondent banking department rejected a BTCB request for a correspondent relationship, BTCB managed to open a

money market account with First Union’s securities affiliate and

used it as if it were a correspondent account for almost 18 months,

from September 1998 until February 2000. During that period,

BTCB moved more than $18 million through the account. First

Union closed the account due to concerns about suspicious activity

and to stop BTCB from claiming a correspondent relationship. It

subsequently discovered and closed several other First Union accounts associated with BTCB.

Interviews were conducted with First Union employees involved

in the opening, administration and closing of the BTCB account

and in First Union’s anti-money laundering program. Documentation in First Union files, account statements, and other materials

and information were collected and reviewed.

Due Diligence Prior to Opening the Account. The evidence

indicates that, in September 1998, BTCB opened a money market

account with First Union’s securities affiliate without any due diligence review. BTCB then requested a formal correspondent relationship, but was turned down by First Union due to negative information about the bank.

According to First Union interviews and documentation, on September 17, 1998, First Union Brokerage Services, Inc. accepted a

telephone call from BTCB and immediately opened a money market account for the bank, called a ‘‘CAP’’ account. First Union Brokerage Services, Inc., now First Union Securities, Inc., is a subsidiary of First Union Corporation and closely affiliated with First

Union National Bank. It is a fully licensed and regulated brokerdealer.

A licensed broker at a First Union Brokerage Services ‘‘call center’’ opened the BTCB account. First Union indicated during interviews that rules in place at the time prohibited opening a CAP account for a bank, but those rules had not been spelled out and the

broker was unaware of them. First Union said that research has

since determined that no bank, other than BTCB, has ever opened

a First Union CAP account, and its rules have since been clarified

to prevent any bank from opening a CAP account in the future.

First Union said that the money market account was immediately opened, without any due diligence, on the understanding

that the accountholder would subsequently provide a limited

amount of account opening and corporate documentation. First

Union indicated during interviews that the broker acted in accordance with accepted practice in 1998, although its money market account opening procedures have since been changed. First Union

said that its brokers must now complete an initial due diligence

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checklist over the telephone prior to opening a CAP account. It said

that foreign nationals or nonresident aliens are no longer permitted

to open CAP accounts over the telephone; their inquiries are instead directed to First Union’s private bank. It said that, if a U.S.

citizen or resident alien provided satisfactory oral information in

response to the due diligence telephone checklist, a First Union

broker could authorize the immediate opening of a money market

account during the telephone conversation, subject to a subsequent

review by compliance personnel and senior securities personnel.

It is unclear who from BTCB made the call to First Union’s securities affiliate. First Union’s ‘‘New Commercial CAP Account Application’’ lists two contacts for the account: Ralph Hines and George

Betts. The application also provides a U.S. address for the account:

‘‘British Trade and Commerce Bank . . . c/o First Equity Group of

[Florida], 444 Brickell Avenue.’’ Later bank statements list the

same 444 Brickell Avenue address, but send the statements in care

of ‘‘FEC Financial Holdings, Inc.’’ The CAP account application is

signed by Betts.

Within a few months of opening the CAP account, BTCB asked

First Union to issue a letter of credit to secure a BTCB credit card

account with Mastercard. BTCB was initially directed to First

Union’s domestic corporate banking personnel. However, when told

that BTCB was ‘‘chartered in Dominica and owned by Texans,’’ a

domestic corporate banker directed BTCB to First Union’s international division. First Union records indicate that BTCB contacted

three different international bankers at different First Union offices over several months in late 1998 and early 1999, in an attempt to open a formal correspondent relationship, but First Union

personnel declined to issue a letter of credit or otherwise establish

a correspondent relationship with BTCB.

First Union interviews indicate that its most detailed due diligence review of BTCB was conducted in late 1998, after Hines had

contacted a Miami office that formerly belonged to Corestates Financial Corporation, a U.S. bank which had been purchased by

First Union. BTCB submitted a large packet of information about

its ownership, lines of business and financial status, and offered to

deposit $15 million with the bank. In response, several First Union

employees in the international division made inquiries about the

bank. One First Union correspondent banker indicated in an interview that he asked three other U.S. banks about BTCB which, by

then, had been in operation for over a year. The First Union correspondent banker indicated that he had received uniformly negative reports about BTCB, including statements that the bank was

‘‘not reputable’’ and First Union should ‘‘stay away.’’

The First Union correspondent banker also reviewed the materials provided by BTCB. He said that BTCB had presented itself

as having strong ties to the United States, stressing its ownership

of First Equity Corporation of Florida, but he was not familiar with

that securities firm. He indicated that BTCB’s unaudited financial

statement as of June 1998, had raised ‘‘red flags.’’ He said it had

indicated, unlike most banks, that BTCB was involved with investment, rather than lending activities. He noted that BTCB had

claimed $400 million in ‘‘securities held for investment and financing’’ and then listed three ‘‘unusual’’ securities. The first was $130

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170Transactions of note included a $175,000 deposit by BTCB in November 1998, in connection with its requests seeking a letter of credit and correspondent relationship with First Union.

In December 1998, BTCB deposited 200 small checks and increased the closing balance to

$252,000. January saw 185 small deposits, BTCB’s withdrawal of the $175,000, and a closing balance of $187,000. February saw $279,000 in small deposits, and a closing balance of

million in ‘‘Government of Grenada Guarantees,’’ which he said he

had ‘‘never heard of’ and could not verify as having the value indicated. The second was $76 million in ‘‘Bolivian Municipal Bonds.’’

He said that Bolivian bonds represented a ‘‘very small market,’’

and the large investment figure claimed in the financial statement

did not ‘‘make sense’’ to him. He also questioned the value of the

third investment, $140 million in ‘‘Russian Government Guarantees.’’ He said that, together, the listed securities were ‘‘beyond

credibility.’’

He said the statement’s claim that BTCB had $9 million in retained earnings after just 9 months of operation was also ‘‘unusual’’

and ‘‘not credible.’’ He said that Note 8’s claim that BTCB had

earned $10 million from ‘‘primarily the financing of bonds from the

Government of Venezuela’’ was also ‘‘not feasible’’ since Venezuela

was then experiencing economic hardship. He also questioned the

$1 million Treasury stock entry, given BTCB’s brief existence. He

said that, overall, the financial statement was ‘‘not credible.’’ He

said that he did not question BTCB about its financial statement,

however, since the negative reports on the bank’s reputation had

already led him to recommend against establishing a correspondent

relationship.

Although BTCB’s request for a correspondent relationship was

rejected, BTCB began to use the CAP account at First Union’s securities affiliate as if it were a correspondent account and began to

claim a correspondent relationship with First Union. First Union

personnel were adamant in rejecting BTCB’s claim of a First Union

correspondent relationship, calling that characterization of the relationship between the two banks ‘‘unfair’’ and ‘‘inaccurate.’’

Monitoring the CAP Account Activity. The evidence indicates

that, about 6 months after BTCB opened the CAP account, First

Union began receiving reports of unusual account activity, suspicious letter of credit transactions, and inaccurate claims by BTCB

that it had a correspondent relationship with First Union. While

First Union quickly detected and analyzed the transactions in the

BTCB account, it was slow to take decisive action in response.

After first asking BTCB to voluntarily close its account in May

1999, First Union unilaterally closed it 9 months later, in February

2000.

The CAP account opened by BTCB functioned in the same way

as a checking account. BTCB made deposits and withdrawals,

using wire transfers, deposit slips and checks drawn on the account. First Union paid interest on the deposits and imposed

charges for wire transfers, overdrafts and other account activity.

First Union sent BTCB monthly account statements. First Union

also opened a brokerage account for BTCB, although this account

was never used. BTCB used the CAP solely to move funds; it never

used the account to purchase any securities.

BTCB opened the CAP account on September 17, 1998, with

$10,000. The account saw little activity for about 6 months.170 The

427

$467,000. March saw a $400,000 withdrawal by BTCB which sent the funds to its account at

Security Bank. The closing balance in March was only $16,000. 171These transactions included the following:

—$2 million in withdrawals from April to October 1999, involving companies or persons associated with IBCL and the Cook fraud (see explanation of the Cook fraud in the appendix); —-$6 million deposit on 4/26/99, involving McKellar, Garner and possibly the JVW high

yield investment funds, followed by 101 outgoing wire transfers totaling $5.7 million, including $1 million to BTCB’s account at Correspondent Services Corporation and $1 million to BTCB’s account at Security Bank (see explanation of the $10 million CD interpleader action in the appendix);

—$1 million deposit on 10/19/99 by Garner, possibly involving the JVW investment funds,

followed by multiple outgoing wire transfers to bank accounts around the world;

—$3 million Gold Chance deposit on 12/15/99, followed by multiple wire transfers to bank

accounts around the world (see explanation of the Gold Chance fraud in the appendix);

—$2.1 million in transfers from July 1999 to January 2000 involving Orphan Advocates,

China Fund for the Handicapped, and ‘‘Corporation Project of the Rehabilitation of Disable Children’’ (see explanation of the Gold Chance fraud in the appendix);

—$185,000 in transfers in November 1999 involving the KPJ Trust (see explanation of the

$1 million investment involving KPJ Trust in the appendix);

—$220,000 transfer involving Aurora Investments S.A., a company associated with Scoff

Brett, a part owner of BTCB (see explanation of Brett investors in appendix); and

—$300,000 in deposits involving Global/Vector Medical Technology (see explanation in the

appendix). 172The $6 million deposit is associated with the JVW interpleader action and is described in

more detail in the appendix.

next 9 months saw a significant increase in account activity, as

millions of dollars began moving through the CAP account. An

analysis of the BTCB account transactions shows that, overall during its almost 18 months of existence, about $18 million moved

through the CAP account. Nine transactions involved $1 million or

more, with the largest involving $6 million. Many of the transactions appear associated with matters under civil or criminal investigation or otherwise open to question.171

April 1999 was the first month of increased account activity, when a $6 million deposit was made from a First Union attorney

account belonging to Robert Garner.172 This $6 million deposit was followed by almost $4 million in withdrawals. The April closing balance was $2.3 million, more than five times the previous largest

balance in the account.

On April 15, 1999, a First Union representative in Brazil sent an

email to First Union’s international division describing a customer

engaged in negotiating a credit arrangement with BTCB which

claimed to ‘‘have [an] account with First Union National Bank.’’ In

response, another First Union employee sent an email stating that

a corporate customer in Montreal had reported ‘‘expecting to re- ceive a $30 [million] standby letter of credit’’ from BTCB who had

listed First Union ‘‘as a reference.’’ These and other First Union

emails in April 1999 expressed concerns about BTCB, Dominica,

and whether the CAP account should be closed. One stated: ‘‘Dominica is about 20 sq. miles, with mountainous territory. Their business is banana exports. . . . Very dirty offshore banking center.’’ Another said, ‘‘I think if we don’t feel good about the client, we absolutely must close the account.’’ First Union’s international division asked its anti-money laundering personnel to research the activity in the CAP account.

On May 3, 1999, a First Union employee circulated an email

about the BTCB account stating the following:

We have a multitude of problems here:

(1) International refused to open this acct originally for cause.

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173For more information, see the explanation of the Gold Chance fraud in the appendix.

(2) Customer established an acct via telephone thru CAP in

Sept. of 98.

(3) On 4/26/99, $6MM rolled into the account, via wire, and

half of that rolled out THE SAME DAY, via wire, and went all

over the place. . . .

(4) Customer is indicating that they are a correspondent of

First Union (they’re not); we need a cease and desist letter and

we also need to close this account.

[Emphasis in original text.]

On May 5, another First Union employee forwarded a copy of a

BTCB letter discussing a $6 million letter of credit. The letter by

BTCB, dated April 13, 1999, stated that the bank was ‘‘ready, willing and able to issue a Standby Letter of Credit in the favor of US

C&R HOLDINGS INC. for the amount of . . . $6,000,000.’’ [Emphasis in original text.] An attached 1998 financial statement for

BTCB referenced deposits of over $800,000 at First Union, which

apparently led to First Union’s being asked to confirm the information.

On May 13, 1999, First Union sent BTCB a letter stating that,

in a ‘‘written communication with third parties,’’ BTCB had ‘‘implied that First Union will somehow act in concert with [BTCB] in

a letter of credit arrangement. You are directed to immediately

cease and desist from such unauthorized use of First Union National Bank’s name, and from any express or implied indication

that you have a correspondent or any other sort of relationship

with First Union other than as a depositor.’’ The letter did not, however, ask BTCB to close the CAP account.

Instead, explained a First Union correspondent banker in an interview, the decision had been made to make a verbal request to

BTCB to close the CAP account. He said that he personally made

this request in a May telephone conversation with Ralph Hines

who responded with a ‘‘belligerent tone.’’ He said they then waited

to see whether BTCB would close the CAP account. When asked

why First Union did not put the request to close the account in

writing or unilaterally close it, the correspondent banker indicated

that the bank was worried that it did not have sufficient proof of

wrongdoing and BTCB might sue them, so they had decided to try

to encourage BTCB to close the account on its own.

BTCB chose not to close the account. Instead, it used the next

4 months to move over $5 million through the CAP account, including a $900,000 wire transfer to International Business Consultants,

Ltd., a company associated with the Cook fraud, and a $3 million

deposit by the China Fund for the Handicapped for BTCB’s high

yield investment program.173 On August 27, 1999, a First Union

representative in Argentina sent an email to the international division indicating that BankBoston had called to confirm a statement

by BTCB that it was a correspondent of First Union. First Union’s

international division replied in an email of the same date:

They are not, but they continue to claim that they have a correspondent banking relationship with First Union. We have

asked them to close an unauthorized CAP account that they

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174For more information, see the appendix, in which the $1 million Garner transfer is dis- cussed in connection with the $10 million CD interpleader action and the $300,000 deposit is

discussed in connection with Vector Medical Technology matter.

opened last year. This is their only claim to a relationship with

First Union. We have sent a legal advice to the bank’s President, requesting that they stop promoting false facts, and to refrain from using First Union’s name again. They are not a correspondent!

This email was ‘‘broadcast’’ to all First Union international offices as a warning about BTCB. Despite the email’s exasperated

tone, First Union took no further action to close BTCB’s CAP account.

The next 4 months saw another $5 million move through the CAP account, including a $1 million deposit from the Robert Garner account and $300,000 from the Vector Medical Technology account.174 December witnessed the $3 million Gold Chance deposit, followed by $3 million in wire transfers to bank accounts around

the world.

Closing the BTCB Account. In late December 1999, BTCB attempted to withdraw $1 million on an account balance of about

$733,000. First Union refused to approve the overdraft and another

round of internal emails raised questions about the account, including the risk of monetary loss to First Union. On December 28,

1999, the First Union correspondent banker then in charge of the

Americas division decided the time had come for the bank to unilaterally close the account. He telephoned BTCB and informed it

that the account was going to be closed and then sent an email to

the legal division stating the following:

URGENT!! This account has significant wire and cash letter

activity that is suspicious. We need to close account! I just

spoke to the . . . accounts Manager at BT&C and I requested

for the bank to close the account at once. He requested for me

to send a letter to the bank’s President. . . . This account was

opened by the CAP department without International’s authorization, and without any compliance requirements. I have reported this problem to Loss Prevention for over 1 year. It has

turned out to be a headache for the bank, as this entity boasts

to be a correspondent of First Union National Bank. . . . I

need a letter as soon as possible.

In an interview, the First Union correspondent banker said that

later the same day, he received a telephone call from Betts in Florida asking for the account to be kept open, at least to the end of

the year, to allow completion of ongoing transactions. On December

29, 1999, First Union sent a letter to BTCB stating that the CAP

account would allow fund transfers for 10 days and close in 30

days. No significant account transactions took place after that letter, aside from a final $1 million transfer to Orphan Advocates

LLC. First Union notified law enforcement about BTCB’s actions,

and, on February 7, 2000, First Union closed the CAP account.

But the BTCB story was not over. For 6 months, First Union

continued to receive reports of suspicious activity and requests to

confirm a First Union correspondent relationship. On January 13,

2000, for example, Huntington National Bank in Cleveland asked

430

First Union to confirm a BTCB letter of credit for $30,000. First

Union personnel summed up their reaction with one word: ‘‘unbelievable.’’ First Union sent word that it had no correspondent relationship with BTCB and would not confirm a letter of credit.

On May 1, 2000, First Union received two telexes from BTCB

about a $100 million transaction. The two telexes, which contained

the same message, began as follows:

Please advise First Union National Bank Jacksonville, Florida

as follows. We British Trade and Commerce Bank confirm with

full responsibility the authenticity of the issuance of promissory notes numbers 1–10 with a nominal value of ten million

dollars each to in total equals 100 million United States dollars

in favor of St. David’s Investment Trust and Bank Co., Ltd.

First Union personnel said their reaction to this $100 million

telex was twofold: ‘‘unbelievable’’ and ‘‘this is fraud.’’

On May 4, 2000, First Union sent a second ‘‘broadcast’’ warning

to all of its international personnel about BTCB. The email stated,

‘‘Please be advised that, under no circumstances, is business to

be conducted with [BTCB] without first contacting me.’’ [Emphasis

in original text.]

On May 8, 2000, First Union sent BTCB a letter stating:

[W]e have become aware of a Brokerage account . . . in the

name of [BTCB]. We have also received two unauthenticated

SWIFT messages from [BTCB] dated May 1, 2000 confirming

the issuance of ten promissory notes in the amount of ten million dollars each. . . . Please be advised that it is our policy

to work and maintain accounts only with foreign banking institutions that meet our internal compliance criteria and that fit

our line of business criteria. [T]he Bank has ascertained that

your company does not fit our requirements. . . . [E]ffective

immediately, your above referenced account has been closed.

Please refrain from attempting to use this account and from

sending First Union National Bank or any subsidiaries thereof

transaction related information or requests in the future. . . .

[A]ny attempt to use First Union’s services or its name will invite First Union to consider other remedies it may have.

First Union reported the telexes to law enforcement, and placed

BTCB on an internal ‘‘hotlist’’ to prevent BTCB from opening a

new account.

In July 2000, First Union received an email indicating that a

Costa Rican bank was discussing a standby letter of credit with

BTCB who was, again, claiming a correspondent relationship with

First Union. First Union also learned that BTCB had listed First

Union as one of its correspondent banks in the widely-used Polk directory of correspondent banking relationships. One First Union

correspondent banker wrote: ‘‘Too late . . . it is already in the

Polks directory!! We are one of their correspondents listed . . . unbelievable.’’ But another First Union employee responded, ‘‘It’s

never [too] late! . . . Polk’s is now going through the update process and has informed us that they will honor our written request

to remove our name from BTC’s entry if BTC includes us.’’ First

Union sent a letter regarding the Polks directory on July 21, 2000.

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175See chart entitled, ‘‘BTCB Related Accounts at First Union National Bank.’’ These accounts

included:

—the Robert Garner attorney account, which was opened on 1/20/98, had only a few transactions over 3 years, almost all of which appeared to involve BTCB, and was scheduled

for closure in October 2000;

—an FEC Financial Holdings, Inc. account, which was opened over the telephone, operated

for about 19 months from 11/12/98 until 6/30/00, and appeared to involve primarily BTCB

related transactions;

—a BTC Financial Services account, which was opened on 11/2/99, appeared to involve primarily BTCB related transactions, and was scheduled for closure in October 2000; and

—numerous accounts involving Global/Vector Medical Technology, Inc., described in the appendix.

First Union personnel told Minority Staff investigators that the

bank’s experience with BTCB was an eye-opening lesson about how

a foreign bank can misuse a U.S. correspondent relationship. They

indicated that they felt BTCB had repeatedly mischaracterized its

relationship with First Union, had repeatedly misused First

Union’s name to lend credibility to questionable transactions, and

had moved suspect funds through First Union accounts.

Other BTCB-Related Accounts at First Union. In interviews,

First Union personnel indicated that they had since learned of

other First Union accounts with ties to BTCB.175 They indicated

that they had closed or were in the process of closing these accounts. First Union also learned from Minority Staff investigators

that its correspondent account with Banque Francaise Commerciale (‘‘BFC’’) in Dominica, had functioned as a conduit for

BTCB banking transactions for over 2 years. An analysis of BFC

monthly account statements showed transactions linked to BTCB

from July 1997 until May 1999. First Union subsequently decided

to close the BFC account as well.

(d) Other U.S. Banks

In addition to the bank accounts just examined, BTCB appears

to have had access to a number of other U.S. based banks, including past or present accounts at Banco International de Costa Rica

in Miami, Pacific National Bank in Miami, U.S. Bank, Bank of

Nova Scotia in New York, the Suisse Security Bank and Trust account at Citibank, and the St. Kitts-Nevis-Antilles National Bank

account at Bank of America. It may also be functioning through

bank accounts opened by First Equity Corporation of Florida, FEC

Financial Holdings, Inc., BTC Financial Services or other related

entities. It has also carried on business through bank accounts belonging to securities firms, including PaineWebber’s Correspondent

Services Corporation account at the Bank of New York.

B. THE ISSUES

When it began operations in 1997, BTCB was an unknown, offshore bank in a small bank secrecy jurisdiction known for weak

banking and anti-money laundering controls. BTCB was nevertheless able, within 3 years, to open accounts at several U.S. banks

and move more than $85 million through the three accounts examined in this investigation. Evidence indicates that a significant portion of these funds involved illicit proceeds from financial frauds or

Internet gambling. While the U.S. banks examined in this investigation closed their BTCB accounts in 7 months to 2 years, BTCB

was able to replace each closed account with a new one, and conVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00441 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
432

tinues to operate in the United States today. BTCB’s apparent case

in opening and utilizing U.S. bank accounts demonstrates how vulnerable the U.S. international correspondent banking system is to

a rogue foreign bank intent on infiltrating the U.S. financial system.

Lack of Due Diligence by U.S. Banks

The BTCB case history illustrates problems in the due diligence

efforts at each of the three U.S. banks examined in this investigation.

When asked to open an account, all three of the U.S. banks

worked to gather information about BTCB’s ownership, finances

and business activities. The efforts of BIV and Security Bank were

made more difficult by the fact that BTCB was a new bank with

a limited track record, while First Union was able to draw on reactions to the bank after more than a year of operation. Despite their

good intent and initial work, the due diligence efforts of all three

are open to criticism. BIV relaxed its requirements for audited financial statements and bank references, and opened the BTCB account prior to compiling a complete file. Security Bank failed to

conduct even minimal research into Dominica, waived its usual onsite visit to the bank, and failed to analyze BTCB’s financial statement. First Union obtained immediate negative information on

BTCB and decided against establishing a correspondent relationship, but failed to close the CAP account which BTCB then used

as if it were a correspondent account. None of the three banks appear to have asked BTCB anything about BTCB’s own anti-money

laundering efforts.

Once BTCB began using its U.S. accounts, new warning signals

emerged. All three banks witnessed sudden surges in account activity, involving millions of dollars. All three received telexes or faxes

about BTCB’s participation in questionable credit transactions involving $1 million, $6 million, $20 million, even $100 million.

BTCB tried to pressure BIV into signing a proof of funds letter containing unusual language. BTCB tried to convince Security Bank

that its high yield investment program could earn returns of 20%.

BTCB ignored First Union’s demands to stop claiming a correspondent relationship.

The U.S. banks’ response to these warning signs was indecisive

and ineffective. The BIV account officer indicated that it never occurred to her that BTCB might be engaged in wrongdoing. She assumed the sudden increase in account activity was the normal

growth of a new bank. She viewed in the best possible light BTCB’s

letter requests, telex difficulties, and involvement in letters of

guarantee for $100 million. She accepted BTCB’s explanation that

the repeated cash payments to its personnel involved salary payments. Neither she nor any of her superiors engaged in heightened

scrutiny of an offshore bank that, despite its brief existence, remote

location and limited assets, was moving millions of dollars through

its BIV account. It was only after the BIV team from New York arrived that the BTCB account was reviewed with a skeptical eye,

and signs of self-dealing and possible money laundering were followed by the account’s immediate closure.

433

Security Bank personnel did not view BTCB through quite the

same rose-tinted glasses as the BIV account officer, but they too

gave BTCB the benefit of repeated doubts. Security Bank’s international department head indicated that the bank repeatedly had

concerns about BTCBs conduct, but felt they never witnessed actual wrongdoing by the bank. Security Bank knew about BTCB’s

high yield investment program, its lack of lending or trade activities typical of foreign banks, and its involvement in unusual, multimillion-dollar letter of credit transactions. It was aware that at

least one financial fraud, committed by Koop, had utilized BTCB’s

account, and another depositor was fighting BTCB for the return

of $1 million. Security Bank had itself repeatedly warned BTCB

against wrongfully involving it in credit transactions with third

parties. But Security Bank personnel showed no skepticism or reticence in providing services to an offshore bank in a remote location.

The international department head said that he thought he had

stopped BTCB transactions misusing Security Bank’s name, and

had protected the bank against loss by refusing to extend BTCB

any credit. The bank’s anti-money laundering personnel had assumed a correspondent account would show multi-million-dollar

movements of funds and made no attempt to understand the transactions, clients or origins of the funds. The only reason Security

Bank closed the BTCB account was because its name began appearing on Internet gambling websites and it did not want to be

associated with gambling.

First Union initially displayed a much tougher attitude than BIV

or Security Bank toward BTCB. Its initial inquiries produced an

immediate negative impression of BTCB, and First Union refused

to establish a correspondent relationship. Nevertheless, First Union

did not initially recommend or even seem to consider closingBTCB’s CAP account. Later, when it began to receive information

that BTCB was falsely claiming a correspondent relationship with

First Union, misusing the bank’s name in questionable transactions, and moving millions of dollars in suspect funds through its

money market account, First Union responded with a weak verbal

request that BTCB voluntarily close the account. When BTCB refused, First Union took another 9 months, replete with troubling

incidents and additional millions of dollars, before it unilaterally

closed the CAP account. The incident that finally produced decisive

action was an attempted overdraft by BTCB that risked monetary

loss to First Union.

Each of the U.S. banks examined in this investigation provided

BTCB with access to the U.S. banking system. BIV opened the door

to BTCB’s U.S. activities, not only by providing BTCBs first correspondent relationship, but also by providing letters of reference

for the bank, including the undated general letter relied upon, in

part, by Security Bank. Security Bank personnel appeared oblivious to common signs of financial fraud, such as high yield investment programs offering double digit returns, standby letters of

credit involving millions of dollars, and a small foreign bank with

no lending or international trade portfolio but alleged access to

tens of millions of dollars. First Union provided a major boost to

BTCB’s U.S. profile by allowing it to keep a money market account

for 2 years despite mounting evidence of misconduct—a decision of

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increasing significance in U.S. financial circles, given the consolidation of the U.S. banking and securities industries and the uneven

anti-money laundering controls being applied to securities accounts.

None of the three U.S. banks appeared sufficiently aware of or

alarmed by the potential damage that a single rogue foreign bank

with a U.S. bank account could cause in the United States. The potential damage is illustrated by the facts of the BTCB case history,

with all its suspect transactions, client complaints, correspondent

abuses, law enforcement investigations, and prosecutions. Here, a

single foreign bank accepted $8 million in proceeds from the Koop

and Cook frauds, facilitating the swindling of hundreds of U.S. investors, with their resulting criminal prosecutions and civil recovery proceedings. It accepted $3 million in Gold Chance fraud proceeds leading to civil litigation in Canada and related discovery

proceedings in the United States. It issued a $10 million bearershare CD, resulting in lengthy civil litigation in New York, and

took $1 million from a Malaysian investor who is still trying to recover his money through complaints to officials in Dominica and

the United States. These and other BTCB-related investigations

and proceedings continue to clog U.S. courts and consume U.S. law

enforcement resources, while tarnishing the U.S. banking system

with questions about its safety, integrity and money laundering

risks. None of it would have happened if the U.S. banks had not

opened their doors and their dollar accounts to BTCB, an offshore

bank in a suspect jurisdiction.

Difficulties in Seizing Illicit Funds

The BTCB case history also illustrates the legal difficulties involved in seizing funds related to financial frauds from a U.S. correspondent account. The Koop, Cook, and Gold Chance proceedings

involve fraud victims seeking the recovery of millions of dollars. In

proceeding after proceeding, BTCB has contested jurisdiction and

impeded discovery.

In Schmidt v. Koop, for example, a defrauded investor filed civil

suit in a Federal court in New Jersey to recover $2.5 million he

wire transferred to BTCB. BTCB claimed that the U.S. court had

no jurisdiction over it and responded to discovery requests with

claims that it had no accounts for Koop or his company. It was only

after Koop pleaded guilty to criminal charges and sent BTCB written authorization to disclose information about his accounts that

BTCB admitted the existence of five Koop-related accounts and

produced limited documents for them, in exchange for being dismissed from the suit. It has not returned any funds to the defrauded investor, even though it may have $1.3 million in Koop-related funds. In the Gold Chance civil suit, the fraud victims have

named BTCB a defendant and are actively seeking return of their

funds. BTCB is contesting jurisdiction and has refused to return

the disputed $3 million. In the Cook case, a receiver appointed by

the SEC to recover funds for defrauded investors was never told by

BTCB that BTCB had invested funds for some of the fraud victims

and may still retain possession of some of the money. The SEC receiver is still mulling his legal options for compelling discovery and

seizing funds from this bank’s U.S. accounts.

435

176See Chapter V (G) of this report.

BTCB is contesting jurisdiction in the United States, despite its

U.S. ownership, affiliation with U.S. firms, numerous U.S. clients

and multiple U.S. accounts. It does not volunteer any information

about its U.S. business activities, and litigants are not having an

easy time investigating or proving them. Should jurisdiction be established, BTCB could then draw upon a body of U.S. law giving

it added protections against seizing funds from its U.S. accounts.176

BTCB’s conduct in the legal proceedings suggests that it is well

aware of the legal protections afforded to U.S. correspondent accounts and the difficulties involved in obtaining information or

funds from an offshore bank in a bank secrecy jurisdiction.

BTCB MONTHLY ACCOUNT ACTIVITY AT BANCO INDUSTRIAL

DE VENEZUELA (MIAMI OFFICE)

October 1997–June 1998

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

October 1997 $0 $1,005,000 $25,020 $980,195

November 1997 $980,195 $0 $25,020 $958,052

December 1997 $958,052 $0 $953,473 $5,860

January 1998 $5,860 $49,784 $9,413 $46,231

February 1998 $46,231 $1,224,688 $820,886 $99,980

March 1998 $99,980 $2,294,532 $181,742 $2,565,499

April 1998 $2,565,499 $4,573,517 $474,375 $6,679,330

May 1998 $6,679,330 $7,878,012 $11,095,470 $3,498,560

June 1998 $3,498,560 $0 $3,498,560 $0

TOTAL: $17,025,533 $17,061,441

Prepared by U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, November 2000.

436

BTCB MONTHLY ACCOUNT ACTIVITY AT SECURITY BANK N.A.

June 1998–March 2000

E-Z Checking–01 and Supernow Account–02 177

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

June 1998 $0 $7,531,481 $2,843,531 $4,702,514

July 1998 $4,702,514 $1,959,222 $4,311,023 $2,349,448

August 1998 $2,349,448 $2,706,444 $4,076,552 $983,035

September 1998 $983,035 $3,503,107 $1,362,231 $3,128,526

October 1998 $3,128,526 $9,104,555 178 $11,525,055 $199,781

November 1998 $199,781 $2,471,456 $1,142,509 $1,513,716

December 1998 $1,513,716 $1,256,985 $2,436,698 $334,430

January 1999 $334,430 $932,660 $1,075,860 $139,939

February 1999 $139,939 $3,927,591 $3,346,225 $722,161

March 1999 $722,161 $740,980 $1,914,233 $41,262

April 1999 $41,262 $1,776,821 $698,192 $1,119,728

May 1999 $1,119,728 $543,072 $0 $1,726,521

June 1999 $1,726,521 $1,346,212 179 $2,603,353 $447,978

July 1999 $447,978 $943,969 $885,209 $485,338

August 1999 $485,338 $1,276,015 $1,497,505 $275,793

September 1999 $275,793 $1,591,406 $1,764,662 $100,866

October 1999 $100,866 $1,233,542 $718,733 $617,388

November 1999 $617,388 $1,175,632 $1,326,191 $236,179

December 1999 $236,179 $2,285,069 $1,907,943 $387,808

January 2000 $387,808 $1,546,739 $1,460,796 $464,204

February 2000 $464,204 $1,679,586 180 $2,187,400 $103,244

March 2000 $103,244 $1,333,168 $1,439,092 $4,944

TOTAL: $50,865,712 $49,310,114

Prepared by U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, November 2000.

177 Records were subpoenaed from June 1998 to March 2000. The account remained open until July 2000. 178 Includes $6 million withdrawal from Supernow Account-02. 179 Includes $1 million withdrawal from Supernow Account-02. 180 Includes $200,000 withdrawal from Supernow Account-02.

437

BTCB MONTHLY ACCOUNT ACTIVITY AT FIRST UNION

September 1998–February 2000

MONTH OPENING

BALANCE DEPOSITS181 WITHDRAWALS182 CLOSINGBALANCE

September 1998 $0 $10,000 $0 $9,912

October 1998 $9,912 $0 $0 $9,941

November 1998 $9,941 $190,000 $0 $200,185

December 1998 $200,185 $52,041 $0 $252,862

January 1999 $252,862 $109,441 $175,000 $187,804

February 1999 $187,804 $278,980 $0 $467,449

March 1999 $467,449 $9,500 $462,000 $15,941

April 1999 $15,941 $6,250,445 $3,929,780 $2,336,908

May 1999 $2,336,908 $40,000 $1,755,818 $617,476

June 1999 $617,476 $3,131,007 $1,665,228 $2,070,975

July 1999 $2,070,975 $94,055 $2,162,187 $3,502

August 1999 $3,502 $2,367,820 $732,900 $1,642,611

September 1999 $1,642,611 $226,263 $1,837,721 $32,068

October 1999 $32,068 $1,363,509 $806,375 $589,525

November 1999 $589,525 $289,243 $804,275 $74,951

December 1999 $74,951 $3,986,184 $3,051,363 $1,011,538

January 2000 $1,011,538 $2,655 $1,014,175 $211

February 2000 $211 $56 $229 $0

TOTAL: $18,401,199 $18,397,051

Prepared by U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, November 2000.

181 Does not include interest/dividend payments. 182 Does not include wire transfer or annual fees.

BTCB RELATED ACCOUNTS

AT FIRST UNION

ACCOUNT HOLDER TYPE OF ACCOUNT ACCOUNT NUMBER ACCOUNT STATUS REMARKS

British Trade & Commerce Bank CAP 998–387–1373 Open 9/17/98–2/4/00 Key account

BRK 17624265 Open 9/17/98–2/4/00 Never used

Banque Francaise Commerciale DDA–corporate 209–000–140–8334 Open 5/15/96–now

IIDA 200–009–067–1052 Open 8/28/98–5/17/99IIDA 200–009–060–0120 Open 5/14/99–now

FEC Financial Holdings Inc. DDA–corporate 202–000–072–6184 Open 11/12/98–6/30/00BTC Financial Services Inc. DDA–corporate 200–000–282–1162 Open 11/2/99–nowRobert F. Garner Attorney At Law DDA–corporate 202–000–035–7100 Open 1/30/98–nowGlobal/Vector Medical Technologies Inc. DDA–corporate 209–000–294–6659 Open 9/30/98–11/01/99

CAP 998–324–6063 Open 1/6/99–now Key accountDDA–corporate 200–000–276–0469 Open 8/30/99–nowDDA–corporate 200–000–276–0375 Open 9/8/99–nowDDA–corporate 200–000–748–1837 Open 5/10/00–now $5–$8 millionBRK 24021271 Open now $6–$7 millionMoney manager 4063000997 Open now

Possibly other account

First Union private b

Michael H. Salit, M.D. DDA–individual 109–001–566–5656 Open 4/28/98–nowSignal Hill Media Grp DDA–corporate 200–000–677–7665 Open 6/30/00–now

Prepared by U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, December 2000

439

183See United States v. Koop (U.S. District Court for the District of New Jersey Criminal Case

No. 00–CR–68); United States v. Wingrove (U.S. District Court for the District of South Carolina

Criminal Case No. 0:00–91); and United States v. Cabe (U.S. District Court for the District of

South Carolina Criminal Case No. 0:00–301). See also the description of the Koop fraud in the

appendix.

Case History No. 5

HANOVER BANK

Hanover Bank is an offshore shell bank licensed by the Government of Antigua and Barbuda (GOAB). This case history looks at

how an offshore bank, operating well outside the parameters of

normal banking practice with no physical presence, no staff, virtually no administrative controls, and erratic banking activities,

transacted business in the United States by utilizing a U.S. correspondent account belonging to another foreign bank and became

a conduit for millions of dollars in suspect funds.

The following information was obtained from documents provided

by GOAB, Hanover Bank, and Harris Bank International; court

pleadings; documents associated with regulatory proceedings in

Jersey and the United Kingdom; interviews of persons in Antigua

and Barbuda, Ireland, Jersey, the United Kingdom and the United

States; and other materials. A key source of information was a

June 26, 2000 interview of Hanover Bank’s sole owner, Michael Anthony (‘‘Tony’’) Fitzpatrick, an Irish citizen who voluntarily cooperated with the investigation. Another key bank official, Richard

O’Dell Poulden, a British citizen no longer with the bank, refused

to provide either an interview or answers to written questions. Two

additional key interviews were conducted on March 30, 2000, with

William H. Koop, a U.S. citizen who has pled guilty to laundering

money from a financial fraud through Hanover Bank, and on July

23, 2000, with Terrence S. Wingrove, a British citizen fighting extradition to the United States to stand trial on criminal charges related to the Koop fraud.183 Wingrove was interviewed at Wormwood Scrubs prison in London. The investigation also greatly benefited from assistance provided by the Antigua and Barbuda Government, the Jersey Financial Services Commission, and the Jersey

Attorney General.

A. THE FACTS

(1) Hanover Bank Ownership and Management

The Hanover Bank, Ltd. (‘‘Hanover Bank’’) was established as an

international business corporation on August 12, 1992. According

to one document, the bank received its offshore banking license the

same day; according to another, the license was actually granted 4

months later on December 8, 1992. As of this writing, Hanover

Bank remains a fully licensed offshore bank. Throughout its existence, the bank has had no physical office or permanent staff other

than Fitzpatrick, the bank’s sole owner, who operates the bank

from his residence in Ireland.

Hanover Bank’s Formation. When asked how Hanover Bank

got started and how he ended up as its sole owner and chief executive despite a lack of banking experience, Fitzpatrick provided the

following information. Fitzpatrick indicated that, in 1992, when he

440

184 Cooper is also associated with American International Bank, another case history examined in this investigation. 185Fitzpatrick and Poulden also established Hanover Nominees Ltd., described in Fitzpatrick’s

resume as a ‘‘marketing subsidiary of The Hanover Bank.’’

decided to try to open an offshore bank in Antigua and Barbuda,

he realized he would need assistance from persons with banking

experience. Fitzpatrick stated in his interview that he was ‘‘not a

banker’’ and did not have any banking experience prior to his involvement with Hanover Bank. He said that his business background was in marketing, and later noted that he had never ‘‘gone

to university.’’ A copy of his resume, which he submitted to GOAB

in 1993 in connection with Hanover Bank, lists credentials in the

field of journalism and public relations, including serving from

1981-82, as public relations advisor to the Honorable Charles

Haughey, then Prime Minister of Ireland.

Fitzpatrick turned to two individuals with banking experience to

help him establish Hanover Bank. The first was Richard O’Dell

Poulden, a British citizen with whom Fitzpatrick had done business in the past. He said that he turned to Poulden, because

Poulden’s credentials, which include a London and Harvard Business School degree, an Oxford law degree, and work at a leading

merchant bank and accounting firm, would impress GOAB authorities, and because Poulden’s business connections would help attract

deposits for the bank. He said that Poulden agreed in a telephone

call to serve as the bank’s nominal owner and chairman.

The second individual with banking experience who helped

Fitzpatrick establish Hanover Bank was William W. Cooper.184

Fitzpatrick said that he met Cooper through the Antiguan office of

PriceWaterhouse (now PriceWaterhouseCoopers), an accounting

firm he had contacted for assistance. Fitzpatrick said that he

worked with one of the PriceWaterhouse partners, Don Ward, to

set up the bank. He said that Ward introduced him to Cooper, an

American who was an Antiguan resident with extensive banking

experience and who owned Antigua Management and Trust, Ltd.,

which was experienced in obtaining bank licenses. He said that

GOAB law required a local director for each of its banks, and

Cooper had agreed to serve as Hanover Bank’s local director. He

said that Ward also introduced him to Justin L. Simon, an Antiguan citizen who was then legal counsel to PriceWaterhouse and

who agreed to serve as the bank’s local registered agent, another

requirement under GOAB law. He indicated that PriceWaterhouse

prepared the paperwork necessary to ‘‘set up the bank for me.’’ 185

Fitzpatrick said that he paid PriceWaterhouse a total of $25,000,

of which $10,000 went for the bank’s initial licensing fees.

GOAB documentation corroborates this description of Hanover

Bank’s formation. The August 1992 application to establish Hanover Bank Ltd., for example, lists Cooper and Simon as the company’s original ‘‘incorporators,’’ as does the company’s articles of incorporation. The company’s by-laws state that the ‘‘initial Board of

Directors shall consist of the following members: Justin Simon,

Richard O’Dell Poulden and Antigua Management & Trust Ltd.’’ [Lower case letters added to original text.] The banking license application names the same three ‘‘proposed directors’’ for the bank.

Although Fitzpatrick’s name does not appear on any of the 1992 inVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00450 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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corporation or licensing documents, Simon confirmed that

Fitzpatrick was the moving force behind the formation of the bank.

Cooper also recalled Fitzpatrick’s being associated with the bank

from its inception.

When asked, Fitzpatrick indicated that although he was the initial organizer and financial backer of Hanover Bank, he did not undergo any due diligence review by GOAB authorities in 1992. He

said that GOAB authorities instead focused on Poulden, who was

then the bank’s sole shareholder and chief executive. Because

Poulden refused to respond to requests for information, he did not

provide any description of his role in Hanover Bank’s formation.

Ward of PriceWaterhouseCoopers also declined to cooperate with

the investigation and so was unavailable to answer questions about

his role in the bank’s formation.

In early 1993, Fitzpatrick was listed for the first time in filings

submitted by the bank to GOAB as Hanover Bank’s sole owner. Notice of his status is recorded in a Hanover Bank corporate resolution which was signed by Fitzpatrick, as sole shareholder, and submitted to GOAB on March 31, 1993. The resolution stated that

Hanover Bank had replaced Antigua Management & Trust Ltd.

with two new directors, Fitzpatrick and Cooper. The official form

notifying the government of this change did not explain how

Fitzpatrick had become the bank’s sole shareholder, nor what happened to Poulden.

According to Fitzpatrick, Poulden had decided to resign from the

bank after the Clerical Medical scandal, described below, and, in

1993, transferred all of his shares to Fitzpatrick, in return for

about $200,000 that was never paid. Simon also recalled a transfer

of shares in 1993, and promised to look for the official notification

to the government of the change in bank ownership. Although neither Fitzpatrick nor Simon produced documentation to substantiate

this explanation of how Fitzpatrick assumed control of the bank,

the investigation found no evidence to contradict it. It is undisputed that, from 1993 to the present, Fitzpatrick—a man without

any banking experience—took control of Hanover Bank and served

as its sole owner and chief executive.

Hanover Bank Management. Hanover Bank’s chief executive,

holding the titles of Chairman of the Board and Managing Director,

has long been Fitzpatrick. The bank has no other paid staff, either

on a management or clerical level, although Fitzpatrick indicated

that the bank could hire employees on a part-time basis if needed

and has paid commissions to individuals in the past for bringing

in deposits or performing other services. Fitzpatrick said during his

interview that it had always been his intent to hire professionals

to manage Hanover Bank, but the persons he had dealt with had

‘‘never delivered,’’ and he had essentially been operating the bank

on his own ‘‘most of the time.’’ He said that he believed his lack

of banking experience and misjudgements had contributed to problems at the bank.

GOAB documentation does not identify Hanover Bank’s management team other than Fitzpatrick, but does record 8 years of frequent changes in Hanover Bank’s directors, including nine individVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00451 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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186 Hanover Bank’s directors included the following:

4/92 Initial directors: Simon, Poulden, and Antigua Management & Trust Ltd. (AMT), the

company owned by Cooper.

3/93 AMT was removed as a director, and Fitzpatrick and Cooper were appointed. Although the status of Simon and Poulden is unclear from the documentation, it appears that

Simon remained a director, while Poulden resigned during 1993.

Cooper resigned at some point.

C. Peter Crawshay appointed at some point.

10/97 Crawshay resigned on 10/7/97, and Peter Coster was appointed. Directors were:

Fitzpatrick, Simon, Coster.

3/98 Poulden and Tbeoddor Tsuru appointed directors by bank resolution on 3/12/98, with

notice provided to GOAB on 5/11/98, in Hanover Bank’s annual report (item 5). Directors were:

Fitzpatrick, Poulden, Tsuru, Simon and Coster. Tsuru appointment was later rescinded, and

Poulden apparently resigned or his appointment was ended at some point in 1998.

4/99 Coster resigned.

11/99 Mohammad Jawad and Michael Gersten appointed. Directors were: Fitzpatrick,

Simon, Jawad and Gersten.

uals and one company.186 The Bankers Almanac, a leading source

of information about banks worldwide, states in a 1999 entry for

Hanover Bank that the bank had five employees, including three

executives besides Fitzpatrick: John Burgess, described as the

bank’s ‘‘general manager’’; Brian Shipman, in the bank’s ‘‘International Division’’; and Jeffre St. James, in the bank’s ‘‘Foreign Exchange & Documentary Credits’’ division. Older versions of the

Bankers Almanac list Poulden as the general manager and Peter

Coster as the head of correspondent banking. When asked about

the Bankers Almanac information, Fitzpatrick said the named individuals had been bank employees or officers in the past, although

never ‘‘full time.’’ However, Burgess told a Minority staff investigator that, although he had received commissions from the bank

and did ‘‘not want to embarrass Tony,’’ he had never been a Hanover Bank employee. When told that the Bankers Almanac described him as Hanover Bank’s general manager, Burgess laughed

and said, ‘‘That’s the first I’ve heard of it.’’

Proposed Bank Sale in 1998. Fitzpatrick indicated in his interview that he had attempted several times to sell Hanover Bank

and was still interested in selling it. He said that one set of negotiations took place in 1998, when Poulden telephoned him unexpectedly and asked whether he would consider selling Hanover

Bank to a group of Japanese stockbrokers looking to form a financial group. Fitzpatrick indicated that he would, and said it was unclear whether Poulden was representing the group as an attorney

or as a business partner who might become one of the bank owners. He said that Poulden introduced him to Theoddor Tsuru and

Takuma Abe, two Japanese businessmen who appeared to be part

of the group negotiating to buy Hanover Bank, although Poulden

never identified the specific individuals involved. Fitzpatrick said

that Poulden engaged in detailed negotiations on behalf of the

group, including settling on a $1 million purchase price and proposing to structure the sale by using a company to purchase the

bank. He said that the designated company was at first Cranest

Capital S.A., a company that appeared to be associated with Tsuru,

but it later changed to Societe Suisse S.A., a bearer share corporation then owned by Poulden. Societe Suisse S.A. made an initial

payment of 20,000 towards the purchase price, and a second payment of $100,000 was made from another source, before the deal

fell through during the summer of 1998.

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Fitpatrick said that as part of the purchase negotiations, Poulden

had requested and he had agreed to immediately appoint Poulden

as the chairman of the bank and to appoint Tsuru as a director.

He said that Hanover Bank issued a corporate resolution in March

1998 appointing both men to the board of directors, but never filed

formal notice of the change in directors with the government, as required by GOAB law, so the appointments never became final.

When asked why the required papers were not filed, he said that

he had been keeping them until closure of the deal and awaiting

final paperwork from Poulden and Tsuru that never arrived.

Fitzpatrick stated that he did not conduct any due diligence review

of Tsuru prior to appointing him a bank director, but relied on

Poulden’s judgment as to Tsuru’s reputation and suitability. He

said when he later learned of Tsuru’s possible involvement in the

Casio fraud, described below, he rescinded the Tsuru appointment.

He said the Poulden board appointment also ended after the bank

purchase fell through.

Documentation obtained by the investigation indicates that,

whether or not the Poulden and Tsuru appointments became final

under GOAB law, during 1998, Poulden repeatedly represented

himself as the bank’s chairman. In addition, Hanover Bank’s 1997

annual submission to the GOAB announced in Note 5, ‘‘two new

appointments to the Board of Directors,’’ naming Poulden and

Tsuru. Poulden also exercised joint signatory authority over Hanover Bank’s correspondent account at Standard Bank, which was

opened in 1998. Fitzpatrick explained that he had agreed to make

Poulden a signatory on the account, because Poulden had helped

convince Standard Bank to open the correspondent account, he

thought Poulden would attract new business to the bank, and his

group would soon be the bank owner. He said that he did not give

Poulden sole signatory authority over the account, because he had

to protect the assets of the bank until the purchase was complete.

He said that because the transfer of ownership over the bank was

still ‘‘in transition,’’ it had seemed appropriate for them to share

control over the Hanover account and so became joint signatories.

Fitzpatrick indicated that, while serving as bank chairman in

1998, Poulden also became actively involved in the bank’s management. He said that Poulden opened accounts, attracted new deposits, and approved all outgoing wire transfers. He said he had communicated with Poulden two or three times per week, usually by

telephone or fax. He said that he had also traveled with Poulden

to Antigua and introduced him to government officials and other

business contacts. Fitzpatrick indicated that Poulden’s management role at the bank had ended when the purchase agreement fell

through in the latter half of 1998.

Fitzpatrick said that he had entertained other offers to buy Hanover Bank as well. He said that one of the bank clients, Terrence

Wingrove, had repeatedly expressed interest in buying the bank in

1998, but never took any concrete action to do so. In 1999, he said,

two British residents, Mohammad Jawad and Michael Gersten, had

offered to buy the bank for $500,000. He appointed them directors

in November 1999, and notified GOAB authorities. As of December

2000, however, the bank had not yet changed hands.

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187 Assets included ‘‘[f]ee income’’ of over $1.3 million, and ‘‘[i]nterest receivable’’ of over $1.1

million, both of which showed a tenfold increase over the prior year. Expenses exceeded $1 million, including ‘‘[m]anagement charges’’ of $124,500; ‘‘[c]ommissions and consultancy fees’’ of almost $276,000; travel expenses exceeding $93,000; and interest charges exceeding $562,000. The

financial statement showed ‘‘[c]ash & inter bank deposits’’ of $1.2 million; ‘‘Government securities’’ valued at about $1 million; ‘‘[o]ther listed securities’’ valued at $4.1 million; and ‘‘[b]ills

of exchange’’ valued at $6.4 million. ‘‘Loans and advances’’ were $3.4 million. ‘‘Issued share capital’’ was $1 million, the minimum required under GOAB law. Audit and accountancy fees were

a bargain, just $15,000. 188 Assets showed fee income had dropped to about $965,000, while interest receivables had

increased to about $1.4 million. Expenses again exceeded $1 million, including management

charges of $82,000; commissions and consultancy fees of more than $344,000; travel expenses

exceeding $71,000; and interest charges exceeding $645,000. A new expense for ‘‘[f]oreign exchange trading losses’’ exceeded $186,000. At the same time, ‘‘[c]ash and inter bank deposits’’ had fallen tenfold to about $150,000. Assets represented by securities were zeroed out, while

‘‘[b]ills of exchange’’ had risen slightly to $6.5 million. ‘‘Loans and advances’’ had increased sig- nificantly to $5.6 million. ‘‘Issued share capital’’ increased fivefold, from $1 million to $5 million,

in response to GOAB’s new capital requirement for offshore banks. At the same time, the finan- cial statement included a new entry for $4 million in ‘‘[p]romissory notes,’’ suggesting that the

bank’s $4 million in additional capital might have been financed through a book entry loan. Audit and accountancy fees remained at $15,000. 189Fee income had fallen to about $119,000, and interest receivables were down to about

$283,000. Expenses had also fallen, with management charges down to $60,000; commissions

and consultancy fees down tenfold to $24,000; travel expenses halved to about $37,000; and both

interest charges and foreign exchange losses zeroed out. ‘‘Cash & inter bank deposits’’ were

down to about $66,000. ‘‘Bills of exchange’’ were down tenfold to $658,000. ‘‘Loans and advances’’

were down a similar amount to about $630,000. A new category of liability appeared called ‘‘Directors loan accounts,’’ for about $84,000. The promissory note total had increased to about $4.2 million. Audit and accountancy fees were halved to $7,500.

(2) Hanover Bank Financial Information

GOAB law requires offshore banks to submit annual audited financial statements. Hanover Bank’s financial statements for 3

years, 1997, 1998 and 1999, were audited by Vaghela Unadkat &

Co., which the investigation has been told is a one-man firm operating out of the accountant’s residence in Birmingham, England.

These statements show, over a 3-year period, tremendous swings in

Hanover Bank assets, liabilities and expenses, as well as significant payments to Fitzpatrick.

The 1997 statement depicted an active bank with rapidly growing earnings, and net profits of over $1.3 million.187 It indicated

that customer deposits had skyrocketed over the prior year to almost $14 million, almost all of which would turn out to be related

to the Koop and Casio frauds, described below. The financial statement also showed a dividend payment to Fitzpatrick, the bank’s

sole shareholder, of $350,000.

The 1998 statement presented a more mixed picture of the bank,

but an even larger dividend payment to Fitzpatrick.188 Net profits

were about $1 million. Customer deposits had fallen from $14 million to $650,000. The dividend payment to Fitzpatrick had climbed

to $1.9 million, twice the amount of net profits.

The 1999 statement depicted a much less active and profitable

bank.189 Net profits were 80% lower, at about $211,000. Customer

deposits had fallen another 10% to about $563,000. No dividend

payment was made to Fitzpatrick. This statement covers the period

in which, according to Fitzpatrick, Hanover Bank had ceased operations and kept its funds in its solicitor’s account in London.

The three financial statements show wild swings in the bank’s

assets and liabilities. In the space of a year, customer deposits

plummeted from $14 million to $650,000; Hanover Bank’s own deposits fell from $1.2 million to $150,000; commission payments

dropped from $344,000 to $24,000; securities valued at $5 million

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disappeared; foreign exchange losses of $186,000 appeared one year

and disappeared the next; dividend payments swung from $1.9 million to nothing. These financial statements suggest an offshore

bank that was neither stable nor engaged in the prudent banking

activities typical of a U.S. financial institution subject to safety and

soundness regulation.

(3) Hanover Bank Correspondents

Fitzpatrick told the investigation that he kept 100% of Hanover

Bank’s client deposits in correspondent accounts. Although the Minority Staff investigation never discovered any U.S. bank that

opened a correspondent account for Hanover Bank, Hanover Bank

nevertheless gained access to the U.S. banking system by using

U.S. correspondent accounts belonging to other foreign banks, such

as American International Bank and Standard Bank.

American International Bank. Fitzpatrick indicated that

when Hanover Bank began operation in 1992, he opened its first

correspondent account at American International Bank (AIB), an

offshore bank that was also licensed in Antigua and Barbuda. He

said that he left this account open for years, despite making little

use of it. He indicated that, in 1997, he received a letter from Overseas Development Bank and Trust (ODBT) indicating that AIB had

gone into liquidation and ODBT would be opening an office in Antigua and taking over AIB’s accounts. He said that he, again, left

Hanover Bank’s account open and, in a 1997 submission to GOAB,

listed ‘‘Overseas Development Bank Ltd.’’ in Antigua as Hanover

Bank’s ‘‘banker.’’ He said that he later learned ODBT had closed

its Antiguan office, but continued to operate in Dominica.

AIB and OBDT each opened a number of correspondent accounts

in the United States, as explained in the AIB case history. By

maintaining an account at AIB and then ODBT, Hanover Bank

maintained access to their U.S. correspondent accounts as well.

Fitzpatrick said that, in 2000, he had telephoned ODBT to see if

he could deposit a client’s funds in Hanover Bank’s account at that

bank. He said he was informed that ODBT had unilaterally closed

the Hanover Bank account due to inactivity, and he took no steps

at that time to re-open it.

Standard Bank/Harris Bank International. Fitzpatrick said

that he soon discovered that clients in Europe did not want to deal

with a bank whose only correspondent was another Antiguan offshore bank. He said that is why, in 1992, Hanover Bank opened

a correspondent account at Standard Bank Jersey Ltd. According

to the Bankers Almanac, Standard Bank Jersey Ltd. is a subsidiary of Standard Bank Offshore Group Ltd., and is related to

The Standard Bank of South Africa Ltd., a major financial institution with over $22 billion in assets, and subsidiaries and related

companies worldwide. According to the Bankers Almanac, Standard

Bank Jersey Ltd. alone has over 200 employees and more than

$600 million in assets.

When asked how Hanover Bank was able to open a correspondent account at Standard Bank Jersey Ltd. (‘‘Standard

Bank’’), Fitzpatrick attributed it to Poulden’s business contacts. He

said that, in 1992, Poulden served on the boards of several companies, including a venture capital company whose board included

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David J. Berkeley, then managing director of Standard Bank. He

said that Poulden telephoned Berkeley directly to request a correspondent account for Hanover Bank. He said it was his understanding that Berkeley immediately agreed on the telephone, and

the account opening forms were a mere formality. Because Standard Bank declined to respond to requests for information, it has not

provided a description of or documentation related to the 1992 account opening.

Fitzpatrick stated that he knew in 1992, that Standard Bank had

a U.S. dollar account with Harris Bank International in New York,

and that by opening an account with Standard Bank in Jersey,

Hanover Bank would be able to transact business through Standard Bank’s account in the United States.

Fitzpatrick indicated that Standard Bank closed the Hanover account in 1993, after less than a year, due to the Clerical Medical

scandal, described below. However, he said that 6 years later in

1998, Standard Bank opened a new account for Hanover Bank,

again after Poulden contacted Berkeley, who was still at Standard

Bank. Fitzpatrick explained that, to strengthen the bank in connection with the proposed 1998 sale, Poulden had, again, telephoned

Berkeley and reached him at an airport. He said that Berkeley

gave his approval for the correspondent account during the telephone call, instructed Poulden to wait 5 minutes to give him time

to contact a Standard Bank employee, and then to call that employee who would provide him with an account number. He said

that Berkeley told Poulden that he could complete the account

opening documentation at a later time. He said that the Clerical

Medical scandal was not discussed. He said that Poulden followed

the instructions and immediately obtained an account number for

Hanover Bank from a Standard Bank employee. He said they later

met with Standard Bank employees in person and completed the

account opening documentation. Fitzpatrick said that Standard

Bank should not have opened the account in the way that it did,

but it was instructive to him to see that large banks also sometimes broke the rules.

Because Standard Bank declined to respond to requests for information, it has not provided a description of or documentation related to the 1998 account opening. What is known, however, is that

Jersey banking regulators subsequently investigated and censured

Standard Bank for exercising inadequate due diligence in opening

the Hanover Bank account. In a statement issued on July 13, 2000,

the Jersey Financial Services Commission stated that, in opening

the Hanover Bank account, ‘‘the senior officers [at Standard Bank]

directly involved failed to follow proper procedures’’ and ‘‘[t]he conduct of the Bank fell well short of the standards expected by the

Commission’’ with respect to due diligence. As a result of the investigation, Berkeley and another senior official left Standard Bank.

The Commission’s July statement observed: ‘‘The Commission is

also satisfied that senior management changes in place, including

the departure of the officers concerned, have strengthened the

management of the Bank.’’ When contacted by Minority Staff about

this investigation, Jersey regulators indicated that the facts they

uncovered did not match Fitzgerald’s description of the 1998 account opening, but declined to provide the text of the report, a deVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00456 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
447

scription of their findings or the underlying documentation, because the report had not been made public. The regulators indicated that, as a rule, such reports are not made public, although

the Commission had yet to make a decision with respect to the

Hanover Bank matter.

Fitzpatrick indicated that Hanover Bank actually used the

Standard Bank correspondent account for only about 3 months, primarily from April to June 1998, after which the account was frozen

amid questions regarding possibly suspicious activity. Fitzpatrick

said the account was actually closed in December 1998 or January

1999.

Documents obtained by the investigation substantiate this description of the Hanover correspondent account at Standard Bank.

In response to a Subcommittee subpoena, Harris Bank International provided copies of Standard Bank account statements for

1998 and 1999. These account statements and related wire transfer

documentation show Hanover transactions taking place over approximately a 3-month period, with the first on March 30, and the

last on June 16, 1998. Harris Bank International also provided a

copy of a June 14, 2000 letter from Standard Bank attaching ‘‘a

schedule detailing all items relating to Hanover Bank which were

received and paid through Harris Bank for the whole period during

which Hanover Bank maintained accounts with our client.’’ The

Standard Bank schedule shows a total of about $17.4 million in deposits and $13.9 million in withdrawals moving through the Harris

Bank International over the 3-month period. Other documentation

indicates that Hanover Bank made use of other Standard Bank correspondent accounts, for example, to transact business in British

pounds or Australian dollars. Harris Bank did not have, and

Standard Bank did not produce any records relating to the closing

of the Hanover Bank account in late 1998 or early 1999.

Hanover Bank has had at least a few other correspondent accounts during its 8 years of existence, including a 1992 account at

Lombard National Westminster Bank in Cyprus, and perhaps an

account at a bank in Switzerland. The investigation did not attempt to document its non-U.S. correspondent accounts.

No Current Correspondent Bank. Fitzpatrick indicated that,

as of his June 2000 interview, Hanover Bank had become inactive

and had no correspondent account at any bank. According to Fitzpatrick, all remaining funds in the Hanover Bank account at

Standard Bank had been transferred in late 1998 or early 1999 to

an attorney trust account belonging to Finers in London, Hanover

Bank’s legal counsel. He indicated that funds remained in that account, although reduced, in part, by legal fees. The bank’s 1998 financial statement shows that Hanover Bank also paid Fitzpatrick

a 1998 ‘‘ dividend’’ of $1.9 million, twice the amount of the bank’s

net profits. It is unclear whether any client deposits were used for

the dividend.

(4) Hanover Bank Operations and Anti-Money Laundering

Controls

Because the investigation was interested in the day-to-day operations of a shell offshore bank, Minority Subcommittee investigators interviewed Fitzpatrick about how his bank actually conducted

448

190 AIMS is also discussed in the case history for American International Bank.

business. His explanations and other information provide vivid details about a bank operating with few, if any, of the administrative

procedures and internal controls in place at U.S. banks.

According to Fitzpatrick, Hanover Bank did not have a permanent office or a permanent staff other than himself, and he was not

a banker or accountant by training. Fitzpatrick said that he generally kept records associated with Hanover Bank at his residence

in Ireland, although Poulden also kept some records during the

time he was associated with the bank. Fitzpatrick stated that he

did not have ‘‘computerized’’ records for Hanover Bank in Ireland,

nor did the bank have an electronic ledger.

Fitzpatrick indicated that, for about a 6-month period in 1997,

the bank used the services of an Antiguan company called American International Management Services Ltd. (‘‘AIMS’’) to handle

Hanover Bank’s back office operations, including administering its

client accounts and keeping the bank’s books.190 He said that he

had visited the company in Antigua and found a ‘‘very professional’’ operation handling administrative matters for six or seven ‘‘small

obscure banks like mine.’’ He said, however, that Hanover Bank

could not afford the $5,000 per month cost. He also described an

unpleasant encounter with the head of AIMS, John Greaves, over

what he described as improper disclosures of confidential information to a Hanover Bank client, which led him to sever relations

with AIMS and return to operating the bank on his own.

Fitzpatrick said that Hanover Bank kept 100% of its client funds

in its correspondent accounts. He said that the bank dealt mostly

in U.S. dollars, but also occasionally in other major currencies such

as sterling or yen. He said the bank usually had only a few client

accounts open at a time, and he kept track of each client’s funds

by analyzing the monthly account statements sent by the correspondent banks. He said the monthly statements showed all of

the deposits, withdrawals and fees affecting the Hanover Bank accounts, and he would use this information to attribute deposits,

withdrawals and fees to Hanover Bank’s individual client accounts.

Fitzpatrick said that Hanover Bank did not routinely prepare

bank statements for its clients, nor did it pay interest on client

funds. He said that most persons using a bank like his were concerned about confidentiality, and did not want monthly statements

sent to them because they did not want others knowing they had

an offshore bank account. He said the bank usually prepared account statements only upon request. He described one occasion in

1998, when he and Poulden together typed up statements for two

client accounts, the Wingrove and Doi accounts, using Poulden’s

computer in England. He said they prepared the statements without assistance from anyone else, using the information in correspondent banks’ monthly statements. His description indicated

that it was an unusual and ad hoc effort.

One of Hanover Bank’s clients, Terrence Wingrove, who was

interviewed by Minority Staff investigators, confirmed that the

bank did not routinely prepare account statements. When asked

how he felt about not receiving monthly account statements,

Wingrove said, ‘‘You don’t go into a fish and chip shop and ask for

449

filet mignon.’’ He said that he had trusted Fitzpatrick to handle his

money properly, without worrying about the paperwork, and had

told Fitzpatrick, ‘‘If my money goes walkabout, you go walkabout.

That wasn’t a threat, it was a promise.’’ He said that, while Hanover Bank was not the most ‘‘efficient’’ bank, Fitzpatrick had acted

as his ‘‘personal banker’’ and provided acceptable service, which

was why he had maintained an account there.

When asked how Hanover Bank found clients, Fitzpatrick indicated that it was willing to pay commissions to individuals who

brought deposits to the bank. He said the bank also had an entry

in the Bankers Almanac, which helped demonstrate to clients that

the bank was an established institution with an 8-year track

record. He said that the bank did not engage in extensive marketing efforts, which was one reason it had so few accounts at a

time.

Subsequent to the Fitzpatrick interview, another Hanover Bank

client, John Burgess, voluntarily contacted a Minority Staff investigator and discussed his experience with the bank. Burgess said

that for a period of time, from 1997 until early 1998, a Swiss company he controlled, The Trust and Agency Co. (‘‘Tragenco’’), had

managed a portion of the bank’s business. He said Tragenco had

operated under an agreement which authorized it to unilaterally

open Hanover Bank accounts for Tragenco clients engaged in investment activities. He said these clients collectively made $50–$60

million in deposits and provided Hanover Bank with about $2 million in earnings, until Tragenco ended its investment program.

While the investigation did not attempt to confirm this activity, it

suggests the existence of another roster of Hanover Bank clients

functioning through another, unidentified correspondent account,

perhaps in Switzerland, raising additional questions about Hanover

Bank’s account opening procedures and internal controls.

When asked how the bank handled wire transfers, Fitzpatrick indicated that Hanover Bank did not have its own capability to send

or receive wire transfers, but worked through its correspondent

banks. He said that incoming wire transfers were handled entirely

by the correspondent bank, which unilaterally decided whether to

accept the incoming funds and credit them to Hanover Bank’s account. He said that he played no role in deciding whether the funds

should be accepted. He said that he usually learned of an incoming

wire transfer some days after the funds had come in, when he received and reviewed Hanover Bank’s monthly account statement

from the correspondent bank. He said that the monthly statement

would list all deposits into the Hanover Bank account, virtually all

of which would have been made by wire transfer.

Fitzpatrick said that the monthly statements often provided little

or no information about particular deposits, and he sometimes had

to contact the correspondent bank to get additional information to

determine which client account should be credited with the incoming funds. He said, for example, that the wire transfer documentation often failed to name a Hanover Bank accountholder as the

beneficiary of the funds, instead referencing individuals or companies who were not accountholders at the bank. When asked how he

knew to attribute these incoming funds to a particular client,

Fitzpatrick said that the bank generally had only a few accounts

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and he could figure it out. He said that Hanover Bank’s clients also

often contacted him to let him know funds were coming in and

should be attributed to their account.

When asked about outgoing wire transfers, Fitzpatrick explained

that he personally approved all outgoing wires. Fitzpatrick said

that the outgoing wire transfers were actually made by correspondent bank personnel who would debit the funds from Hanover Bank’s correspondent account. He said that the bank would

complete an outgoing wire transfer only after receiving written

‘‘wire instructions’’ from Hanover Bank specifying the amount, the

beneficiary and the beneficiary’s bank, and signed by a person authorized to withdraw funds from the account. He said that he usually faxed the wire instructions from his residence in Ireland to the

appropriate correspondent bank personnel.

Fitzpatrick described, for example, how Hanover Bank worked

with Standard Bank in 1998 with respect to wire transfers. He said

that incoming funds were typically in U.S. dollars and wired to

Standard Bank’s correspondent account at Harris Bank International in New York. He said that the accompanying wire transfer

documentation, identifying the originator and intended recipient of

the funds, went to Harris Bank International, and was not routinely forwarded to Hanover Bank. He said that what he received

was Hanover Bank’s monthly account statement from Standard

Bank, which was sent to his address in Ireland. He said that he

would review the monthly statement to determine what deposits

had been made into the account. However, the monthly statements

often listed an incoming amount without any origination or beneficiary information. He indicated that, even when information was

provided, he was sometimes unable to determine who was the intended recipient of the funds at Hanover Bank and would have to

contact his clients to ask about particular deposits.

With respect to outgoing wire transfers, Fitzpatrick explained

that he and Poulden had joint signatory authority over the 1998

Hanover account at Standard Bank, and had to jointly approve all

funding withdrawals. He said that, typically, if an outgoing wire

transfer involved an account he had opened, such as the Wingrove

account, he would initiate a fax with the desired wire transfer instructions and send it to Poulden; Poulden would sign the instructions with no questions asked; and Poulden would fax the instructions to Standard Bank. He said that if an outgoing wire transfer

involved an account that had been opened by Poulden, Poulden

would initiate the fax to him, he would sign it with no questions

asked, and he would fax the instructions to Standard Bank. Standard Bank would then complete the transfer.

Fitzpatrick discussed one incident in May 1998, which suggested

that the wire transfer approval process did not always work

smoothly. He said that, on the day he was moving to a new residence in Ireland, he received a request from Wingrove for an outgoing wire transfer. He said that he approved the wire and sent

the wire instructions to Poulden, without first checking Wingrove’s

account balance because the bank records were inaccessible during

the move. Standard Bank completed the wire transfer, and Fitzgerald later discovered that there was a shortfall in the Wingrove

account of more than $800,000. That meant the outgoing wire

451

transfer had been paid for with funds deposited by another Hanover client. Both he and Wingrove stated that neither had been

aware there were insufficient funds in Wingrove’s account to cover

the wire transfer. Both said that Wingrove quickly repaid about

$400,000 of the shortfall but, as of July 2000, 2 years later, about

$400,000 plus interest remained unpaid.

Hanover Bank’s Anti-Money Laundering Controls. When

asked about Hanover Bank’s anti-money laundering efforts, Fitzpatrick provided a copy of a 1997, one-page ‘‘Policy Statement on

the Opening and Conduct of Accounts.’’ Fitzpatrick indicated that

he had drafted the policy statement in response to efforts by the

Antiguan government to strengthen their banks’ anti-money laundering controls. The Hanover Bank policy statement set forth a

number of due diligence requirements for opening new accounts, including the following:

—Customers must supply one reference from another banking

institution covering the customer’s banking history for at

least 5 years.

—[A] customer must supply two professional references, by

whom the customer has been known for at least 10 years.

—In respect of a corporation, the same references must be supplied for each director as well as for the corporation itself.

—Each and every signatory or proposed signatory of an account . . . must be personally interviewed by a Bank officer

prior to the opening of the account.

—[T]he required account opening forms must be completed.

—[T]he original of each signatory’s passport must be inspected

and a copy taken for the Bank’s file.

—[A] notarized statutory declaration, duly legalized, as to beneficial ownership of funds . . . must be completed.

—Cash transactions are prohibited.

—All transactions in excess of USD 50,000 have to be personally authorized by a bank director.

Fitzpatrick said that he was responsible for implementing these

due diligence requirements, but admitted that he did not always

comply with them. For example, he said that when he opened the

Wingrove account in November 1997, a month after issuing the policy statement, he did not perform any due diligence review. He said

that he had known Wingrove for several years and was convinced

that Wingrove was an established art dealer with access to substantial funds. Fitzpatrick said that, contrary to Hanover Bank policy, he did not obtain any bank or professional references prior to

opening the account. He said that he had actually asked Wingrove

for these references, but he had not produced them, and Fitzpatrick

had opened the account anyway. He acknowledged that there were

only two pages of account opening documentation for the Wingrove

account, a one-page application form and a 1-page copy of Wingrove’s passport photograph. In his interview, Wingrove said that

he had signed the account opening documentation while at an airport in England, and never saw or was asked to sign a signatory

card for the account.

Fitzpatrick said that although he normally was the only person

who opened accounts at Hanover Bank, in 1998 Poulden also

452

opened them. Fitzpatrick explained that, since Poulden was then

chairman of the bank, he and Poulden had agreed that Poulden

could open accounts on his own authority, without the prior approval of Fitzpatrick. He said that he had instructed Poulden on

how to open an account, by completing certain paperwork and performing a due diligence review on the prospective client, as set out

in Hanover Bank’s policy statement. Fitzpatrick said that because

Poulden was a ‘‘practicing barrister’’ and experienced businessman

and seemed to want a successful Hanover Bank as much as he did,

he had trusted Poulden to comply with the account opening requirements and never doublechecked his efforts. He said that

Poulden had also often told him he had the paperwork for the accounts he had opened, so Fitzpatrick had not bothered to obtain a

copy for his files.

Fitzpatrick said he later determined, however, that Poulden had

opened some accounts without telling him and had failed to complete any account opening or due diligence documentation. Fitzpatrick was also unaware of what due diligence reviews Poulden

had conducted, if any. According to Fitzpatrick and documentation

obtained during the investigation, Poulden appears to have opened

at least four accounts in 1998:

(1) Account No. 930509—$2.4 million deposit made on 4/1/98

for Yoshiki Doi;

(2) Account No. 930510—opened for Cranest Capital S.A., but

no apparent transactions;

(3) Account No. 930511—$190,000 deposit made on 4/24/98 for

Ted Tsuru and Takuma Abe joint account; and

(4) Account No. 930512—$10 million deposit made on 6/2/98

for Morgan Steepleton Investment & Securities S.A.; funds

withdrawn and wire transferred 2 weeks later on 6/15/98

to a Morgan Steepleton account at another bank.

Fitzpatrick said that, because there was no account opening or

due diligence documentation, he could not say with certainty who

the account signatories were or what the relationships were among

the accounts. He said that he had no information about Doi other

than an address in Japan, and had never met or spoken with him.

He thought that Poulden, Tsuru and Abe had administered the Doi

account but was not sure who had signatory authority over it.

Fitzpatrick thought Cranest Capital and Morgan Steepleton Investment & Securities were companies associated with Tsufu, but was

not sure and was unaware who had signatory authority over either

of those accounts.

When asked about the $2.4 million deposit to the Doi account,

Fitzpatrick said that he first learned of that deposit when reviewing Hanover Bank’s April 1998 account statement from Standard

Bank. He said the amount ‘‘surprised’’ and ‘‘delighted’’ him, because he assumed it was the result of Poulden’s efforts to bring

new deposits to the bank and provided proof that Poulden had access to individuals with substantial funds. He said that after he

saw the deposit, he telephoned Poulden who told him about opening the account for Doi. Fitzpatrick said that he did not know the

purpose of the deposit or the source of the funds.

453

191 U.S. bank records show outgoing transfers totaling over $1.3 million, including $300,000 on 4/6/98; $100,000 (in two $50,000 payments) on 4/9/98; $300,000 on 4/9/98; $150,000 on 4/20/

98; $400,000 on 5/15/98; and $100,000 on 6/19/98, that were apparently initiated by Poulden or

associated with the accounts opened by Poulden. Other bank records show outgoing transfers

of 135,000 (U.S. $225,000) on 4/21/98; and 130 million Japanese yen (U.S. $500,000) on 5/29/

98.192The $300,000 payment on 4/9/98 was made to an account at Texas Commerce Bank N.A.

for ‘‘Anglo Gulf Energy Inc.’’ Articles of incorporation for Anglo-Gulf Energy Inc., filed in Texas

in October 1997, indicate that it is a Texas corporation and Poulden was one of its two initial

directors. An article in Private Equity Week, dated 8/10/98, states: ‘‘Anglo-Gulf Energy Inc. of Spring, Texas, is raising $3 million through a private placement of common stock. . . . Alden

Capital Markets Inc. of New York is acting as agent for a sales commission of $300,000.’’ It is

possible that Alden Capital Markets Inc. was the securities firm referred to by Fitzpatrick. 193With respect to purchasing Hanover Bank, Fitzpatrick indicated that he thought Poulden

had obtained approval to transfer $100,000 from the Doi account, in two $50,000 payments on

4/9/98, to Fitzpatrick’s personal bank accounts, in partial satisfaction of the bank’s proposed $1

million purchase price. When asked whether Doi was one of the Japanese stockbrokers buying

the bank, Fitzpatrick said that was never made clear.

When asked what had happened to the $2.4 million, Fitzpatrick

said that a number of large outgoing wire transfers initiated by

Poulden had utilized funds from the Doi account.191 Fitzpatrick

thought these transfers were used, in part, to purchase an oil company in Texas and a securities firm in New York; 192; to pay legal

or consulting fees; and to help finance the purchase of Hanover

Bank.193 Fitzpatrick said that another $400,000 was inadvertently

withdrawn from the Doi account in connection with the Wingrove

overdraft. He said that he wrote to Doi several times about the

overdraft, but Doi had never responded or requested the return of

his $400,000, which Fitzpatrick said he found surprising and suspicious. When asked about the $10 million deposit in June and its withdrawal 2 weeks later, Fitzpatrick indicated that he did make inquiries about those wire transfers at the time. He said that

Poulden had told him the $10 million was going to be used to purchase ‘‘prime bank notes,’’ and that Poulden was acting as a middleman in the transaction, between the sellers of the notes and the

purchaser, Tsuru. Fitzpatrick said that Poulden had agreed with

him that it was a scam, since prime bank notes are fictitious instruments with no tradeable market, but Poulden said he had been

unable to convince Tsuru not to go forward with the purchase.

Fitzpatrick thought, in the end, however, the purchase had not

gone forward. Fitzpatrick said he did not know Tatsuya Omura,

the person identified on the wire transfer documentation as the

originator of the $10 million deposit, nor did he know the source

of the funds. He also had no information about the Morgan

Steepleton account to which the $10 million was transferred.

Fitzpatrick was also asked about Hanover Bank’s lending activities. He said that Hanover Bank did not engage in regular lending,

but occasionally issued a letter of credit, certificate of deposit or

loan, which he would approve. The few credit transactions examined during the Minority Staff investigation presented additional

evidence of questionable operations at the bank. For example, an

April 3, 1998 letter signed by Fitzpatrick stated that Doi had $16.5

million in his account, even though bank records indicate that the

account never held more than $2.4 million. When asked about the

letter, Fitzpatrick said that Doi had asked for a ‘‘temporary loan,’’

and Hanover Bank had engaged in a ‘‘book transaction’’ in which

it loaned him the funds and he repaid them a few days later, reVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00463 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
454

194See 8/25/00 letter from the GOAB’s International Financial Sector Regulatory Authority to

Elise Bean of Senator Levin’s office, at 2.

turning his account to its original status. When asked where Hanover Bank had obtained the capital to make a $16.5 million loan,

Fitzpatrick said that it was ‘‘just a book transaction’’ that took

place on paper and did not involve actual funds. He said that

Poulden had drafted and asked him to sign the letter. He said he

had trusted Poulden ‘‘one hundred percent,’’ thought Poulden

would not want to get him or the bank into trouble, and so had

done as he asked in signing the letter. Fitzpatrick could not provide any other information about the transaction. A second questionable credit transaction, involving a $1 million letter of credit

issued to an individual seeking to launder criminal proceeds, is described below in connection with the criminal conviction of Eric

Rawle Samuel who once worked for Hanover Bank.

Together, the information collected by the Minority Staff investigation about the day-to-day operations of Hanover Bank show a

bank that operated with few formalities, few controls, few records,

and few worries about client due diligence or money laundering.

(5) Regulatory Oversight of Hanover Bank

In 8 years of operation, Hanover Bank never underwent a bank

examination by its primary regulator, the Government of Antigua

and Barbuda. GOAB authorities did not conduct examinations of

any of its licensed banks until 1999, previously relying on audited

financial statements and other filings prepared by its banks to

monitor their activities. In 1999, GOAB authorities initiated a new

program for government-sponsored bank examinations and, in

2000, began its first examination of Hanover Bank.194 The examination completed a review of the bank’s documents in Antigua

over the summer and requested an on-site inspection in Ireland in

late 2000.

Irish banking authorities have also never conducted an examination of Hanover Bank. Personnel from the Central Bank of Ireland

indicated, when contacted by the Minority Staff investigation, that

they had been unaware of Hanover Bank’s activities in Ireland.

They indicated that they had not known that Fitzpatrick was involved in international banking, that he was the sole owner of

Hanover Bank, or that he was keeping bank records and faxing

wire transfer instructions from his residence in Ireland. They also

indicated that Ireland does not exercise any regulatory authority

over Hanover Bank, since it is licensed by GOAB and apparently

does not solicit deposits in Ireland.

Although it has not been the subject of routine bank examinations, Hanover Bank has undergone three special reviews by bank

regulators. The first took place in 1993, shortly after the bank was

licensed, when it was alleged to be involved in the Clerical Medical

fraud, described below. U.K. authorities conducted a lengthy investigation, but took no formal action against the bank. GOAB authorities apparently did not investigate or take any action against

the bank in this matter.

A few years later, however, as part of a general offshore banking

reform effort, GOAB issued a March 24, 1997 notice of its intent

455

195See appendix for a more detailed description of the Koop fraud.

to revoke Hanover Bank’s license. The specified grounds were the

bank’s failure to pay its 1996 registration fees and its failure in

1992 to commence banking operations within 6 months of receiving

a license. GOAB actually revoked the bank’s license 2 days later.

Hanover Bank was one of over a dozen banks whose licenses were

revoked in the 1997 GOAB reform effort, and it is included in a list

of banks that GOAB told the U.S. State Department were closing

their doors. But Hanover Bank refused to close. Justin Simon, the

bank’s local director and registered agent, filed suit in court to

overturn the license revocation. According to Simon, the suit was

heard by Justice Kenneth Allen in 1997. Although GOAB authorities thought the court had overturned the revocation as a result of

that proceeding, Simon indicated that Justice Allen did not actually

issue a decision on the merits. He said that, instead, Keith Hurst,

then head of the GOAB’s International Business Corporations

(IBC) Unit, unilaterally reversed the government’s position and reissued the bank’s license. The May 30, 1997 certificate reinstating

Hanover Bank’s license is signed by IBC Director Hurst.

In 1998, U.K. and Jersey banking authorities commenced a special investigation of Hanover Bank after receiving evidence that the

bank was conducting illegal banking activities in both jurisdictions,

as described below. In July 1998, the U.K. Financial Services Authority (FSA) obtained a court injunction prohibiting Hanover Bank

from conducting banking activities in the United Kingdom. The

FSA rescinded this injunction only after receiving Hanover Bank’s

assurance that it would not conduct business in the jurisdiction.

Jersey banking authorities conducted a parallel investigation into

Hanover Bank’s activities in Jersey. This investigation led to its

censuring Standard Bank Jersey Ltd. for opening a Hanover Bank

correspondent account; alerting U.S. authorities to suspicious activity in Standard Bank’s U.S. correspondent account at Harris Bank

International related to Hanover Bank; and alerting GOAB authorities to their findings and concerns about Hanover Bank. These

actions contributed to the unraveling, of the Koop fraud and the filing of multiple U.S. indictments,195 as well as GOAB’s subsequent

decision to conduct an on-site examination of Hanover Bank in

2000.

(6) Money Laundering and Fraud Involving Hanover Bank

The Minority Staff investigation found evidence of fraudulent

and criminal activities throughout Hanover Bank’s 8 years of operation, involving millions of dollars lodged in various correspondent

bank accounts. Three frauds in 1998, involving virtually all of Hanover Bank’s clients and 100% of the funds it moved through a U.S.

correspondent account, raise particular concerns. Together, they

demonstrate that Hanover Bank’s inadequate oversight of its few

clients, associates and transactions contributed to fraudulent activity and multiple violations of banking, civil and criminal laws in

the United States, United Kingdom, Jersey and elsewhere.

456

196See, for example, ‘‘Primed for fraud,’’ Accountancy (4/95). 197See, for example, ‘‘Suspension lifted on fund managers,’’ Financial Times (London) (7/19/

94); ‘‘Clerical Medical regains Pounds 20m,’’ The Times (7/11/94); ‘‘British Firm Sues Two Lebanese Men For Embezzlement,’’ AP Worldstream (4/28/94); ‘‘SIB investigates switch of Clerical

Medical funds to Cyprus,’’ The Times (1/3/94); ‘‘Clerical Medical rejects demands over funds,’’

The Times (8/23/93); ‘‘Insurer sues over controls of Pounds 20m,’’ The Times (8/14/93). 198Letter dated 5/30/00 from FSA to Subcommittee.

(a) Clerical Medical Scandal

In 1993, soon after receiving its banking license, Hanover Bank

became embroiled in a major financial scandal involving 20 million, a prominent British insurance company called Clerical Medical, and a fraudulent investment scheme involving prime bank

notes. Prime bank notes are fictitious financial instruments which

typically contain a false promise or ‘‘guarantee’’ by a well-known or

‘‘prime’’ bank to pay a specified amount of funds, and the notes are

then fraudulently characterized as available for trade at a discounted price. Fitzpatrick said during his interview that he now

knows that no trading market exists for prime bank notes and they

are considered a warning sign of financial fraud, but said he did

not have that information at the time. The 1993 scandal, highly

visible at the time, is still cited on occasion as one of the earliest

examples of prime bank note fraud.196

Fitzpatrick explained that, soon after the bank began operations,

Poulden and he began to negotiate a prime bank note investment

with Managed Opportunities Ltd., an Isle of Man corporation that

managed funds for the Clerical Medical Group. He said the negotiations led to an agreement among Hanover Bank, Managed Opportunities Ltd., and a Cyprus company called Kinitor Ltd., which

essentially provided that Kinitor would provide certain prime bank

notes in exchange for 20 million to be deposited into a Hanover

Bank correspondent account at Lombard National Westminster

Bank in Cyprus. Other companies, such as Bankhall Investment

Management and Corporate Financial Investments were also involved.

Press reports indicate that after the 20 million was transferred

to Hanover Bank’s account at the Cyprus bank in or around June

1993, Clerical Medical claimed the transfer was unauthorized and

demanded return of the funds.197 Legal injunctions and lawsuits

followed, freezing the funds in the Hanover account in Cyprus for

about a year. Inquiries were launched by two U.K. bodies, the Securities and Investments Board and the Financial Intermediaries,

Managers and Brokers Regulatory Association, as well as by the

fraud office of the International Chamber of Commerce. Fitzpatrick

said that, in the end, Clerical Medical recovered the 20 million,

and the lawsuits were settled. He said that none of the inquiries

reached any conclusions regarding Hanover Bank’s knowing participation in a fraud. When the Minority Staff contacted the U.K.

Financial Services Authority (FSA) for its evaluation of the Clerical

Medical matter, the FSA declined to provide any information because, as the FSA stated in a letter, ‘‘the Financial Services Act of

1986 . . . does not provide for publication of any report . . . and

use of, and/or disclosure to third parties, of information contained

in any such report or otherwise obtained in the course of a Section

105 investigation is subject to statutory restrictions.’’ 198

457

199See United States v. Samuel (U.S. District Court for the Northern District of Georgia

Criminal Case No. 93–CR–420–ALL), indictment dated 10/5/93; ‘‘News Release’’ dated 1/19/94,

by the U.S. Attorney for the Northern District of Georgia, announcing guilty plea; ‘‘Judgement

in a Criminal Case’’ dated 3/30/94. 200See United States v. Samuel, ‘‘Affidavit’’ dated 9/10/93, paragraph (3). 201 Id., paragraphs (19) and (25). 202 United States v. Samuel, indictment, paragraph (17).

The Clerical Medical scandal was the first indication that Hanover Bank was possibly engaging in questionable activity. Despite

the lengthy investigations into its conduct, U.K. policies against releasing FSA reports meant than none of the FSA information was

made available to the public or persons attempting to evaluate

Hanover Bank’s track record.

(b) Eric Rawle Samuel Criminal Conviction

In September 1993, just after the Clerical Medical scandal broke,

Eric Rawle Samuel was arrested in the United States for offering

to launder up to $12 million through Hanover Bank.199 In January

1994, Samuel pled guilty to one count of money laundering related

to his actions and was sentenced to more than 5 years imprisonment in the United States.

Samuel had ‘‘represented himself to be an employee’’ of Hanover

Bank, according to the indictment. Fitzpatrick said in his interview

that Samuel was never an employee of the bank, although he had

occasionally performed some services for it. According to the indictment, Samuel had traveled to the United States on two occasions,

in August and September 1993, to negotiate the sale of letters of

credit to be issued by Hanover Bank in exchange for drug proceeds

and a $100,000 fee for each $1 million laundered through the bank.

A publicly available affidavit filed by U.S. law enforcement noted

that Samuel had specifically mentioned Hanover Bank’s correspondent relationships with Standard Bank in Jersey and Harris

Bank in New York in connection with the laundering scheme.200

The affidavit indicated that Samuel had also mentioned Hanover

Bank’s involvement with a ‘‘scam’’ involving ‘‘prime bank guarantees’’ and laundering funds ‘‘from Nigeria.’’ 201 Samuel was arrested

in Atlanta, Georgia, after exchanging a $1,000,000 Hanover Bank

letter of credit for ‘‘what he believed to be . . . $100,000 in

cash.’’ 202

In his interview, Fitzpatrick characterized the U.S. prosecution

as a case of ‘‘clear entrapment.’’ He said that it was his understanding that Samuel had received an unexpected telephone call

from someone he knew in the United States, who was secretly participating in a law enforcement sting operation in an effort to reduce his own criminal sentence after an arrest. He said that the

individual had apparently told Samuel that he had cash to invest,

and wanted to buy a certificate of deposit or letter of credit from

Hanover Bank with a face value of $1 million, for which he would

pay $800,000 up-front and the rest later. He said that Samuel had

told him about the proposal, which he had considered essentially

a loan request, and he had approved going forward. Fitzpatrick

said that he personally drafted the letter of credit Samuel used in

the transaction. He said that Samuel then telephoned the person

in the United States to inform him that the deal had been approved.

458

203Fitzpatrick said that after the arrest, a friend of Samuel had telephoned him and told him

what had happened, and he had sent some money to help pay Samuel’s legal fees. He said that

he was never questioned by anyone about the matter and was never asked to testify. 204For more information about the Koop fraud, see the appendix and the case histories for

British Trade and Commerce Bank and Overseas Development Bank and Trust.

He said that the person had then told Samuel that he had ‘‘dirty

money,’’ and Samuel ‘‘fell for it’’ and said he ‘‘didn’t mind’’ and

would accept the cash. He said that Samuel flew to the United

States with the letter of credit and met the person at a hotel,

where their conversation was apparently recorded by the Federal

Bureau of Investigation (FBI). He said that the person had apparently again told Samuel that he had ‘‘dirty money’’ and Samuel had

again said he ‘‘didn’t mind’’ and would accept it. He said the FBI

then arrested Samuel who spent 5 years in prison.203

GOAB authorities indicated, when asked about the Samuel

money laundering conviction, that they had no knowledge or record

of the indictment or Hanover Bank’s involvement. Hanover Bank’s

local director and registered agent, Justin Simon, indicated that he

thought the indictment had involved a different Hanover Bank and

was surprised to hear that Fitzpatrick had acknowledged his

bank’s involvement in the facts underlying that prosecution. The

Samuel money laundering conviction provided a second strong, and

early indication of Hanover Bank misconduct, but news of the conviction apparently never even reached the bank’s licensing authority.

(c) Koop Fraud

William H. Koop, a U.S. citizen from New Jersey, utilized Hanover Bank in a financial fraud in which, from 1997 to 1998, he

bilked hundreds of U.S. investors out of millions of dollars through

a high yield investment scam.204 In interviews with Minority Staff

investigators, Fitzpatrick, Koop and Wingrove offered different and

often conflicting views of what happened during the fraud, who was

defrauding whom, and who knew what was going on when. Rather

than attempt to evaluate their conflicting statements or assign culpability, the investigation focused on how Hanover Bank, whether

knowingly or unknowingly, became a conduit for millions of dollars

in illicit fraud proceeds.

The evidence indicates that Hanover Bank played a prominent

role in the Koop fraud in two ways. First, Koop sent almost $5 million in fraud proceeds to Hanover Bank, partly in response to

claims by Wingrove that Koop could earn returns of 20% or more.

Second, Hanover Bank became a featured element in Koop promotional materials. Koop urged potential investors in his fraudulent high yield program to wire their investment funds to his Hanover Bank account and offered, for a fee, to open a Hanover Bank

account for any investor wanting an offshore account. Documentation suggests that Koop pretended to open over 200 Hanover Bank

accounts for his defrauded clients, eventually charging over $3,300

to open each new account.

Laundering $5 Million in Fraud Proceeds. In his interview,

Koop stated that he first learned of Hanover Bank in late 1997,

during a London meeting in which he was introduced to Wingrove.

In a sworn deposition, Koop said that Wingrove had claimed to be

459

205Koop deposition in Schmidt v. Koop (12/10/98) at 182. 206 Id. at 169, 232. 207 Id. at 169–71. 208 Id. at 225. See also Koop deposition in Schmidt v. Koop (3/2/99) at 369. 209Koop deposition in Schmidt v. Koop (12/10/98) at 165–167. 210 Id. at 165–66, 182–83. 211Koop deposition in Schmidt v. Koop (12/10/98) at 166, 178–80. 212 Id. at 169, 227–232. 213 As explained in the BTCB case history, ‘‘IFS’’ refers to several different corporations controlled by Koop, including International Financial Solutions. Ltd. and Info-Seek Asset Management S.A.

a ‘‘majority stockholder of Hanover Bank’’ 205 and an international

trader who could produce significant returns on short term investments.206 Koop indicated that, after checking into the background

of both Wingrove and Hanover Bank, he had decided to open an account and direct some of his illicit proceeds to Wingrove for investment.207

Koop said that he never spoke with anyone else at Hanover

Bank, including Fitzpatrick, and did not find out for a number of

months that Wingrove had no official position with the bank.208 He

said that he thought Wingrove had opened a Hanover Bank account for him, under the name of IFS, for which Koop was the sole

signatory, and which paid 20% interest on deposits.209 He said that

he later discovered that no account had ever been opened, and all

the funds he sent to Hanover Bank had actually been deposited

into Wingrove’s account at the bank.210

Koop maintained in his deposition that, of the nearly $5 million that he and his associates directed to Hanover Bank, about $3 million was supposed to have been deposited into his account, while

the other $2 million was intended for Wingrove, for international

investments.211 Koop said that Wingrove actually took control of all $5 million and has yet to return a single dollar of these funds.

Koop indicated that Wingrove had led him to believe he was investing the funds in artwork and antiquities, ‘‘currency trading’’ and ‘‘computer chips,’’ although he did not ask and was not informed

about specific trades made with his funds.212

Wingrove maintained in his interview that he never misrepresented his relationship to Hanover Bank and never agreed to make

investments of any type other than in art and antiquities, which

were his specialty. He said that he did promise Koop to produce a

50% return over a 5-year period from the purchase and sale of art

and antiques. Both Koop and Wingrove agreed, however, that this

promise was never put in writing, and Koop sent Wingrove millions

of dollars without any formal agreement.

Wingrove said that ‘‘within weeks’’ of their first meeting, Koop

began sending him money to speculate in art. He said, at a later

point, Koop arranged for him to meet his associate, Johnny Cabe,

who was in London on a business trip. He said that Cabe also

began to invest funds with him and introduced him to his London

accountant, Winston Allen.

Both Koop and Wingrove indicated that the $5 million sent to

Hanover Bank was part of a larger sum, $12 million, that Koop directed to Wingrove over the course of 6 months using accounts at

several banks. According to Wingrove, the funds sent to Hanover

Bank were at first deposited by Koop through his company IFS,213

or by Cabe through his company Hisway International Ministries.

460

214Fitzpatrick and Poulden prepared one account statement for the Wingrove account, covering the months of April and May 1998. This document was turned over by Hanover Bank in

discovery proceedings associated with a U.S. civil suit filed by an investor attempting to recover

his funds from Koop, Schmidt v. Koop (U.S. District Court for the District of New Jersey Civil

Case No. 978–CIV–4305). This suit named Hanover Bank as a defendant, but voluntarily dismissed the bank from the suit after obtaining discovery documents. 215 Virtually all of the deposits credited by Fitzpatrick to the Wingrove account were directed

to be paid to someone other than Wingrove. For example, the very first deposit into the 1998

Hanover Bank account at Standard Bank was for $250,000 on March 30, 1998. That deposit

was made by wire transfer from the United States and directed the funds to be paid to ‘‘Financial Solutions Ltd.’’ Three days later, on 4/2/98, $1.2 million was deposited into the Hanover

Bank account for further credit to ‘‘Acct A01001001 INT.’’ Fitzpatrick acknowledged in his interview that Financial Solutions Ltd. was not a Hanover Bank accountholder, nor would Hanover

Bank’s numbering system produce an account number like ‘‘A01001001.’’ He said that many of

the deposits into the Hanover Bank account referenced companies or individuals who were not

accountholders at the bank and were unfamiliar to him. When asked how he knew to credit

such funds to the Wingrove account, Fitzpatrick said that Wingrove had sometimes called to

alert him to expected incoming funds, while other times Wingrove had appeared surprised by

particular deposits but agreed they should be attributed to his account. 216Fitzpatrick said that the only other active Hanover Bank accounts in 1998 had been

opened by Poulden, who would tell him when incoming funds should be credited to one of his

clients’ accounts.

Later, Wingrove said, funds were sent to Hanover Bank by third

parties in the United States with whom he had no direct contact.

He said these third party deposits caused confusion and cash flow

problems, because the timing and amounts of the deposits often

conflicted with information provided by Koop or Cabe about incoming funds.

Standard Bank account statements at Harris Bank International

and a Hanover Bank account statement prepared for the Wingrove

account 214 show numerous deposits related to the Koop fraud, to- taling almost $5 million. Fitzpatrick confirmed that he attributed

all of these funds to the Wingrove account. He explained that he

had never met Koop or any of the other persons indicted in the

Koop fraud and had never opened an account for any of them other

than Wingrove. Fitzpatrick indicated that he had no idea that Koop

and Cabe thought they had accounts at Hanover Bank and were

directing funds into them. According to him, that was why it never

occurred to him, when a $240,000 deposit was made on April 6,

1998, to ‘‘International Financial Solutions,’’ or a $103,000 deposit

was made on April 22, 1998, to ‘‘Hisway Inc.,’’ that the funds might

be intended for an account other than the Wingrove account.215

Banking experts, however, have told the Minority Staff that a

bank’s casual acceptance of deposits earmarked for persons or accounts not associated with the bank is both unusual and improper

bank procedure.

Fitzpatrick noted that Hanover Bank had only a handful of accounts in 1998, and the Wingrove account was the only one receiving numerous deposits at the time.216 He said that he opened the

Wingrove account in November 1997, but Wingrove did not begin

using it until March 1998, when Hanover Bank opened its correspondent account at Standard Bank. Fitzpatrick stated, and bank

records confirm, that from the day the account opened, Wingrove

immediately began moving millions of dollars through it.

The bank records and other information indicate that Wingrove

quickly transferred the deposits made into his Hanover Bank account to other bank accounts around the world. Fitzpatrick said

that the quick passage of the funds through the Wingrove account

did not strike him as suspicious, since he assumed Wingrove was

receiving funds from clients and immediately using the funds to

461

217These instructions stated in part:

‘‘Deposit Funds To: Harris Bank International, New York, New York

For Credit To: Standard Bank Jersey, Limited, Isle of Jersey, Channel Islands

For Further Credit To: Hanover Bank, Limited

For Further Credit To: I.F.S. Account #A01–001–001.’’

purchase artwork. Legal action on behalf of Koop fraud victims has

since been taken to seize remaining funds from Wingrove-controlled accounts as well as some of the artwork purchased with the

Koop funds.

Advertising Hanover Bank in the Fraud. In early 1998, promotional materials associated with the Koop fraud began to feature

Hanover Bank. One example is a packet of information entitled,

‘‘The I.F.S. Monthly ‘Prime’ Program,’’ which Koop gave to potential investors to convince them to place funds in his fraudulent investment program. Section 2 of the packet, entitled ‘‘Wire Transfer

Instructions,’’ directed all investors to send their funds to the IFS

account at Hanover Bank.217 The Koop packet also provided background information about Hanover Bank, describing the bank’s establishment, services and correspondents, and claiming the bank

had ‘‘one of the most extensive and complete list of correspondent

banks in the entire banking business.’’

In an early version of the Koop packet, a document entitled

‘‘Banking Information’’ stated:

We have made arrangements with The Hanover Bank to open

accounts for each of our clients . . . without any charge to you.

If you are interested in doing so, please send a duplicate copy

of your bank reference letter and a copy of your passport picture page. . . . IFS will then open an account for you in The

Hanover Bank in the name of your trust. We are negotiating

for the purchase of this bank at this time.

A later version of this document stated that, ‘‘[a]s of April 1st,

1998, IFS has . . . become the largest stockholder . . . of the Hanover Bank.’’ A document entitled, ‘‘Trusts and Bank Accounts’’ offered to set up an offshore trust and bank account at Hanover

Bank for $3,375, with checks made payable to Koop. Both the early

and late versions of the Koop packet provided blank copies of Hanover Bank’s account opening forms for personal and corporate accounts.

Still another document, dated June 22, 1998, and entitled ‘‘A

Personal Letter from the Desk of William H. Koop,’’ described how

Koop’s company, IFS, had been experiencing problems with its

prior bank, Overseas Development Bank, and decided to make a

‘‘changeover’’ to Hanover Bank. The document described plans to

‘‘re-structure’’ the bank and move its ‘‘operating office from Antigua

to the Island of Jersey.’’ The Koop letter promised ‘‘in the very near

future’’ to ‘‘unveil the positive factors of the bank, showing you the

opportunities that it will present to you personally [including]. . . .

numbered accounts[,] . . . high interest rates on time deposit

accounts[, and] . . . debit cards.’’ The Koop letter remarked that,

by June 1998, ‘‘[m]ost of you’’ already had Hanover Bank accounts.

Documents collected in civil proceedings associated with the Koop

462

218Schmidt v. Koop, (U.S. District Court for the District of New Jersey Civil Case No. 978–

CIV–4305). 219Koop deposition in Schmidt v. Koop, (12/10/98) at 158. 220Koop deposition in Schmidt v. Koop (3/2/99) at 431.

fraud 218 included a specific list of investors who supposedly had

Hanover Bank accounts. This list identified over 200 individuals by

name, providing each with a fictitious account number at Hanover

Bank.

Fitzpatrick indicated during his interview that he had no idea at

the time that Koop was purporting to open Hanover Bank accounts. Fitzpatrick speculated, and Wingrove separately confirmed,

that Koop had obtained copies of Hanover Bank’s account opening

forms and wire transfer instructions from Wingrove, who had that

information. Wingrove stated in his interview that he had sent the

Hanover Bank account opening forms to Koop, because Koop had

been considering opening an account.

When asked about statements in the IFS promotional materials

about purchasing Hanover Bank, Koop indicated during his interview that he and Wingrove had often spoken about buying the

bank, but never completed the transaction. In a sworn deposition,

Koop said Wingrove had told him he was ‘‘going to have a percentage of stock in [Hanover Bank, but] . . . never turned the stock

over to me.’’ 219

Koop created further confusion about his relationship to Hanover

Bank and the bank’s role in the Koop fraud by incorporating a Dominican company called ‘‘Hanover B Ltd.’’ and opening an account

at British Trade and Commerce Bank (BTCB) in the name of this

corporation. Koop stated in a sworn deposition that he chose the

company’s name ‘‘to correspond to Hanover Bank.’’ 220 Wingrove indicated during his interview that he was well aware of the account

at BTCB, thought Koop had opened it in a deliberate attempt to

‘‘mirror’’ the Hanover Bank account, and thought it had helped

Koop appear to be opening Hanover Bank accounts for Koop investors. Fitzpatrick indicated that he knew nothing of ‘‘Hanover B

Ltd.,’’ had never had any contact with BTCB, and had never

opened a correspondent account for Hanover Bank at BTCB.

The Koop fraud provides a detailed account of how criminals can

use an offshore bank to launder funds and perpetuate financial

frauds. It also demonstrates how loose bank controls and nonexistent money laundering oversight contribute to the ability of

criminals to carry out their activities. Fitzpatrick repeatedly said

that he had no knowledge of Koop’s misconduct, Wingrove’s misrepresentations, or their joint misuse of the bank, yet he also failed

to follow basic banking procedures that would have enhanced his

awareness and understanding of the transactions taking place

through his bank. When asked when he first got wind of possible

wrongdoing, Fitzpatrick said that the first indications probably

came in the summer of 1998, when he learned that the U.K. Financial Services Authority was investigating Hanover Bank for illegal

banking activities in England and Jersey and asking about

Wingrove’s role at the bank.

463

221See FSA v. The Hanover Bank Ltd., ‘‘First Affidavit of Peter Geoffrey Brian Willsher,’’ (7/

23/98) at 4. See also FSA Press Release, ‘‘The FSA gains injunctions against Hanover Bank Limited, Winston Allen and Patrick Makosso-Jouvam’’ (7/24/98), reprinted at www.fsa.gov.uk/pubs/

press/1998/050.html; and Terry Wingrove, Winston Allen, Patrick Makosso-Jouvam (CH 1998

Case No. F4107) before the High Court of Justice, Chancery Division. Neither the FSA nor Jersey authorities would provide copies of the pleadings. However, Fitzpatrick provided copies of

certain pleadings to the plaintiff in Schmidt v. Koop pursuant to discovery in that case, and

plaintiff provided copies to the Minority Staff investigation. 222 Id. at 5. 223 Id. at 7–8. 224 Evidence obtained by the Minority Staff investigation indicates that Allen was also associated with the Koop fraud. For example, documentation and interviews establish that, in 1997

and 1998, Allen worked for Cabe, Hisway International Ministries, and related companies. In

a sworn deposition, Koop described Allen as ‘‘a personal friend’’ to whom he loaned over

$140,000 to purchase and furnish an apartment in New York. See Schmidt v. Koop, Koop deposition (12/10/98) at 209, 211–14, 235–36, 243; and Koop deposition (3/2/99) at 393–95. A 10/1/

98 fax sent by Koop to Leonard Bedneau at BTCB, asked the bank to establish a new Dominican

corporation called Atlantic Marine Bancorp, Ltd. and ‘‘add Winston Allen as an organizer with

William H. Koop.’’ Wingrove indicated in his interview that Allen was also involved in Koop’s

establishment of the Hanover B account at BTCB. 225The injunction also prohibited Wingrove, Allen, and Jouvam from ‘‘using the name Hanover Bank,’’ describing themselves as bankers, or otherwise engaging in banking activities within the United Kingdom. A second FSA affidavit in FSA v. The Hanover Bank Limited, ‘‘Second

Affidavit of Peter Geoffrey Brian Willsher (7/28/98), asked the court to restrain Wingrove from

‘‘making certain misleading, false or deceptive statements’’ regarding Hanover Bank.

(d) Illegal Bank Activities in England and Jersey

In 1998, for the first time since the Clerical Medical scandal 5

years earlier, bank regulators in England and Jersey took a close

look at Hanover Bank. They determined that the bank was not

only operating illegally in both their countries, but was also moving

millions of dollars in suspect funds. Their inquiry led to exposure

of the Koop fraud, the censure of Standard Bank for providing correspondent services to Hanover Bank, and additional regulatory examination of this offshore shell bank’s activities.

The 1998 inquiry began after an individual who was considering

depositing funds with the bank asked Jersey banking authorities to

confirm that Hanover Bank had a Jersey banking license and a

London representative office.221 The Jersey authorities contacted

the U.K. Financial Services Authority (FSA) which obtained a

search warrant, entered the alleged Hanover Bank office in London, and seized documents. The documents included Hanover Bank

‘‘brochures’’ stating that ‘‘[t]he bank holds a license to conduct

international banking business on the Island of Jersey’’ and was ‘‘operating within the security of Jersey’s stringent banking

laws.’’ 222 Another document described the London address as Hanover Bank’s ‘‘Representative Office.’’ 223 FSA investigators then

interviewed persons associated with the London office, including

Terrence Wingrove, Winston Allen 224 and Patrick MakossoJouvam.

On July 24, 1998, at the request of the FSA, the High Court in

London issued an emergency injunction prohibiting Hanover Bank

from conducting banking activities in the United Kingdom, since it

was not licensed to accept deposits or operate a representative office.225 An affidavit filed in the case by an FSA official stated that

Wingrove had allegedly represented himself to be Hanover Bank’s

chairman and promised to pay commissions to Allen and Jouvam

if they located new deposits for the bank.

Fitzpatrick said that he first learned of the FSA injunction when,

in July 1998, he received a letter from Standard Bank stating that

it intended to close Hanover Bank’s correspondent account due to

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226 In his interview, Wingrove essentially confirmed Fitzpatrick’s description of what happened, but maintained that Allen and Jouvam had prepared the false Hanover Bank literature

without his knowledge or involvement. 227 An analysis of Hanover and Wingrove account statements by Minority investigators, how- ever, found one $50,000 deposit on May 20, 1998, described in wire transfer documentation as

a transfer from ‘‘Metro Telecom Inc.’’ for further credit to ‘‘Ottershaw Consultancy Ltd.,’’ but

which was credited to the Wingrove account and appeared to be associated with the AllenJouvam marketing effort. When asked about this deposit, Fitzpatrick said that he was unfamiliar with the names and could not recall the circumstances surrounding the deposit. He said

it was possible that Wingrove had told him to credit the $50,000 to his account and he did so

without asking additional questions.

its distribution of inaccurate literature. He said the letter was a

‘‘shock,’’ and he immediately began investigating the matter.

Fitzpatrick said he eventually learned of the role of Wingrove, who

denied misrepresenting his relationship with Hanover Bank and

admitted only to describing Hanover Bank’s willingness to pay

commissions for new deposits. Fitzpatrick said that Allen and

Jouvam had used a computer to design new Hanover Bank ‘‘literature’’ to market the bank, included incorrect information about

its license and ability to transact business in the U.K. and Jersey;

and began prospecting for clients.226 Fitzpatrick indicated that he

did not know how many clients had been contacted or how many

accounts had been purportedly opened in the Allen-Jouvam marketing effort, but believed no deposits had actually been made to

the bank in connection with the effort.227

On November 26, 1998, the High Court in London withdrew the

injunction against Hanover Bank, with the consent of the FSA and

on Hanover Bank’s representation that it would not transact any

banking business in the U.K. Hanover Bank issued a press release

claiming it had been cleared and including the Fitzpatrick statement, ‘‘I am delighted the FSA has accepted that the bank was not

involved in any wrongdoing.’’ But the FSA had not cleared Hanover Bank of wrongdoing. To

the contrary, the inquiry led FSA and Jersey authorities to take a

much closer look at Hanover Bank and its Standard Bank account.

Jersey authorities alerted U.S. authorities to signs of suspicious activity in the Standard Bank account at Harris Bank International,

which led to a U.S. law enforcement investigation of the Koop

fraud, and the resulting guilty pleas and pending indictments, including the pending indictment of Wingrove. Jersey authorities not

only cooperated with the U.S. investigation, but also launched an

investigation of Standard Bank, resulting in the censure of the

bank and the departure of the bank’s chairman.

Fitzpatrick was asked during his interview, what steps Hanover

Bank had taken or could take in the future to prevent third parties

like Koop, Wingrove, Allen and others from misusing the bank’s

name and pretending to own it. Fitzpatrick responded that he was

only one person, the bank was very small, and it was very difficult

to guard against third parties misusing the name and reputation

of the bank. He said that he had experienced repeated instances of

strangers misrepresenting the ownership of Hanover Bank, and

there was ‘‘nothing [he] can do to stop it’’ unless others demanded

adequate proof of ownership.

He related an incident of several years ago in which his Antiguan agent, Justin Simon, telephoned him from Antigua to say

that a Brazilian businessman was on the island claiming to be the

465

228See, for example, Casio Computer Co. v. Sayo (CH 1998–C No. 3241) before the High Court

of Justice Chancery Division in London, including 6/10/98 ‘‘Injunction Prohibiting Disposal of Assets Worldwide’’ naming Tsuru, among other defendants; and Casio Computer Co. v. Sayo (U.S.

District Court for the Southern District of New York, Civil Case No. 98–Civ–3772–WK), including 6/18/98 ‘‘Second Amended Complaint’’ naming Tsuru, among other defendants. 229 Casio Computer Co. v. Sayo (U.S. District Court for the Southern District of New York,

Civil Case No. 98–Civ–3772–WK), Second Amended Complaint at 2.

Brazilian representative of Hanover Bank and investigating the

bona fides of the bank. He asked Simon to have the gentleman telephone him in Ireland. He said that the person called, and

Fitzpatrick informed him of his ownership of Hanover Bank. He

said the Brazilian told him that a U.S. citizen had shown him documents establishing his ownership of the bank and had asked him

to become the bank’s Brazilian representative to find new deposits

for the bank. Fitzpatrick said that the Brazilian told him he had

already raised $15,000. Fitzpatrick said that when he asked for the

name, address and telephone number of the U.S. person claiming

ownership of the bank, the Brazilian said that he did not have that

information. Fitzpatrick said this was not the only incident of this

kind—it had happened a number of times over the years.

(e) Casio Fraud

227An analysis of Hanover and Wingrove account statements by Minority investigators, however, found one $50,000 deposit on May

20, 1998, described in wire transfer documentation as a transfer

from ‘‘Metro Telecom Inc.’’ for further credit to ‘‘Ottershaw

Consultancy Ltd.,’’ but which was credited to the Wingrove account

and appeared to be associated with the Allen-Jouvam marketing effort. When asked about this deposit, Fitzpatrick said that he was

unfamiliar with the names and could not recall the circumstances

surrounding the deposit. He said it was possible that Wingrove had

told him to credit the $50,000 to his account and he did so without

asking additional questions.

In 1998, banking authorities examined Hanover Bank for illegal

banking activities in Jersey and the United Kingdom and launched

an investigation into what would turn out to be the Koop fraud, but

they apparently missed the bank’s possible involvement in still another multi-million-dollar financial fraud, which began in Japan

and led to legal proceedings in multiple jurisdictions. The fraud involved a major Japanese electronics company, Casio Computer Co.

Ltd. (‘‘Casio’’), which filed suit in Japan, the United Kingdom and

the United States, among other countries, claiming that a senior

employee, Osamu Sayo, had defrauded the company out of $100

million.228 The legal suits sought worldwide injunctions against

Sayo and other individuals and corporate entities associated with

the fraud, including Theoddor Tsuru, who had apparently been

hired by Sayo to help hide and invest a portion of the stolen funds.

Casio alleged in its U.S. complaint that ‘‘the various conspirators

lied to, and cheated, Casio and each other, generated fraudulent

records to conceal the frauds, and engaged in an elaborate series

of wire transfers in an effort to launder the stolen funds and conceal their racketeering activities.’’ 229 Tsuru is described as a key

conspirator who, beginning in February 1997, helped transfer Casio

funds through numerous bank accounts and place them in various

high yield investment schemes. The U.S. complaint alleged, among

466

230 Id. at 15. 231The three deposits were:

—$2.475 million deposited on 3/31/98, which Hanover Bank credited to the Doi account; —$190,000 deposited on 4/22/98, which Hanover Bank apparently credited to the Tsuru-Abe

joint account; and —$10 million deposited on 5/29/98, which Hanover Bank apparently credited to the Morgan

Steepleton account. 232When asked whether he thought Tsuru was using Hanover Bank in connection with the

Casio fraud, Fitzpatrick said that he did not know, but ‘‘it looks like that.’’ He said he first found

out about the Casio fraud through an article in The Observer that ‘‘had Tsuru’s name all over

it.’’ He said he immediately wrote to Poulden expressing concern and the need to remove Tsuru

from the bank’s board, and later rescinded Tsuru’s appointment. Fitzpatrick said that he also

wrote to Doi asking him whether his account was associated with the Casio fraud, and received

a letter denying any connection. He agreed to provide copies of that letter exchange, but did

not do so. He noted, however, that Doi was from Japan, the source of funds in his account was

unclear, and Doi allegedly allowed his funds to be used for various investments at the direction

of Tsuru, Abe and Poulden. Fitzpatrick also noted that when $400,000 was mistakenly withdrawn from the Doi account due to the Wingrove overdraft, Doi never complained or demanded

return of the funds, which he found unlikely conduct with respect to legitimate funds. 233Wingrove indicated that he also believed the funds deposited in Hanover Bank were associated with the Casio fraud. He indicated that he was first introduced to Tsuru and Poulden by

Fitzpatrick in March of 1998, when Tsuru was attempting to recover funds from another individual associated with the Casio fraud, Joseph R. Kelso. (Kelso’s role in the Casio fraud is described, for example, in ‘‘Wanted—over there, but not over here,’’ The Observer (4/12/98); and ‘‘Casio admits to $100m loss as executive goes into hiding,’’ The Observer (6/21/98).) Wingrove

said that he met with Kelso on Tsuru’s behalf while Kelso was detained in England on alleged

immigration violations and obtained some promising information. Wingrove indicated that, because he spoke fluent Japanese and was promised 10% of any funds he recovered, he also traveled to Japan on behalf of Tsuru and Poulden. He declined to provide specific information about

the trip, other than to say he met with Doi among others, and when he returned in May 1998,

warned Fitzpatrick about what he had found out. He said that, in the end, he never recovered

any funds for Tsuru. 234Poulden had introduced Tsuru and convinced Fitzpatrick to appoint Tsuru to Hanover

Bank’s board in March 1998. Tsuru stated in pleadings before the London High Court that, from

September 1997 until well into 1998, he had employed Poulden as a ‘‘barrister’’ to represent him

in matters relating to unsuccessful investments made with the Casio funds. See Casio Computer

Co. v. Sayo (CH 1998–C No. 3241), ‘‘Third Affirmation of Theoddor Tsuru’’ (1/12/99) at 63. Since,

by Tsuru’s own admission, Poulden was representing him in 1997 and 1998, in matters involving investments made with Casio funds, it is logical to assume Poulden was continuing to do

so in connection with their dealings with Hanover Bank.

other misconduct, that Tsuru personally misappropriated a portion

of the missing money, stating: ‘‘All told, it appears that Tsuru stole

at least $8,000,000 of the Casio funds.’’ 230

In June 1998, the London court issued a worldwide Mareva injunction freezing Tsuru’s assets, including a $2 million house in

Japan, a $2 million house in Florida, a $1.8 million apartment in

New York, and a $4 million yacht. It later issued a judgment

against him and ordered him to repay $3.3 million to Casio. Additional civil litigation in the United States involving Tsuru and the

Casio funds is ongoing in Florida, Illinois and New York.

Based upon the Minority Staff investigation’s analysis of bank

records and other evidence, it appears that three 1998 Hanover

Bank deposits totaling about $12.6 million are likely associated

with the Casio fraud. The deposits were made on three occasions

in 1998, using Standard Bank’s U.S. correspondent account at Harris Bank International.231 The evidence linking the deposits to the

Casio fraud includes the following:

—Both Fitzpatrick 232 and Wingrove 233 indicated during their

interviews that they thought the deposits were likely related

to the Casio fraud.

—The funds were deposited into accounts opened at the direction of Poulden, who was then an associate and representative of Tsuru, a key figure in the Casio fraud.234

467

—The deposits were made in 1998, when Tsuru was still handling Casio funds, and were deposited to accounts associated

with Tsuru, including a joint Tsuru-Abe account, the Doi account and a corporate account for Morgan Steepleton, a company Fitzpatrick said was associated with Tsuru.

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

While the evidence linking the $12.6 million to the Casio fraud

is far from conclusive, it is more than sufficient to raise concern.

U.S. legal counsel for Casio indicated that they were spending considerable time trying to track down funds and assets related to the

Casio fraud, had been wholly unaware of the Tsuru-related accounts at Hanover Bank, and were interested to learn of the deposits and withdrawals.

The fate of the Casio funds that were still on deposit with Hanover Bank when the bank became inactive in 1998 is also of interest. Fitzpatrick indicated that all remaining funds in its account at

Standard Bank were transferred in December 1998 or January

1999, to an attorney trust account belonging to the bank’s London

solicitor, Finers. No documents were produced, however, showing

exactly how much was transferred to the Finers account. Evidence

obtained by the investigation indicates that, at the time, a dispute

arose between Fitzpatrick and Poulden over where the funds

should be transferred, with each man insisting on a different attorney trust account. Fitzpatrick resolved the dispute by terminating

Poulden’s relationship with Hanover Bank and instructing Standard Bank to transfer the funds to Finers. There is also some evidence that Tsuru may have asserted ownership of the funds, which

Fitzpatrick declined to acknowledge in light of the Casio fraud and

uncertainty over the funds’ status.

Fitzpatrick indicated during his June 2000 interview, that the

funds sent to Finers remain in the attorney trust account, although

somewhat reduced by legal fees. The bank’s 1998 financial statement shows that Hanover Bank also paid Fitzpatrick a 1998 ‘‘dividend’’ of $1.9 million. The source of the funds used to pay the $1.9

million dividend is unclear; if the funds were drawn from the Hanover Bank correspondent account at Standard Bank, they may have

included illicit proceeds from the Casio fraud.

(7) Correspondent Account at Harris Bank International

In 1998, over a 3-month period, Hanover Bank accumulated deposits of more than $17 million. Nearly $5 million of these deposits

came from the self-confessed Koop fraud; the remainder appears

likely to have been associated with the Casio fraud. All $17 million

was deposited into and later transferred from Standard Bank’s

U.S. correspondent account at Harris Bank International in New

York. The evidence indicates this U.S. account was the account

Hanover Bank used most often during 1998, although Harris Bank

International had no knowledge it was providing correspondent

services to this offshore shell bank.

Information about Hanover Bank’s use of the Harris Bank International account was obtained, in part, through interviews with

468

235See Harris Bank website at www.harrisbank.com/facts.html; and 6/15/00 letter from Harris Bank International to the Subcommittee. 236Letter dated 6/15/00 from Harris Bank International to Subcommittee.

Harris Bank International personnel involved in the administration of the Standard Bank account. Standard Bank declined to provide either an interview or written response to a letter requesting

information. Documentation in Harris Bank International files, account statements, and other materials and information were collected and reviewed.

Harris Bank International. Harris Bank International Corp.

(‘‘Harris Bank International’’) is a wholly owned subsidiary of Harris Trust and Savings Bank, a major Midwestern bank with over

6,500 employees and over $26 billion in assets.235 Harris Bank

International, an Edge Act corporation with about 40 employees, is

headquartered in New York City, with a representative office in

London. Both banks are members of the Bank of Montreal Group

of companies.

According to Harris Bank International personnel, its core business is international correspondent banking, particularly handling

U.S. dollar ‘‘electronic funds transfers of international origin.’’ 236

In the Bankers Almanac, about 40 foreign banks identify Harris

Bank International as their U.S. correspondent. These 40 banks include a few large banks and many smaller banks, including banks

in jurisdictions known for bank secrecy, weak anti-money laundering controls or high money laundering risks, such as Austria,

Bosnia-Hercegovina, Costa Rica, Latvia, Luxembourg, and Turkey.

One of the 40 is Standard Bank Jersey Ltd.

Standard Bank and Hanover Bank. Harris Bank International indicated that Standard Bank Jersey Ltd. was one of its

larger clients. Harris Bank International account statements for

Standard Bank Jersey Ltd. show numerous transactions involving

millions of dollars each day, including large bank-to-bank and

bank-to-broker transfers and smaller transfers involving individual

clients. The transactions included significant sums transferred to

or from foreign banks in the Standard Bank group. In 1998 and

1999, the Standard Bank account saw so many transactions each

day that Harris Bank International issued daily account statements. Daily account totals during April 1998, for example, ranged

from a low of $3.4 million on April 10th to a high of $134 million

on April 28th. In just 3 months, from April to June 1998, when the

Hanover Bank account was active, more than $1.5 billion was deposited into the Standard Bank account at Harris Bank International, primarily through inter-bank transfers and the sale of

large blocks of securities. Of that $1.5 billion, only about $17 million, or about 1% of the total, were deposits to Hanover Bank.

Harris Bank International stated in its letter to the Subcommittee that it has ‘‘never maintained an account relationship

for Hanover Bank Ltd., Antigua and has acted only as an intermediary to transactions on behalf of Standard Bank, Jersey.’’ Harris Bank personnel indicated that the bank did not even know that

it had been providing correspondent services to Hanover Bank in

1998. Fitzpatrick and Harris Bank personnel agreed that the two

469

237Wingrove said in his interview that he frequently spoke with Harris Bank International

customer service personnel in 1998, to find out whether certain wire transfers had been deposited into the Hanover Bank account, but the bank indicated that its customer service representatives had no recollection of Wingrove.

banks had never communicated directly with each other.237 Harris

Bank International indicated that it had not known that Hanover

Bank was an offshore shell bank, or that it was owned by a single

individual and licensed by a secrecy jurisdiction. It indicated that,

if Hanover Bank had applied directly for a correspondent relationship, Harris Bank International would likely have rejected the application.

Harris Bank International’s lack of awareness of Hanover Bank

is attributable, in part, to the relatively small number and dollar

volume of transactions involving Hanover Bank, when compared to

the other activity in the Standard Bank account. But it is also

attributable to Harris Bank International’s practice of not asking

its respondent banks about their bank clients.

Harris Bank International indicated, for example, that despite

having a longstanding correspondent relationship with Standard

Bank of Jersey, it had no information on Standard Bank’s own correspondent practices. Harris Bank International did not know how

many accounts Standard Bank had opened for foreign banks, nor

did it know whether Standard Bank would readily accept offshore

shell banks or banks in secrecy jurisdictions with weak anti-money

laundering controls. Harris Bank International indicated that, even

after the Hanover Bank incident, it had not collected information

on what foreign banks may be utilizing Standard Bank’s account,

and had no immediate plans to find out.

Harris Bank International stated in its letter to the Subcommittee that it did conduct ongoing due diligence reviews of

Standard Bank and its correspondent account. It indicated, for example, that it took steps to ensure that Standard Bank had an active anti-money laundering program in place, and provided a copy

of Standard Bank’s November 1999 ‘‘Anti-Money Laundering Handbook.’’ Standard Bank’s Handbook provides general information

and specific bank procedures for combating money laundering. It

specifies a Money Laundering Reporting Officer for the bank, emphasizes the bank’s need to ‘‘know its customers,’’ and provides

useful guidance on how to recognize and respond to signs of possible money laundering. The Handbook provides employee instruction on account opening and monitoring procedures, conducting due

diligence, and reporting suspicious activity. It does not provide any

specific guidance or instruction on correspondent banking. Because

Standard Bank did not respond to requests for information, it is

not clear if the same due diligence procedures were in place in

1998, or how the bank applies its anti-money laundering policies

and procedures to correspondent bank clients.

Harris Bank International said that it has correspondent relationship managers in New York and London who oversee the

Standard Bank account. It indicated that it monitors all of its accounts, including the Standard Bank account, by ‘‘regularly

review[ing] transaction volumes, value and payment content.’’ Harris Bank International indicated that its monitoring efforts have

relied on manual reviews of this information, but after a recent

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Federal Reserve audit recommended strengthening its monitoring

program, it has allocated funds and is in the process of selecting

an electronic monitoring system. It indicated that its manual monitoring program did not and could not have identified the Hanover

Bank transactions as a problem, because the total dollar volume involved represented such a small portion of the Standard Bank account activity. As it stated in its letter to the Subcommittee, the

Hanover transactions ‘‘were not and would not be considered suspicious from our intermediary bank perspective. These transaction

types are typical of Standard Bank.’’ Harris Bank International said that it had relied on Standard

Bank to comply with its Anti-Money Laundering Handbook and exercise due diligence in opening and monitoring all of its accounts,

including the Hanover Bank account. Harris Bank International indicated that, it was only after the Minority Staff inquiry about the

account, that it learned Jersey regulators had censured Standard

Bank for failing to conduct adequate due diligence in initiating a

correspondent relationship with Hanover Bank.

As described earlier, in July 2000, the Jersey Financial Services

Commission issued a statement finding that senior officials at

Standard Bank had ‘‘failed to follow proper procedures,’’ and the

bank had fallen ‘‘well short of the standards expected’’ with respect

to due diligence. The statement commended the bank for making

changes in its senior management, including dismissing the chairman of the bank, Berkeley. Because Jersey officials declined to provide copies of their investigative report or the supporting bank documentation, it is unclear whether they made assessments or issued

findings regarding Standard Bank’s overall anti-money laundering

efforts in correspondent banking.

B. THE ISSUES

Hanover Bank is a little known, offshore shell bank, licensed by

a small bank secrecy jurisdiction. It is essentially a one-man operation, taking deposits, wiring funds and dabbling in credit transactions, with virtually no controls and minimal outside oversight.

On two occasions it opened a correspondent account at Standard

Bank in Jersey and conducted transactions through Standard

Bank’s U.S. correspondent account at Harris Bank International in

New York, unbeknownst to Harris Bank International. In 3 months

in 1998, Hanover Bank moved over $17 million through the New

York account, virtually all of which were likely illicit proceeds from

the Koop and Casio frauds. The U.S. bank responsible for accepting

and wire transferring the $17 million had no idea it was providing

correspondent services to an offshore shell bank with no office, no

trained staff, few operational controls, and past associations with

fraud and criminal money laundering.

Offshore Shell Bank Operations

Because Hanover Bank’s owner, GOAB authorities, and Harris

Bank International cooperated with the investigation, and supporting documents and interviews were obtained from several

sources, the Hanover Bank case history provides a rare opportunity

to take a close look at how one offshore shell bank operated on a

day-to-day basis. The view is not an inspiring one.

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Hanover Bank operated well outside the parameters of normal

banking practice, without the most basic administrative controls

that U.S. banks expect in a regulated financial institution. It did

not have a single trained banker or accountant on staff. It had no

full time staff at all. It had no electronic ledger, and stored its

records at the bank owner’s personal residence. It opened accounts

with little or no account opening documentation. It drew up a onepage set of due diligence requirements for new accounts and then

ignored them. It accepted incoming funds for persons who were not

accountholders at the bank. It kept all of its funds in its correspondent accounts and tracked client deposits by reviewing

monthly correspondent account bank statements. It authorized outgoing wire transfers, without documenting who had authority to

withdraw funds from particular client accounts. It operated without

compiling or issuing regular client account statements. It certified

one client account as having $16.5 million, when the account balance never exceeded $2.4 million. It incurred an $800,000 overdraft

after failing to check a client’s account balance before approving a requested wire transfer. It watched $17 million move through its

accounts without asking any hard questions about the source of the

funds. It operated for 8 years without a single on-site visit from its

primary government regulator.

Hanover Bank was able to avoid regulatory oversight in part because it was a shell operation without a permanent office or staff.

GOAB authorities could not simply walk in the bank’s doors, ask

questions and inspect documents. The bank owner was literally

thousands of miles away from routine oversight. At the same time,

due to its low profile, the bank never drew the attention of bank

regulators in Ireland. Even after learning of its existence in the jurisdiction, Irish regulators were hesitant to exercise oversight of a

bank that was licensed in the Caribbean, accepted deposits in the

Channel Islands, and limited its day-to-day activities in Ireland to

making telephone calls and faxing wire instructions.

The result was a bank that experienced minimal oversight and

accumulated a track record of operational problems and suspect

conduct, including handling funds associated with money laundering and frauds that are the subject of ongoing criminal prosecutions and civil litigation in New Jersey, New York, South Carolina,

Florida, and Illinois in the United States, as well as other countries

around the world.

Interviews conducted with bankers and bank regulators in the

United States and elsewhere indicate that the international banking community has little awareness and no specific information on

how offshore shell banks conduct business. Many expressed surprise when told of the weak recordkeeping practices and loose operating procedures at Hanover Bank. Some expressed surprise that

a small, offshore shell operation gained access to a U.S. bank. Some

expressed surprise at the amount of trouble that this one-man

bank caused in the United States alone, apparently becoming a

magnet for financial fraud and suspect funds.

Lack of Due Diligence by U.S. Bank

Although Hanover Bank never opened its own U.S. correspondent account, it managed in 3 months to use Standard

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Bank’s U.S. account to move millions of dollars associated with financial fraud and money laundering. The Hanover Bank case history demonstrates the money laundering vulnerability of U.S.

banks that fail to ask questions about the correspondent practices

of their foreign bank clients.

Harris Bank International’s core business is international correspondent banking and its primary activity is providing international wire transfer services to foreign banks. Yet Harris Bank

International did not ask its respondent banks about their correspondent banking activities. It did not ask its foreign bank client

whether they provided correspondent banking services to other

banks. It did not ask how many banks might be using the foreign

bank’s U.S. correspondent account, what types of banks might be

using it, or the names of those banks.

The practical result is that Harris Bank International never

knew it was providing correspondent services to an offshore shell

bank licensed by a bank secrecy jurisdiction. Because Hanover

Bank’s transactions comprised just 1% of Standard Bank’s total account activity, Harris Bank International’s monitoring systems

could not reasonably be expected to isolate and evaluate these

transactions. The result is that Hanover Bank got a free pass into

the U.S. banking system and carried out its transactions without

triggering any anti-money laundering oversight in the United

States.

That free pass would not have been issued if Harris Bank International had required its respondent banks to identify their bank

clients and to refuse to give offshore shell banks access to their

U.S. correspondent accounts.

In December 2000, Harris Bank International personnel indicated that, in light of the Bank of New York scandal, the Minority

Staff investigation, and a recent Federal Reserve Bank audit, the

bank had decided to strengthen its anti-money laundering controls

in the correspondent banking field. Harris Bank International

personnel indicated that, among other measures, funds had been

allocated to develop better risk assessments of its existing correspondent bank clients, better client profiles, and better monitoring systems, including the bank’s first electronic monitoring software. Harris Bank International personnel also indicated that the

bank had decided to ask new applicants to identify their bank clients and correspondent banking practices, although it had not yet

been decided whether the bank would ask the same questions of its

existing clients.

Harris Bank International’s recent commitment to improving its

anti-money laundering controls is welcome. But the bank’s hesitancy to ask its existing bank clients about their correspondent

practices—including whether they allow offshore shell banks to use

their U.S. accounts—continues a limited due diligence approach

that is easy to administer, but hard to justify in light of the money

laundering risks illustrated by the Hanover Bank case history.

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HANOVER BANK TRANSACTIONS

USING STANDARD BANK’S U.S. CORRESPONDENT ACCOUNT

AT HARRIS BANK INTERNATIONAL

April–July 1998

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

APRIL $0 $6,781,409 $3,265,545 $3,515,864

MAY $3,515,864 $431,800 $525,000 $3,422,664

JUNE $3,422,664 $10,180,635 $10,099,985 $3,503,314

JULY $3,503,314 $30,925 $0 $3,534,239

TOTAL $17,424,769 $13,890,530

Data based upon information provided by Standard Bank Jersey Ltd. and attached to 6/14/00 letter to Harris

Bank International Corporation from Jonathan Speck of Mourant de Feu & Jeune.

Prepared by U.S. Senate Permanent Subcommittee of Investigations, Minority Staff, November 2000.

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238 Banco Anglo operated as a wholly owned subsidiary of Lloyds until 1976, when Colombian

law changed to require local ownership of Colombian banks, and Lloyds sold 51% of Banco AnCase History No. 6

BRITISH BANK OF LATIN AMERICA

British Bank of Latin America, Ltd. (BBLA) is a small offshore

bank that obtained a license in the Bahamas, sought clients in Colombia, kept its money in the United States, and closed its doors

in 2000 after being named in two separate U.S. money laundering

stings. This case history examines the failure of BBLA and its

major U.S. correspondent bank, the Bank of New York, to guard

against money laundering through the Colombian black market

peso exchange, the largest money laundering system in the Western Hemisphere.

The following information was obtained from court pleadings;

documents provided by BBLA, Lloyds TSB Bank (‘‘Lloyds’’), and the

Bank of New York (‘‘BNY’’); interviews; and other materials. Key

sources of information included a March 9, 2000 written submission by BBLA to the Subcommittee; a March 31, 2000 interview of

BBLA and Lloyds personnel; and an August 17, 2000 interview of

BNY personnel. All three banks voluntarily cooperated with the investigation.

A. THE FACTS

The British Bank of Latin America, Ltd. (‘‘BBLA’’) began operations in 1981. From its inception to its closure in 2000, BBLA

maintained an administrative office in the Bahamas and a representative office in Colombia. In the Bahamas, the bank held an

official offshore banking license; in Colombia, it held an official certificate, first issued in 1983, authorizing it to operate a representative office. All of BBLA’s clients were Colombian. At its height,

BBLA had 8 employees, about 200 clients, and about $135 million

in assets. Throughout its existence, BBLA was affiliated with a

large Colombian bank, Banco Anglo, and a major international

bank based in London, Lloyds TSB Bank.

(1) BBLA Ownership

BBLA is a longtime Lloyds affiliate. Lloyds TSB Bank is a decades-old financial conglomerate with, according to the Bankers Almanac, about 77,000 employees and $280 billion in assets worldwide. The Lloyds TSB Group includes not only Lloyds TSB Bank

in London, with its 1,800 branches and numerous affiliated banks,

securities firms and other companies, but it is also associated with

one of the world’s most prominent insurance companies, Lloyd’s of

London.

BBLA was first established and licensed in the Bahamas in 1981,

under the name Banco Anglo Colombiano (Nassau) Ltd. It began

its existence and continued for more than a decade, from 1981 until

1993, as a wholly owned subsidiary of a Colombian bank, originally

called Banco Anglo Colombiano S.A., then renamed Banco Anglo

S.A. (‘‘Banco Anglo’’). Banco Anglo is a well established Colombian

bank with over 1,000 employees and 50 branches throughout the

country. It, too, is a longtime Lloyds affiliate.238

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glo’s shares to local Colombian investors. In 1991, after Colombian law reversed course to again

permit foreign ownership of Colombian banks, Lloyds re-purchased Banco Anglo stock and eventually regained its position as the bank’s majority shareholder. 239The remaining 51% of SIAC shares were held by a number of local Colombian investors. 240From 1993 to 2000, Lloyds steadily increased its ownership of the shares of both Banco

Anglo and SIAC. By December 1999, Lloyds owned about 97% of Banco Anglo and about 98%

of SIAC. Lloyds did not become a 100% owner of BBLA, because Bahamian law had long required its banks to have more than one shareholder. For example, when Bahamian law required

its banks to have a minimum of five shareholders, BBLA’s shareholders included SIAC and four

Lloyds employees in the Bahamas, each of whom owned one share of BBLA. In 1997, when Bahamian law changed to permit a minimum of two bank shareholders, BBLA’s shareholders became SIAC and Lloyds TSB Nominees Ltd., another company in the Lloyds group. 241 Internal credit analysis of BBLA by BNY Credit Division (10/17/95) at 4, BNYSEN 676. 242 Internal BNY document by ‘‘BNY Credit Division’’ (10/18/95), BNYSEN 351.

In 1993, Colombian law was changed to prohibit Colombian

banks from owning foreign bank subsidiaries, and Banco Anglo was

required to sell its bank in the Bahamas. On June 29, 1993, it sold

the bank to a newly-formed holding company, Sociedad Inversionista Anglo Colombiano S.A. (‘‘SIAC’’), which was incorporated

in Colombia. SIAC’s largest stockholder was a company in the

Lloyds group, Lloyds Bank (BLSA) Ltd., which owned 49% of the

shares.239 Because a Lloyds company was the largest stockholder

of both Banco Anglo and SIAC, the transfer of BBLA from one to

the other in 1993 essentially kept the bank within the Lloyds

group. In 1994, SIAC changed the bank’s name from Banco Anglo

Colombiano (Nassau) Ltd. to British Bank of Latin America, presumably to stress the bank’s affiliation with Lloyds, a leading British bank.240

Throughout its 19 years, despite multiple technical ownership

changes to comply with changes in Colombian and Bahamian laws,

BBLA remained a Lloyds affiliate, through either Banco Anglo or

SIAC. BBLA continually advertised its Lloyds affiliation as a key

aspect of its ownership, organization and operation.

(2) BBLA Principal Lines of Business

When asked about BBLA’s major business activities, BBLA and

Lloyds personnel explained that, because Colombian law used to

severely restrict the ability of Colombian banks to offer U.S. dollar

loans to their clients, many Colombian banks established offshore

subsidiaries to provide the U.S. dollar loans they could not. According to them, BBLA was established by Banco Anglo for that purpose. As one BNY analysis put it, ‘‘BBLA exist[ed] to book dollar

loans for [Banco Anglo] customers.’’ 241

Over time, BBLA took on additional lines of business, but continued to work closely with Banco Anglo. In simplest terms, Banco

Anglo provided banking services to its clients in Colombian pesos,

and referred them to BBLA if they needed banking services in U.S.

dollars.

BBLA stated, and the documentation substantiated, that the

bank eventually had two basic groups of clients. The first consisted

of Colombian companies that needed U.S. dollars to engage in foreign trade or other business transactions. BBLA provided these clients with U.S. dollar loans and trade financing, BNY stated in one

memorandum, ‘‘[BBLA] takes dollar funds and makes dollar loans

to Colombian borrowers to finance imports, working capital, and

equipment.’’ 242 BBLA explained that it financed its U.S. dollar

loans primarily through credit lines granted to the bank by its U.S.

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243 Internal BNY ‘‘Call Report’’ on BBLA (3/24/00) at 1, BNYSEN 333.

correspondents or Lloyds affiliates. BBLA indicated that its company clients were not shell investment vehicles, but manufacturers,

coffee growers and other Colombian businesses with tangible assets

and active import and export sales.

BBLA’s second category of clients consisted of wealthy Colombian

individuals seeking private banking services in U.S. dollars. Among

other services, BBLA accepted deposits from these clients and

placed them in U.S. dollar investment funds and higher interest

bearing accounts, primarily through accounts made available to

BBLA by its U.S. correspondents or Lloyds affiliates. BBLA earned

revenue from these placements, not only by assessing fees for its

services, but also by sharing in the higher interest earnings paid

on the deposits. BNY stated that BBLA was also used as a vehicle

to allow its individual shareholders to ‘‘receive dividends offshore.’’ 243

During its interview, BBLA stated that, at its height, it had

about 140 depositing clients and about 60 borrowing clients. The

borrowing clients were all companies. Of the 140 depositors, BBLA

estimated that 90% were individuals holding accounts in their own

names, and about 10% were corporations. At its height, BBLA indicated that it had about $50 million in client deposits, all of which

were held in its correspondent accounts. Part of BBLA’s attraction

for Banco Anglo clients seeking private banking services included

BBLA’s location in a bank secrecy jurisdiction with no personal or

corporate taxes, and its ready access through its correspondents to

U.S. dollar time deposits, investment accounts and wire transfer

capabilities.

In addition to serving its two groups of clients, BBLA’s account

statements show a constant stream of large money transfers among

BBLA and a handful of Lloyds affiliates, including Lloyds banks in

Belgium, Colombia, Panama, the United Kingdom and the United

States. These transfers, involving millions of dollars moving on almost a daily basis among the Lloyds group, were the most significant category of transactions on BBLA’s account statements. They

depict an offshore affiliate well-integrated into the Lloyds banking

network.

BBLA stated that it did not act as a correspondent for other

banks or allow other foreign banks to transact business through its

U.S. account. It indicated that it did not offer its clients foreign exchange services, instead offering them banking services solely in

U.S. dollars. BBLA stated that it did not engage in high yield investment programs, Internet gambling, or other high risk activities

described in some of the other case histories. BBLA also indicated

that it did not establish shell corporations for its clients, although

any clients needing such services would be able to obtain them

through other Lloyds banks.

BBLA’s financial statements were audited by KPMG Chartered

Accountants in the Bahamas. The 1998 audited statement indicated that the bank was thinly capitalized but profitable, primarily

due to an active lending portfolio exceeding $120 million, and earnings from about $70 million in client and bank deposits. BBLA indicated that it was highly reliant on Banco Anglo for virtually all

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244 BNY Credit Division’s internal credit analysis of BBLA (10/17/95) at 2, BNYSEN 674. 245These senior bank officials were Abraham Butler, Peter Snell and Peter Bridgewater. 246 BBLA’s board members were Nicoll, Butler and Bridgewater.

of its client referrals. BNY apparently agreed, stating in one credit

analysis, ‘‘[BBLA] exists as a going concern only by virtue of its tie

to [Banco Anglo].’’ 244

(3) BBLA Correspondents

BBLA indicated that, because it specialized in offering U.S. dollar services to its clients, it kept virtually 100% of its funds in U.S.

correspondent accounts and carried out almost all of its transactions in that currency. BBLA stated that its primary U.S. correspondent had long been the Bank of New York, where it opened

an account in 1985, in part because Banco Anglo, already had a

correspondent relationship there. BBLA indicated that it also had

correspondent relationships with a number of other banks, including Bank of America, Bankers Trust, Barclays Bank, Chemical

Bank, Citibank and Lloyds banks in Panama and the United

States.

BBLA indicated that it had not encountered difficulty in obtaining U.S. correspondent accounts, because it had a good reputation,

sound financial statements, and a close association with Lloyds. It

said that, when applying to open a new account or to obtain a new

credit line, it usually cited its Lloyds affiliation and indicated that

it had the ‘‘backing of the Lloyds balance sheets.’’ It said that the

correspondent services it used most often were deposits made to

higher interest bearing accounts and wire transfer capabilities,

while also using to a lesser extent checking clearing and trade financing or other credit arrangements.

(4) BBLA Management and Operations

BBLA Management. During the 1990s, BBLA’s senior officers

were all employees of other Lloyds affiliated banks in the Bahamas

and Colombia. BBLA also shared personnel, office space, and administrative operations with Lloyds affiliates.

In 1998 and 1999, the years focused on in the Minority Staff investigation, BBLA did not have a single senior executive who

worked solely for BBLA; all of its senior management personnel

also worked for other Lloyds banks. In the Bahamas, BBLA’s most

senior executive was David Nicoll, who was the ‘‘managing director’’ and head of the bank. At the same time, Nicoll was the head

of Lloyds’ flagship bank in the Caribbean, Lloyds TSB Bank &

Trust (Bahamas) Ltd. (‘‘Lloyds Bahamas’’) and an ‘‘international

executive’’ with the Lloyds TSB Group. Three other senior managers who provided services to BBLA also worked for Lloyds Bahamas.245 BBLA’s board of directors was also dominated by Lloyds

employees.246 In Colombia, BBLA’s most senior executive was J.

Scott Donald, who also worked for Lloyds TSB Bank and served as

the president of Banco Anglo.

At its height, BBLA employed eight individuals who worked solely for BBLA. Four were clerical staff in the Bahamas, who performed back office and administrative operations for the bank. The

other four worked in Colombia, serving as the bank’s sales representative, an account manager, secretary and assistant. All eight

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BBLA employees worked closely with staff from other Lloyds affiliates, including Banco Anglo and Lloyds Bahamas.

BBLA also shared office space and equipment with Lloyds affiliates. In the Bahamas, BBLA occupied a single room on the second

floor of Lloyds Bahamas. As Lloyds’ flagship bank in the Caribbean, Lloyds Bahamas maintained a sizeable facility in Nassau,

the Bahamas’ capital city, with three floors of offices, bank teller

services in a lobby open to the public, about 70 employees, and a

large sign on the building announcing the presence of the bank.

BBLA’s name did not appear on the outside of the building. In Colombia, in compliance with requirements for separate office space,

BBLA rented an office in the same building in Bogota as Banco

Anglo, but on a different floor. BNY documents suggest that the

Colombian office may have closed in October 1998, even though

BBLA continued to offer client services in Colombia.

BBLA Operations. With respect to day-to-day operations, BBLA

explained that its Colombian representative office acted as the

bank’s front office responsible for developing new business and

servicing existing clients, while its Bahamas office acted as the

bank’s back office responsible for technical and administrative matters. BBLA said that the Colombian office received virtually all of

its client referrals from Banco Anglo and worked closely with

Banco Anglo to open new accounts, evaluate client needs, approve

loans, provide investment advice, and resolve client problems. The

Colombian office did not take deposits or handle cash transactions,

since it was not licensed to conduct banking activities in Colombia.

It would accept client requests for wire transfers, which the Colombian staff would then communicate to the appropriate banking personnel for completion.

BBLA said that its Bahamas office handled specific bank transactions and the bank’s administrative needs, utilizing Lloyds Bahamas’ equipment, electronic data systems, and staff under a management agreement that paid Lloyds Bahamas a large annual fee

to manage the bank. For example, among other services, Lloyds

Bahamas helped keep BBLA’s books, track client account activity,

maintain the bank’s records, handle its correspondent accounts, file

required forms in the Bahamas and Colombia, and pay BBLA’s

bills. BBLA said that it typically handled about 20 to 30 transactions per day, including deposits, loan payments and wire transfers.

BBLA was not the only Lloyds affiliate operating out of the Bahamas under a management agreement with Lloyds Bahamas. Another was Lloyds TSB Bank & Trust (Cayman) Ltd. (‘‘Lloyds Cayman’’). For many years, Lloyds Cayman had a physical presence in

the Cayman Islands and held a banking license that permitted it

to conduct onshore as well as offshore business. In 1995, however,

Lloyds closed the Cayman office, surrendered the bank’s onshore license, and obtained a less expensive offshore license that permitted

the Cayman bank to conduct its banking operations outside the jurisdiction. Lloyds then moved the Cayman bank’s operations to the

Bahamas. Like BBLA, Lloyds Cayman operated under a management agreement with Lloyds Bahamas, utilizing Lloyds Bahamas

equipment, electronic data systems and staff. Unlike BBLA, the

Caymans bank did not have a single employee of its own. Still anVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00488 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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247 Under Bahamian law, every bank is required to have money laundering reporting officer

whose duty is to report any suspicious activity to the Bahamas Government. 248This position, which is recommended but not required under Bahamian law, is supposed

to have overall responsibility for a bank’s money laundering program.

other Lloyds affiliate operating out of the Bahamas location was

Lloyds TSB Bank & Trust (British Virgin Islands) Ltd., a bank

that Lloyds indicated was dormant but could be revived at a later

time. In short, then, four Lloyds affiliated banks—two licensed by

the Bahamas, one licensed by the Cayman Islands, and one licensed by the British Virgin Islands—were co-located at the same

Bahamas location.

BBLA’s Anti-Money Laundering Efforts. When asked about

its anti-money laundering efforts, BBLA disclosed that it did not

have one set of written procedures or one person responsible for

overseeing anti-money laundering efforts at both its Colombian and

Bahamian offices. Instead, each BBLA office had its own antimoney laundering approach.

BBLA’s Colombian office produced a copy of written anti-money

laundering procedures for that office which conformed with Colombian requirements, and said that its account manager and sales

representative in Colombia were well versed in the due diligence

requirements for opening new accounts. BBLA’s Bahamian office,

on the other hand, did not have any written anti-money laundering

procedures, despite Bahamian requirements for them, but later

produced a copy of the anti-money laundering procedures used by

Lloyds Bahamas. A December 1997 anti-money laundering audit

checklist provided by BBLA also indicated that BBLA was ‘‘going

to’’ appoint a ‘‘money laundering reporting officer,’’ another requirement under Bahamas law, but it apparently never did. Instead,

BBLA indicated that in the Bahamas, under its management

agreement, Lloyds Bahamas staff was responsible for managing its

anti-money laundering efforts and provided the services of its own

money laundering reporting officer.247 BBLA said it also used the

services of Lloyds’ ‘‘money laundering prevention officer,’’ Peter

Snell.248 Snell, a senior vice president of Lloyds Bahamas, was not

assigned exclusively to anti-money laundering duties, but had

many other responsibilities. The end result was that BBLA’s Bahamas office had neither written procedures nor a particular person

charged with reporting suspicious activity, as required by Bahamian law, but relied on Lloyds Bahamas procedures and personnel

instead.

BBLA’s anti-money laundering efforts were further disjointed by

the geographical separation of its front and back office operations,

which operated without the benefit of a bank-wide policy or an

overall manager. BBLA’s Colombian staff conducted the initial due

diligence reviews for new customers and handled client requests for

existing accounts, but did not otherwise monitor account activity,

since all account paperwork and activity reports were generated in

the Bahamas. In contrast, BBLA’s Bahamian staff were not involved in the account opening process and were not familiar with

BBLA’s clients, but were expected to monitor day-to-day account

transactions and overall account activity. It is unclear who, if anyone was reviewing client accounts statements or wire transactions

480

249For a description of the black market peso exchange, see below. 250 International Narcotics Control Strategy Report (March 2000)(‘‘INCSR 2000’’) at 637.

for suspicious activity. It is also unclear how BBLA’s staff coordinated their efforts with Lloyds Bahamas.

BBLA was asked, due to its provision of U.S. dollar services to

its Colombian clientele, what steps the bank had taken to ensure

that it was not a recipient of laundered funds from the black market peso exchange.249 BBLA and Lloyds personnel expressed unfamiliarity with both the term and the money laundering risks posed

by that method of foreign currency exchange. BBLA said that it

had no specific policies, procedures or systems in place to detect or

deter money laundering through the black market peso exchange.

BBLA Oversight by Banking Regulators. Despite operating

in two countries at high risk for money laundering, BBLA never

underwent a bank examination or on-site visit by bank regulators

in either jurisdiction and there is no evidence that any regulatory

body ever took a close look at the bank’s operations in 19 years of

operation.

Both the Bahamas and Colombia have been identified as presenting higher than average money laundering risks. In June 2000,

the Bahamas was one of 15 countries named by FATF for weak

anti-money laundering controls and inadequate cooperation with

international anti-money laundering efforts. The U.S. State Department’s most recent International Narcotics Control Strategy Report

(‘‘INCSR 2000’’) describes the Bahamas as a country of ‘‘primary’’

money laundering concern, due to bank secrecy laws and [a] liberal

international business company (IBC) regime [which] make[s] it

vulnerable to money laundering and other financial crimes.’’ 250

While banking and money laundering experts interviewed by the

Minority Staff described the Bahamas as having good intentions

and making important improvements, during the 1990’s, it provided weak oversight and inadequate resources to regulate its more

than 400 offshore banks.

Colombia is considered an even greater money laundering risk

than the Bahamas due to ongoing problems with narcotics trafficking. The INCSR 2000 report, which identifies Colombia as another country of ‘‘primary’’ money laundering concern, provides the

following information:

Colombia produces and distributes more cocaine than any

other country in the world and is also an important supplier

of heroin. . . . Columbia is the center of the international cocaine trade, with drugs flowing out of the country at a stable

and constant rate. . . . Recent statistics indicate that approximately 85 percent of the heroin seized by federal authorities in

the northeastern United States is of Colombian origin. . . . Colombia has financial institutions which engage in currency

transactions involving international narcotics proceeds that include significant amounts of U.S. dollars. . . . Colombia

criminalized the laundering of the proceeds of all illegal activities in 1995 . . . but there still has not been a single money

laundering conviction. . . . Even though progress has been

made with respect to fighting money laundering, Colombia has

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251 INCSR 2000 at 115–16; 657–58. 252The National Money Laundering Strategy for 1999 (September 1999) at 21–22. 253The National Money Laundering Strategy for 2000 (March 2000) at 24–25.

fallen short in its implementation of the money laundering and

asset forfeiture laws.251

One of the key money laundering systems in Colombian drug

trafficking, the black market peso exchange, has been targeted by

the United States as a top law enforcement priority for the last 2

years. The 1999 U.S. National Money Laundering Strategy stated:

The Black Market Peso Exchange is the largest known money

laundering system for drug money in the Western Hemisphere.

It may be responsible for the laundering of as much as $5 billion of narcotics proceeds each year. . . . The Black Market

Peso Exchange lets Colombian narcotics traffickers transform

large quantities of drug dollars from the streets of American

cities into pesos in their Colombian bank accounts.252

The 2000 U.S. National Money Laundering Strategy explains

how the system launders funds:

First, a Colombian drug cartel arranges the shipment of drugs

to the United States. The drugs are sold in the U.S. for U.S.

currency which is then sold to a Colombian black market peso

broker’s agent in the United States. The U.S. currency is sold

at a discount because the broker and his agent must assume

the risk of . . . placing the U.S. dollars into the U.S. financial

system. Once the dollars are delivered to the U.S.-based agent

of the peso broker, the peso broker in Colombia deposits the

agreed upon equivalent in Colombian pesos into the cartel’s account in Colombia. At this point, the cartel has laundered its

money because it has successfully converted its drug dollars

into pesos, and the Colombian broker and his agent now assume the risk for integrating the laundered drug dollars into

the U.S. banking system. . . . [T]he Colombian black market

peso broker now has access to a pool of laundered U.S. dollars

to sell to Colombian importers [who] use the dollars to purchase goods. . . .253

U.S. and Colombian law enforcement and banking authorities

have spent significant resources tracking the black market peso exchange, educating U.S. and Colombian banks about it, and seizing

laundered funds. Despite their joint efforts, the black market peso

exchange continues to be the most prolific money laundering system in the United States, successfully using U.S. and Colombian

banks to launder billions of dollars each year in cocaine and heroin

drug proceeds.

Banking and money laundering experts indicated to Minority

Staff investigators that, despite the magnitude of the money laundering problem in Colombia, Colombia’s banking regulation is

sound, with some of the better money laundering controls in Latin

America. They indicated that Colombian authorities are actively

engaged in bank oversight, including enforcing requirements for detecting and reporting suspicious transactions. The INCSR 2000 report noted: ‘‘Colombia’s banks continue to comply with the reporting requirements designed to flag suspicious transactions and have

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254 INCSR 2000 at 657. 255This memorandum has a bates designation of BNYSEN 648. 256See, for example, internal BNY memorandum to the International Credit Committee (12/

1/95) at 2, BNYSEN 657; internal BNY credit proposal for BBLA to International Credit Committee (4/21/97) at 1, BNYSEN 691. 257 Internal BNY credit proposal for BBLA to International Credit Committee (4/21/97) at 1–

2, BNYSEN 691–92. 258The INCSR 2000 report noted, at page 637, that offshore banks in the Bahamas ‘‘must submit annual statements that do not have to include financial statements,’’ and their ‘‘records can

be maintained anywhere,’’ which makes regular bank oversight more difficult. in 2001, the Bahamas plans, for the first time, to begin conducting its own bank examinations.

been very cooperative with U.S. efforts to curtail financial transactions by individuals and entities designated as involved with narcotics trafficking.’’ 254 This bright spot in Colombian anti-money

laundering efforts, however, did not apply to BBLA, which remained outside Colombian banking oversight and unfamiliar with

Colombian and U.S. efforts to stop money laundering through the

black market peso exchange.

No Bank Examination in 19 Years. In 1995, Banco Anglo sent

a memorandum on behalf of BBLA to Barclays Bank which stated

that, ‘‘BBLA is subject to the supervision in varying degrees of Bahamas, Colombia and the Bank of England.’’ 255 A copy of this

memorandum was provided to BNY which began to incorporate

variations of that sentence in internal reports to indicate that

BBLA was a well regulated bank.256 In 1997, a BNY memorandum

indicated that BBLA had agreed in writing to ‘‘conform to all significant prudential regulations mandated by the Colombian Superintendent of Banks’’ and had given the Superintendent ‘‘full supervisory power’’ over the bank.257 In fact, however, BBLA disclosed

to the Minority Staff investigation that it had never undergone a

bank examination or even a site visit by bank regulators in Colombia or any other country.

BBLA explained that its primary regulator, the Central Bank of

the Bahamas, did not conduct examinations of licensed banks, instead reviewing annual reports submitted by each bank.258 BBLA

stated that it had submitted all required filings and had no history

of problems with Bahamian bank regulators. BBLA noted that it

was also not subject to examination in Colombia, since that country

did not conduct bank examinations of representative offices that

did not transact banking activities within the jurisdiction. BBLA

noted that it had never taken deposits or handled cash transactions

for its clients in Colombia, instead working with Banco Anglo, its

Bahamas office, Lloyds Bahamas and its correspondent banks, to

meet its clients’ banking needs. When asked if it had ever been examined by regulators from the Bank of England or the United

Kingdom’s Financial Services Authority, BBLA indicated that it

had not.

(5) Money Laundering Involving BBLA

In 1998 and 1999, U.S. civil forfeiture actions arising from two

separate money laundering undercover operations, Operation Casablanca and Operation Juno, cited BBLA as a repository of illegal

drug proceeds. In two separate court actions, the United States

sought forfeiture of a total of about $2.7 million in illegal drug proceeds deposited into BBLA’s correspondent account at BNY. A subsequent BBLA audit identified about 85 additional account transVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00492 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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259See United States v. Proceeds of Drug Trafficking Transferred to Certain Foreign Bank Ac- counts (U.S. District Court for the District of Columbia Case No. 1:98–CV–0434 (NHJ)) (hereinafter ‘‘Casablanca forfeiture action’’), memorandum order by the court (4/11/00), and first

amended complaint for forfeiture (5/18/98). 260See Casablanca forfeiture action, motion to file second amended complaint (3/30/99). 261The wire transfer instructions named the following clients and accounts at BBLA:

—$800,000 transferred on 12/3/97 and 12/15/97 to BBLA’s correspondent account for two related companies, Proenfar S.A. and Parowan Group, Inc.; —$350,000 transferred on 12/3/97 and 3/12/98 to BBLA’s correspondent account for Jaime

Trujillo;

—$190,000 transferred on 12/4/95 to BBLA’s correspondent account for a BBLA account

numbered 0019107928; —$150,000 transferred on 12/3/97 to BBLA’s correspondent account for Piedad de Hoyos;

and

Continued

actions in 1998 and 1999, that appeared to involved suspicious activity, and also fired an employee suspected of being involved in

money laundering and other wrongdoing.

(a) Operation Casablanca

Operation Casablanca was a 3-year money laundering sting conducted from 1995 until 1998 by the U.S. Customs Service.259 A related money laundering undercover operation was code named Operation Check Mark. These undercover operations traced the laundering of more than $84 million in illegal narcotics proceeds under

the control of professional money launderers for the Cali drug cartel in Colombia, and the Juarez drug cartel in Mexico. A significant

portion of the $84 million consisted of illegal drug proceeds picked

up in cash from various U.S. city locations by U.S. undercover

agents acting at the direction of the alleged money launderers, deposited at a U.S. bank cooperating with U.S. law enforcement, and

then transferred as part of the money laundering sting operation

to still other bank accounts. Other funds identified or provided by

the alleged money launderers were, at their direction, wire transferred by the U.S. undercover agents to other bank accounts in an

attempt to launder the funds.

In February 1998, the U.S. Department of Justice seized and

sought civil forfeiture under seal of funds in various bank accounts

in the United States and foreign countries related to the money

laundering stings. In May 1998, criminal indictments were unsealed against individuals and banks involved in the money laundering operations. Also in May, the United States filed an amended

complaint in the civil forfeiture actions to correct errors and seek

forfeiture of additional funds. A second amended complaint was

filed in March 1999. Altogether, the United States sought forfeiture

of funds from almost 100 bank accounts in the United States and

16 foreign countries.

The United States did not indict BBLA or allege that BBLA or

its employees were directly engaged in narcotics trafficking or

money laundering. However, the United States did name BBLA in

the first and second amended forfeiture complaints as the recipient

of about $1.57 million in illegal drug proceeds that, during the

sting operations, on the instruction of drug traffickers, had been

wire transferred by U.S. undercover agents to BBLA’s correspondent account at the Bank of New York (BNY).260 The wire

transfers had directed the funds to be credited to specific clients or

accounts at BBLA.261

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—$80,000 transferred on 12/15/97 to BBLA’s correspondent account for two related companies, Amarey Ltd. and Nova Medical. 262See Casablanca forfeiture action, claim filed by Proenfar S.A. and Parowan Group, Inc. (7/

29/99) and claim filed by Piedad de Hoyos (7/21/99). 263See Casablanca forfeiture action, claim filed by BBLA (7/1/99). 264See BBLA letter to the Subcommittee (3/9/00) at 8–9. 265 Id. at 8.

When asked for more information by the Minority Staff investigation, BBLA indicated that Bahamian bank secrecy laws and the

pending litigation prevented it from discussing either the transfers,

the bank’s conduct, or the named accountholders. Pleadings filed by

three of the accountholders provided the minimal additional information that Proenfar S.A. was a manufacturing company established in Colombia, Parowan Group was a Panamanian investment

company, and Piedad de Hoyos was a wealthy woman who had

placed $130,000 in a certificate of deposit at BBLA.262 BBLA accounts statements, subpoenaed from BNY, indicate that several of

the wire transfer recipients conducted numerous transactions

through BBLA’s correspondent account in New York.

In 1999, BBLA filed legal pleadings opposing forfeiture of the $1.57 million in drug proceeds to the United States.263 When asked

why, among other reasons, BBLA stated that the bank ‘‘could be

subject to double liability’’ because the suspect funds had been frozen in both the United States and the Bahamas and, if the courts

ruled inconsistently, it could be required to pay the $1.57 million

twice—once to the U.S. Government and once to the accountholders.264 In its pleadings in the United States, the bank also

seemed to be contending that, because the bank itself was innocent

of any wrongdoing, funds could not be seized under U.S. law from

its correspondent account, even in the event of misconduct by a

BBLA client or by a third party.

In explaining its decision to accept the illegal drug proceeds in

the first instance, BBLA stated: BBLA assumed that the U.S. institutions transferring the dollars would have conducted adequate investigations to ensure the legitimacy of the source of the funds that

they held and transferred to BBLA. Thus, the deposits did not

raise any suspicions at the time they were made.’’ 265 This explanation seems to suggest that BBLA considered any funds transferred by a U.S. bank to be beyond suspicion and in no need of

anti-money laundering oversight, but when asked, BBLA stated

that its anti-money laundering controls also applied to funds transferred from U.S. banks. In light of the pending litigation, however,

BBLA declined to provide additional information about the actions

it took with respect to the $1.57 million.

The United States’ position, in contrast, was that BBLA was not

an innocent bank, should not have accepted the drug proceeds as

deposits, and was not entitled to protection from forfeiture under

U.S. law. When asked by the Minority Staff investigation to elaborate, the U.S. Department of Justice declined to provide further information. The Casablanca civil forfeiture proceedings are ongoing.

(b) Operation Juno

Operation Juno was a 3-year money laundering sting conducted

from 1996 until 1999 by the U.S. Drug Enforcement Administration and Internal Revenue Service Criminal Investigation DiviVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00494 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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266See ‘‘ ‘Operation Juno’ Indictment Targets Five Major Traffickers and $26 Million worth of

Laundered Drug Proceeds,’’ press release issued by the office of the U.S. Attorney for the Northern District of Georgia (12/9/99)(hereinafter ‘‘Juno press release’’). 267See, for example, United States v. Monto (U.S. District Court for the Northern District of

Georgia Case No. 1:99–CR–438), criminal indictment (8/25/99); and United States v. Botero (U.S.

District Court for the Northern District of Georgia Case No. 1:99–CR–439), criminal indictment

(8/25/99). 268See United States v. All Funds in Certain Foreign Bank Accounts Representing Proceeds

of Narcotics Trafficking and Money Laundering (USDC DC Case No. 1:99–CV–03112), verified

complaint for forfeiture in rem (11/23/99). The complaint also seeks forfeiture of about $295,000

in drug proceeds sent to Lloyds TSB Bank & Trust (Panama) Ltd. 269The transfers took place, as follows:

—$250,000 transferred to BBLA’s correspondent account on 7/18/97.

—$250,000 transferred to BBLA’s correspondent account on 9/18/97;

—$126,127 transferred to BBLA’s correspondent account on 1/22/98; —$100,000 transferred to BBLA’s correspondent account on 5/28/98;

—$100,000 transferred to BBLA’s correspondent account on 10/7/98;

—$89,795 transferred to BBLA’s correspondent account on 3/18/99; —$17,185 transferred to BBLA’s correspondent account on 4/13/99;

—$100,000 transferred to BBLA’s correspondent account on 4/29/99; and

—$143,245 transferred to BBLA’s correspondent account on 7/7/99.

sion.266 The undercover operation laundered over $26 million in

drug proceeds, in part using a stock brokerage firm established by

U.S. undercover agents. In December 1999, the United States indicted five Colombian nationals for narcotics trafficking and money

laundering in connection with the sting operation, accusing them

of being major players in the Colombian drug trade. The United

States also seized and filed civil forfeiture actions involving $26

million in over 340 bank accounts at 34 U.S. banks and 52 foreign

banks.

Again, the United States indicted neither BBLA nor its employees for narcotics trafficking or money laundering. However, several

of the Operation Juno indictments referred to drug proceeds being

sent to BBLA.267 The United States also named BBLA in the related civil forfeiture action, this time seeking forfeiture of $1.1 million in drug proceeds that, during the sting operation, at the direction of the alleged money launderers, had been wire transferred to

BBLA’s correspondent account at the Bank of New York (BNY).268

The $1.1 million had been deposited over a 2-year period, from July

1997 until July 1999, in nine wire transfers. All were transfers to

BBLA’s U.S. account for further credit to Andes Trading, a BBLA

client.269 BBLA account statements show numerous transactions

through its BNY account on behalf of Andes Trading. When asked,

BBLA declined to provide any additional information about these

transfers, the bank’s conduct, or Andes Trading.

BBLA opposes forfeiture of the $1.1 million in drug proceeds to

the United States, for many of the same reasons given in the Operation Casablanca matter. Although BBLA ceased to conduct business by mid 2000, its attorneys are continuing to press its claim

to the $1.1 million. The United States has taken the same position

as it has in the Operation Casablanca matter, that BBLA is not an

innocent bank, should not have accepted the drug proceeds, and

should forfeit the funds to law enforcement. Like the Casablanca

forfeiture action, the Juno forfeiture action is ongoing.

Together, the Casablanca and Juno civil forfeiture proceedings

indicate that, over a 3-year period, BBLA became a repository for

about $2.7 million in drug proceeds. Both cases indicate that the

funds were the product of money laundering through the Colombian black market peso exchange. For example, when asked about

486

270 BBLA letter to the Subcommittee (3/9/00) at 8. 271See Operation Juno press release at pp. 3–4, citing involvement of ‘‘money exchanger in

Colombia, who typically would sell the U.S. dollars for pesos on the Colombian Black Market

[P]eso Exchange.’’ The press release also quotes James T. Martin, Chief of the Drug Division

of the U.S. Attorney’s Office stating that, in the Juno case, ‘‘the defendants took millions of dollars in drug money in the U.S., and millions in pesos in Colombia, and laundered them both

with the money physically leaving either country.’’ 272 Internal BNY ‘‘Call Report’’ on Banco Anglo (1/27/00), BNYSEN 335.

the Operation Casablanca deposits, BBLA described them as U.S.

dollars transferred from a U.S. bank, and noted that Colombian

law ‘‘permitted Colombian nationals to make those investments

with foreign currency that had not been obtained through the country’s foreign exchange markets.’’ 270 The Operation Juno deposits

are explicitly linked to the black market peso exchange, and the indictments are characterized by the Drug Enforcement Agency as ‘‘a

significant first step in striking out against the black market peso

system that launders billions of drug dollars every year.’’ 271 The

implied fact pattern in both instances seems to be that, in order

to take advantage of a better exchange rate or perhaps to avoid Colombian legal restrictions, tariffs or taxes, BBLA clients provided

Colombian pesos to a Colombian money broker who exchanged

them for U.S. dollars that were, in fact, the illegal drug proceeds

sent to BBLA’s U.S. account for the specified clients.

(c) Other Suspicious Activity

During the interview with Minority staff investigators, BBLA

and Lloyds indicated that after the bank was named in the two

U.S. forfeiture actions, Lloyds decided to have BBLA’s accounts and

transactions audited to determine if there were other suspicious

transactions. Although it declined to provide a copy of the audit report, BBLA and Lloyds indicated that approximately 85 additional

suspicious transactions were identified during 1998 and 1999,

which led the bank to file about a dozen additional reports with

law enforcement. BBLA and Lloyds declined to provide additional

information about the nature of these transactions, their reports, or

other aspects of the BBLA audit.

A January 2000 memorandum produced under subpoena by the

Bank of New York describes a BBLA employee who was allegedly

engaged in money laundering and other misconduct from 1997

until her employment was terminated by the bank in 1999.272 The

BNY memorandum, prepared after a telephone conversation with

BBLA personnel, stated in part:

It turns out that beginning in 1997, a BBLA employee began

to experience personal financial difficulties. This led to her involvement in criminal activity for personal financial gain, including skimming profits and laundering money. Her activities

were finally discovered in 1999 and she was immediately terminated.

BNY did not have any additional information about this matter,

and BBLA declined to discuss it, so it is unclear how this employee’s misconduct related to the Casablanca and Juno deposits or the

85 suspicious transactions identified in the BBLA audit. The evidence suggests, however, that BBLA’s involvement with money

487

273See BNY letter to the Subcommittee (10/13/00) at 4, response to question (7).

laundering was not limited to the $2.7 million identified in the two

U.S. money laundering stings.

(6) Closure of BBLA

In late 1999 or early 2000, Lloyds made the decision to close

BBLA, and most BBLA transactions ceased at the end of March

2000. Lloyds explained that, during 1998 and 1999, it had been

able to buy out SIAC’s other shareholders and evaluate whether

the bank should be continued or folded into Lloyds’ other banking

operations. Lloyds decided to terminate BBLA as a going concern

and re-distribute its clients, assets and loans to other Lloyds banks

in the Bahamas, Colombia, Panama, and United States. Lloyds denied that the two money laundering forfeiture actions were the primary reason behind closing the bank, but indicated the litigation

did not encourage the bank’s continuation. Lloyds indicated that

legal counsel would continue to press BBLA’s claims in both the

Casablanca and Juno forfeiture actions. Because Lloyds is not surrendering BBLA’s license, but merely discontinuing its operations,

it is possible the bank could be revived at a later time.

(7) Correspondent Account at Bank of New York

The Bank of New York (BNY) began its correspondent relationship with BBLA in 1985. While the Minority Staff investigation did

not examine the bank’s initial decision to open the BBLA correspondent account, it did examine BNY’s due diligence efforts during the latter half of the 1990s with respect to the BBLA relationship. The evidence indicates that, while BNY was diligent in its efforts to monitor the BBLA account, its anti-money laundering efforts suffered several serious deficiencies. Perhaps the most significant deficiency was BNY’s failure to exercise any anti-money laundering controls related to the Colombian black market peso exchange.

Bank of New York. The Bank of New York is a major financial

institution in the United States with, according to the Bankers Almanac, over 17,000 employees and $60 billion in assets. BNY has

a substantial international correspondent banking portfolio, with

over 2,000 international correspondent accounts and 150 correspondent banking relationship managers around the world. Its

international correspondent accounts are handled primarily by its

International Banking Sector which is organized into five geographic regions, including a Latin American Division that also handles banks in the Caribbean. BNY has a long history of correspondent banking in Latin America and the Caribbean, including

more than a dozen relationships in Colombia and almost as many

in the Bahamas.

In responding to the Minority Staff’s survey of correspondent

banking practices, BNY initially stated that, as a policy matter, it

did not open correspondent accounts for offshore banks. When

asked about its longstanding correspondent relationships with offshore banks like BBLA and Swiss American Bank, however, BNY

submitted a revised form of its policy indicating that the bank did

sometimes open correspondent accounts for offshore banks.273 The

488

274 Internal BNY memorandum from Latin American Division to International Credit Committee (10/25/94) at 2; (5/5/95) at 2; (6/20/95) at 2. 275 Internal BNY credit proposal for Banco Anglo to International Credit Committee (12/8/95)

at 2, BNYSEN 697. 276 BNY letter to the Subcommittee (10/13/00) at 5, in answer to question (9). 277 Id. at 5, in answer to question (12).

Minority Staff investigation indicated that BNY has, in fact, had

numerous correspondent relationships with offshore banks. In deciding whether to initiate such relationships, BNY indicated that

its policy was to ‘‘evaluate the ownership, management, and reputation of the bank in question, as well as the regulatory environment of the licensing country.’’ When asked about its correspondent banking practices in Colombia, BNY indicated that while it was cognizant of the money laundering risks in Colombia and designated Colombia as a high risk

area, the Latin American Division’s experience had been generally

positive. As stated in several BNY memorandum on BBLA, ‘‘We are

very comfortable with the country risk of Colombia due to very

sound government management and the continuing positive trends

in this country.’’ 274 Another BNY memorandum states, ‘‘Colombia

has one of the strictest and [most] vigilant bank regulatory systems

in the developing world.’’ 275

BNY also indicated, in response to questions, that it was not unusual for Colombian banks to have offshore subsidiaries and stated

that BNY had correspondent relationships with several of them.

BNY later identified six respondent relationships with offshore

banks that were subsidiaries of Colombian banks, in addition to

BBLA. BNY indicated that all six were licensed in Panama. It said

that BBLA was the only Colombian offshore affiliate in BNY’s portfolio that was licensed in the Bahamas, rather than Panama.

When asked about the black market peso exchange, the head of

BNY’s Latin American Division indicated that she had recently

heard the term in an advanced money laundering training course,

but was unfamiliar with the issue and had been unaware of its importance in U.S. law enforcement’s anti-money laundering efforts.

BNY indicated that it had no specific policies, procedures or systems of any kind related to the Colombian black market peso exchange, even for its Colombian respondent banks or their offshore

affiliates.

BBLA. BNY documentation indicates that BNY viewed BBLA as

part of its correspondent relationships with Lloyds and Banco

Anglo, two important BNY clients. BNY stated in a letter to the

Subcommittee that, ‘‘The Bank viewed BBLA as part of its overall

relationship with the Lloyds Bank group.’’ 276 The documentation

indicates that BNY took on BBLA when it was a subsidiary of

Banco Anglo, one of BNY’s oldest and most profitable clients in Colombia; and BNY had considered the two banks in tandem ever

since. BNY stated that it had often paid ‘‘[j]oint visits’’ to the two

banks,277 and most of BNY’s internal memoranda discuss both

banks jointly.

BNY provided a range of credit and non-credit correspondent

services to BBLA, all in U.S. dollars. They included wire transfers,

check clearing, placements of funds in higher interest bearing accounts, trade financing, and several lines of credit. BBLA made full

use of these services and, despite its small size, moved tens of milVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00498 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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278See chart, ‘‘British Bank of Latin America Monthly Account Activity at Bank of New York;

January 1998-December 1999.’’ 279See, for example, BNY internal memorandum to International Credit Committee (12/1/95),

BNYSEN 657–60.

lions of dollars through its BNY account each month. BBLA’s dollar

volume, in fact, far exceeds any other case history in the Minority

Staff investigation. In 1998 and 1999 alone, BBLA’s deposits and

withdrawals from its U.S. correspondent account at BNY totaled

more than $1.5 billion.278

BNY said that, although BBLA held a Bahamian banking license, BNY classified it as a Colombian bank because it worked

closely with Banco Anglo, had Colombian clients, and BNY’s rating

systems assigned Colombian banks a higher risk rating than Bahamian banks, which ensured a more conservative and careful approach to BBLA’s monitoring.

The documentation indicates that BNY regularly monitored

BBLA and, at times, compiled detailed credit analyses of BBLA’s

finances and business activities. For example, among other measures, BNY took the following steps:

—BNY correspondent bankers regularly traveled to Bogota to

visit BBLA’s offices and meet with the bank’s senior management; these trips were combined with BNY visits to Banco

Anglo. BNY staff also spoke regularly with BBLA staff in

Bahamas and visited the Bahamas office occasionally.

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

—BNY obtained copies of BBLA’s audited financial statements

and other key bank documentation. It inquired about and

analyzed BBLA’s finances and primary lines of business, and

developed detailed credit analyses of the bank. It also inquired about and analyzed BBLA’s client base.

—BNY inquired about BBLA’s reputation and operations with

Banco Anglo and Lloyds, and placed great weight on representations that Lloyds and Banco Anglo controlled BBLA’s

management, exerted ‘‘quality control’’ over its procedures,

and approved its extensions of credit to clients.279 BNY also

inquired about BBLA’s reputation in Colombian banking circles.

—On at least two occasions, BNY studied BBLA’s transactions

and clearing activities to identify suspicious transactions,

and found nothing of concern. There was no evidence, however, that BNY regularly monitored BBLA’s account activity

for possible money laundering.

BNY’s due diligence efforts, while significant, also had several serious deficiencies. For example, BNY apparently did not request a

copy of BBLA’s anti-money laundering procedures and never realized that the Bahamas office had none and there was no BBLA employee assigned to anti-money laundering duties. BNY also never

realized that BBLA had never undergone a bank examination or

site visit by any government bank regulator. BNY indicated, to the

contrary, that it had believed BBLA was subject to more oversight

490

than was usual for an offshore bank, with supervision provided by

the Bahamas, Colombia and the United Kingdom. BNY’s Latin

American Division head indicated that she thought BBLA was, in

fact, examined by Colombian bank regulators and was surprised

and disturbed to learn that no such examination had ever actually

taken place.

BNY indicated that a major factor in its analysis of BBLA was

its affiliation with Lloyds and Banco Anglo, two established banks

with good reputations, sophisticated banking operations, and a history of involvement with the offshore bank. Lloyds, in fact, exercised significant BBLA oversight, through its control of BBLA’s

board and senior management and day-to-day involvement with

the bank’s operations under the agreement assigning Lloyds Bahamas responsibility for managing BBLA’s affairs. BNY indicated

that it had assumed Lloyds would ensure that BBLA had adequate

anti-money laundering policies and procedures in place, but there

was no evidence that BNY had ever actually questioned either

BBLA or Lloyds about BBLA’s specific anti-money laundering efforts.

When asked about the Casablanca and Juno forfeiture actions,

BNY indicated that it did not learn of the Casablanca forfeiture action, filed in May 1998, until more than a year later when, on June

25, 1999, U.S. law enforcement seized the disputed funds from

BBLA’s account in New York. BNY indicated that, until informed

by Minority staff investigators, it had not known that the forfeiture

action was filed in 1998. BNY was also unaware, until informed by

Minority staff investigators, of the audit of BBLA’s 1998 and 1999

transactions that identified 85 additional suspicious transactions.

Nor did it have details about the BBLA employee who was fired in

1999 for 2 years of misconduct including possible money laundering.

After BNY learned of the Casablanca forfeiture action in June

1999, and the Juno forfeiture action 6 months later, BNY personnel

met and spoke with BBLA, Lloyds and Banco Anglo personnel and

completed several additional memoranda. But the written materials do not mention either of the U.S. law enforcement actions nor

do they discuss any of the issues raised by the two seizures of illegal drug proceeds. When asked why not a single BNY analysis of

BBLA ever mentions either matter or any money laundering concerns, the Latin American Division head stated that was ‘‘a good

question’’ to which she did not have an answer.

B. THE ISSUES

Black Market Peso Exchange

The BBLA case history demonstrates how an offshore bank can

increase the vulnerability of a U.S. correspondent bank to money

laundering through the black market peso exchange, when neither

takes any steps to minimize this money laundering risk.

The black market peso exchange risks posed by BBLA were

clear. BBLA had $50 million in client deposits, all in U.S. dollars,

and regularly accepted U.S. dollar deposits from its clients. It did

not provide foreign exchange services itself, but accepted U.S. dollars sent by its clients to its U.S. account. Its clients were all from

491

Colombia. As an offshore bank subject to strict secrecy laws and

weak bank oversight, BBLA was attractive to money launderers. It

took no steps to detect when a Colombian money broker might be

exchanging a BBLA client’s pesos for U.S. dollars obtained from

drug trafficking. The result was that BBLA’s U.S. account became

a conduit for illegal drug money.

Despite a long history in Colombia and relationships with seven

offshore banks affiliated with Colombian banks, BNY’s most senior

Latin American correspondent banker had received little training

about the Colombian black market peso exchange. BNY used none

of the strategies developed to combat this form of money laundering and had failed even to initiate discussions with its Colombian respondent banks about the need to identify and refuse U.S.

dollars coming from the Colombian black market.

Like most correspondent accounts for foreign banks, the majority

of deposits to BBLA’s U.S. account were made by wire transfer,

which meant that electronic software had automatically accepted

the funds and directed them to BBLA’s account. No human intervention or anti-money laundering oversight took place until later.

BNY was necessarily dependent upon BBLA to ensure the legitimacy of the funds sent to its U.S. account, yet BNY failed to acquire an accurate understanding of BBLA’s anti-money laundering

efforts.

BNY’s experience is unlikely to be unique. The Minority Staff

survey of just 20 U.S. banks found over 200 correspondent relationships with Colombian banks; these banks have additional relationships with Colombian offshore affiliates. The BBLA case history illustrates the money laundering risks associated with these relationships and the need for U.S. correspondent banks active in Colombia to focus on the black market peso exchange.

Offshore Affiliate Issues

A second set of issues in the BBLA case history involves how a

U.S. correspondent bank should view an offshore bank that is affiliated with an established bank in another jurisdiction. BNY began

the BBLA relationship in part as a courtesy to an existing customer and in part on the expectation that it could rely on the established bank to oversee its offshore affiliate. BBLA’s affiliates,

Lloyds and Banco Anglo, did exercise oversight of BBLA; and the

evidence reviewed by the investigation suggests that an affiliated

offshore bank often poses less of a money laundering risk than an

unaffiliated offshore bank. At the same time, the BBLA case history suggests that an affiliated status is no guaranty against antimoney laundering deficiencies.

One issue involves the effectiveness of the oversight exercised by

Lloyds. Lloyds was intimately involved with BBLA, through its

control of BBLA’s board, senior management, client referrals and

management agreement. But BBLA was not an easy bank to oversee. It operated in two jurisdictions, with offices that had completely different functions, employees and regulatory environments.

BBLA did not have a single employee overseeing both offices, and

the senior Lloyds managers assigned to the bank had many other

responsibilities. BBLA was, in fact, one of four offshore banks that

Lloyds was operating from the same Bahamas location, and it is far

492

from clear how much attention Lloyds Bahamas actually paid to

BBLA. For example, Lloyds never ensured that BBLA had a fully

functioning anti-money laundering program that met the requirements of Bahamian law.

A second issue is whether BBLA’s affiliated status lulled BNY’s

into paying less attention to the bank. The evidence indicates that

BNY did actively monitor the BBLA account and evaluated both its

operations and interactions with Lloyds and Banco Anglo. However, because it viewed the banks as working in tandem, BNY

treated BBLA in the same way that it treated its affiliates, with

little sensitivity to the fact that BBLA, as an offshore operation,

posed increased anti-money laundering risks. For example, BNY

failed to realize that BBLA’s primary regulator remained the Bahamas, and the tougher oversight theoretically available in Colombia

and the United Kingdom never actually took place. In the end,

BNY failed to obtain an accurate understanding of BBLA’s regulatory oversight.

A third issue is that, while BBLA’s affiliation with Lloyds provided added oversight, the banks’ close association may have also

made Lloyds reluctant to disclose BBLA’s deficiencies and problems. The evidence indicates, for example, that Lloyds failed to

alert BNY to BBLA’s involvement in the Operation Casablanca forfeiture or the Lloyds-ordered audit which found 85 additional suspicious transactions. No one wants to be associated with money

laundering, and Lloyds’ self-interest apparently dictated against its

reporting BBLA’s failings to BNY. The BBLA case history shows a

U.S. correspondent bank cannot always rely on an affiliated bank

for negative information about its offshore affiliate.

One lesson of the BBLA case history, then, is that while BBLA’s

affiliation with Lloyds and Banco Anglo was a positive factor which

the Bank of New York reasonably relied on, it also had hidden

drawbacks that contributed to BNY’s missing important antimoney laundering deficiencies in BBLA’s policies, procedures, personnel and regulatory oversight.

Difficulties in Seizing Illegal Drug Proceeds

Finally, the BBLA case history demonstrates the difficulties

faced by U.S. law enforcement in confiscating known drug proceeds

from a U.S. correspondent account belonging to an offshore bank.

Due to the Operation Casablanca and Operation Juno money

laundering stings, it is undisputed that $2.7 million in illegal drug

proceeds were sent by wire transfer to BBLA’s account in New

York. Yet BBLA is opposing forfeiture of the funds, citing a variety

of defenses. The ongoing litigation continues to consume U.S. law

enforcement and prosecution resources, with the Casablanca forfeiture action exceeding 21⁄2 years so far, and the Juno forfeiture

action hitting the 1-year mark.

BBLA’s argument that it was an innocent bystander to the drug

deposits cannot be evaluated here, since neither BBLA nor the

United States provided information about BBLA’s role in accepting the $2.7 million. On the other hand, BBLA’s argument that it

should not be forced to bear any loss in the event of inconsistent

court decisions in the Bahamas and United States focuses attention

on the legal issue of who, under U.S. law, bears the risk of loss in

493

this situation. BBLA was an offshore bank that, by design, operated in multiple jurisdictions. It chose to get its license in the Bahamas, obtain its clients in Colombia and keep its dollars in the

United States. It profited from that arrangement. Yet it claims that

it should be protected from any risk of loss when faced with forfeiture proceedings in two jurisdictions over the same illegal funds.

But BBLA accepted the risk of inconsistent rulings when it chose

to operate in both jurisdictions at once. Even more, as a policy matter, forcing an offshore bank like BBLA to bear some risk of loss

would provide an incentive for it to screen its U.S. deposits more

carefully in the future. At the moment, however, how U.S. courts

will treat BBLA’s legal argument remains unclear. If BBLA were to prevail in court, the $2.7 million in drug proceeds would be returned to the bank, which would presumably release the funds to the relevant accountholders. The accountholders

would then be made whole and suffer no legal consequences for

having exchanged currency on the black market peso exchange.

Such a conclusion to the BBLA forfeiture actions would make it

that much more difficult for U.S. and Colombian law enforcement

to discourage use of a black market that is financing much of the

illegal drug trade plaguing both our countries.

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BRITISH BANK OF LATIN AMERICA MONTHLY ACCOUNT

ACTIVITY AT BANK OF NEW YORK

January 1998-December 1999

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

January 1998 $213,454 $40,133,745 $43,583,173 $283,057

February 1998 $283,057 $78,285,586 $81,851,437 $223,083

March 1998 $223,083 $67,867,385 $69,162,634 $330,289

April 1998 $330,289 $87,244,132 $85,318,591 $263,158

May 1998 $263,158 $59,968,296 $62,207,011 $428,085

June 1998 $428,085 $61,986,395 $57,747,511 $467,901

July 1998 $467,901 $24,912,043 $25,147,687 $636,209

August 1998 $636,206 $57,963,111 $56,101,057 $501,208

September 1998 $501,208 $109,213,034 $115,092,113 $222,904

October 1998 $222,904 $93,251,230 $91,634,632 $340,490

November 1998 $340,490 $66,367,458 $67,654,369 $355,848

December 1998 $355,848 $52,557,413 $51,912,424 $201,892

January 1999 $201,892 $25,841,407 $26,426,143 $417,358

February 1999 $417,358 $21,556,062 $22,400,269 $783,988

March 1999 $783,988 $77,097,833 $83,362,990 $270,128

April 1999 $270,128 $48,230,657 $47,260,612 $243,138

May 1999 $243,138 $42,193,127 $42,107,758 $128,750

June 1999 $128,750 $101,889,005 $104,288,218 $234,941

July 1999 $234,941 $48,646,448 $53,890,943 $190,446

August 1999 $190,446 $20,524,495 $18,958,590 $356,352

September 1999 $356,352 $71,930,300 $70,778,186 $209,060

October 1999 $209,060 $61,404,775 $65,395,808 $219,542

November 1999 $219,542 $151,528,274 $150,150,064 $204,778

December 1999 $204,778 $41,043,494 $42,785,700 $265,607

TOTAL $1,511,635,705 $1,535,217,920

Prepared by the U.S. Senate Permanent Subcommittee on Investigations, Minority Staff, January 2001.

495

Case History No. 7

EUROPEAN BANK

European Bank is a small onshore bank licensed by the Government of Vanuatu, an island nation in the South Pacific. In 1999,

European Bank opened an account and accepted $7.5 million in deposits that turned out to be the proceeds of a massive credit card

fraud in the United States. This case history looks at how this

bank deposited the $7.5 million in a U.S. correspondent account at

Citibank and fought for over 1 year to prevent U.S. seizure of the

funds. It also looks at the practical difficulties of Citibank’s monitoring a correspondent account in a remote jurisdiction with a tradition of bank secrecy and weak banking and anti-money laundering controls.

The following information was obtained from documents provided

by European Bank and Citibank; court pleadings; interviews of persons in Australia, the Cayman Islands, the United States and

Vanuatu; and other materials. Key information came from interviews with two bank officials, an August 7, 2000 interview of

Thomas Montgomery Bayer, chairman and part owner of European

Bank; and a June 22, 2000 interview of Christopher Schofield

Moore, a financial institutions group vice president at Citibank in

Sydney, Australia. Both European Bank and Citibank voluntarily

cooperated with the investigation. The investigation also benefited

from assistance provided by the Australian, Cayman and Vanuatu

Governments.

A. THE FACTS

(1) European Bank Ownership and Management

European Bank is the only indigenous bank in Vanuatu that is

privately owned. It is licensed to do business with both Vanuatu

citizens and foreign clients. Its offices are located in Port Vila,

Vanuatu’s capital city. In 1999, European Bank had about $29 million in total assets, handled about 90 clients with 250 accounts,

and managed about $62 million in client funds.

European Bank Formation. European Bank Ltd. was first established in 1972. By 1986, it was owned by a consortium of banks

that included Bank of America, Union Bank of Switzerland, and

others. In 1986, the consortium sold the bank to a Delaware corporation called European Capital Corporation, a holding company

which is, in turn, owned by a trust beneficially owned by members

of the Bayer family. The bank’s name was changed in 1986 to European Bank because, according to Thomas Bayer, the bank hoped

to attract European clients doing business in the South Pacific.

Thomas Bayer became the bank’s chairman. In his interview,

Bayer said that, after changing hands, the bank went essentially

dormant for 10 years, handling only a few investments. He indicated that, in 1995, a decision was made to revive the bank. The

bank obtained its current license to service domestic and international clients in April 1995, hired experienced bankers, and in

the last 5 years has become an active financial institution.

European Bank Management. European Bank’s top executive is

Bayer, who has held the title of executive chairman since 1986.

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280 Bayer is a former U.S. citizen who worked for the U.S. Department of Defense, moved to

Australia in 1967, lived in Singapore, and eventually settled in Vanuatu in 1974. After leaving

the U.S. military, Bayer worked in international banking, trust activities and investments, including at offshore financial centers. When Vanuatu declared independence in 1980, and asked

its leading citizens to take Vanuatu citizenship, Bayer became a citizen of Vanuatu in 1982, giving up his U.S. citizenship. Bayer indicated that he has a business degree from the Wharton

School of Business in Pennsylvania, took law courses at a university in Singapore, and is a

member of the International Bar Association. 281Key companies in the Bayer group include the following:

Documentation and interviews indicate he is actively involved in

the management of the bank and serves as its most senior decisionmaker.280 European Bank began hiring management personnel

when the bank came out of its dormancy in 1995. European Bank’s

current president and chief executive officer is Robert Murray

Bohn. The senior vice president in charge of operations is Brenton

Terry whose predecessor, Douglas P.M. Peters, was instrumental in

reviving the bank in 1995. The current operations manager is Kely

Ihrig. The senior vice president in charge of the bank’s data systems is Susan Phelps, who is also an officer of an affiliated company, European Trust Co. Ltd. The senior manager of the bank’s

corporate and trust services is David L. Outhred. Most of the

bank’s senior officers appear to have had solid banking credentials

and experience.

(2) European Bank Financial Information and Primary Activities

European Bank Financial Statements. Vanuatu law requires

its banks to submit annual audited financial statements. In response to a request by the investigation, European Bank voluntarily provided the Subcommittee with a copy of its 1999 financial

statement, which had been audited by the Vanuatu office of KPMG

Chartered Accountants.

The 1999 financial statement presented a mixed picture of the

bank’s finances. It indicated that, overall, European Bank’s 1999

income of $1.7 million was exceeded by operating expenses of $1.8

million, resulting in an overall loss of about $77,000 for the year.

It valued European Bank’s total assets at almost $29 million. Customer deposits, which totaled $112 million in 1998, had dropped by

almost half to $62 million. Note 15 stated that a ‘‘director related

party has placed a deposit of US$984,238 with the bank . . . as security to cover the overdrawn accounts of three clients.’’ ‘‘Issued

share capital’’ was $750,000. Despite the overall loss on the year,

the bank issued a dividend payment of $116,000, double the 1998

dividend of $83,000, which was paid on profits of more than

$291,000.

The financial statement suggests a small, thinly capitalized bank

that, in 1999, suffered some unexpected overdrawn accounts, operating losses and a large drop in customer deposits, but nevertheless

paid a sizeable dividend.

European Bank Affiliations. European Bank is part of a complex group of companies beneficially owned by the Bayer family.

These companies are incorporated in Vanuatu, Canada, the United

Kingdom, and the United States, with offices in other countries as

well.281 European Bank records reflect ongoing transactions with a

497

—European Investment Corp. Ltd., a Vanuatu company which is 100% owned by European

Bank, functions as an investment holding company, and owns one subsidiary, European

Trust Co. Ltd.;

—European Trust Co. Ltd. (‘‘European Trust’’), a Vanuatu company which is licensed to engage in company and trust formation activities in Vanuatu; is 100% owned by European

Investment Corp.; shares employees and office facilities with European Bank; and operates in close cooperation with European Bank;

—Pacific International Trust Company Ltd. (‘‘PITCO’’), a Vanuatu company which is the

only other trust company in Vanuatu aside from European Trust; is owned by PITCO

Corp., a Delaware company; has offices in Hong Kong, Kuala Lumpur, London, New York

and Port Vila; shares employees and office facilities with European Bank; and uses European Bank as one of its bankers; —Pacific Capital Growth Fund Ltd. (PCGF), a Canadian company which is wholly owned

by PITCO; operates several award-winning mutual funds; requires its clients to establish

Vanuatu entities; and uses European Bank as one of its bankers; —Fidelity Pacific Life Insurance Co. Ltd., a Canadian company which is one of only two

registered life insurance companies in Vanuatu; holds preferred shares in European Bank;

and uses European Bank as one of its bankers; —Asian Pacific Finance Ltd., a U.K. company which provides financial services and, like

European Bank, is owned by European Capital Corporation; and

—Vanuatu Maritime Services Ltd., a Vanuatu company which operates Vanuatu’s extensive

international shipping register, which is one of the largest in the world; has registered

over 500 vessels; maintains ship registration offices in Greece, Hong Kong, Japan, Singapore, the United Kingdom, the United States, and Vanuatu; and uses European Bank as

one of its bankers.

number of these related parties. These companies are also a source

of new clients for the bank.

European Bank Primary Lines of Business. When asked to

identify its major lines of business, European Bank described a

number of different types of clients and banking activities, none of

which appear to dominate the bank. Its activities included: (1) domestic banking for Vanuatu residents; (2) private banking primarily for foreign clients, involving funds management and investment activities for wealthy individuals; (3) banking activities for

companies and trusts formed by the bank’s affiliated trust companies, European Trust and PITCO; (4) banking activities for the

bank’s affiliates or their clients, including the PCGF mutual funds,

Fidelity Pacific Insurance, and Vanuatu Maritime Services; (5) offshore banking activities for Asian clients, such as Hong Kong citizens seeking escape from estate duties; (6) merchant credit card accounts; and (7) niche banking services for mail order companies,

telemarketers and lotteries. European Bank indicated that it did

not engage in regular lending activities, although it had a small

trade finance portfolio.

Bayer indicated that, when European Bank first came out of its

10-year dormancy in 1995, it concentrated on a banking specialty

involving services to mail order companies, telemarketers and lotteries. These banking services consisted primarily of clearing thousands of small checks in various currencies from persons buying

merchandise or lottery tickets, and issuing numerous small checks

in various currencies to lottery winners or persons returning merchandise or seeking refunds. European Bank performed the laborintensive work of gathering and batching the consumer checks,

while using correspondent banks with international check clearing

capabilities, such as Citibank, to help it process payments and

issue checks as needed. Bayer indicated that, at its peak, European

Bank was clearing about 100,000 checks per month. Both Bayer

and Moore indicated that it was this check clearing business that

led to the establishment of European Bank’s correspondent relationship with Citibank in 1996.

498

282 According to Bayer, on some occasions, European Bank would combine funds from several

client accounts into a single placement in order to take advantage of the higher interest rates

paid on interbank deposits.

Another key activity at European Bank involving correspondent

banks has been the bank’s fiduciary placement of client funds in

various money market or investment accounts at other banks to

maximize interest earnings. European Bank typically makes these

placements after a competitive bidding process in which its personnel contact the treasury departments at several of its correspondent banks and obtain interest rate quotations for depositing

a specified amount of funds for a specified period of time. For example, European Bank might call Citibank, ANZ Bank, and

Westpac Banking Corp. to find the best interest rate offered for a

30-day deposit of $1 million. Once the placement terms are settled,

European Bank would direct the wire transfer of the funds to the

appropriate bank and, at the end of the agreed upon placement period, collect the promised interest payments.

According to Bayer, these placements are a good source of revenue for the bank, which shares in the higher interest rates paid

on the deposits. For example, if European Bank was able to place

$1 million for 30 days at a 7% interest rate, it might pay its client

5% in interest and keep the remaining 2%. Documentation and

interviews indicate that European Bank took a conservative approach to the placement of client funds, using major banks and

low-risk investments such as money market accounts or U.S. treasury notes. The documentation also indicates that European Bank

often made these placements in U.S. dollars. Documentation and

interviews indicate that European Bank often made a fiduciary

placement soon after receiving a substantial deposit from an individual client. Bayer indicated that European Bank typically tried

to move any large deposit exceeding, for example, $1 million, into

a higher interest-bearing placement by the end of the day. Citibank

account statements show repeated instances in which European

Bank withdrew large client deposits later the same day for placement into a higher interest-bearing money market account either

at Citibank or another bank.282

(3) European Bank Correspondents

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

The role that correspondent banks play in our bank’s operation

is . . . a critical one. All banks place deposits denominated in

foreign currency either directly or indirectly with a correspondent that operates in the country of that currency. . . .

As the Vatu [Vanuatu’s domestic currency] is not an internationally used currency, virtually all of our bank’s assets are

on deposit with our correspondent banks. Even within

Vanuatu, residents generally do not hold their investments in

Vatu, so deposits we received from locally based depositors will

invariably be denominated in a currency other than Vatu. For

us to pay interest on that deposit, we must in turn deposit it

499

283Letter dated 5/22/00 from European Bank to the Subcommittee responding to requests for

information (‘‘European Bank letter’’) at 6. 284 Both ANZ Bank (Vanuatu) Ltd. and ANZ Bank (United States) are affiliated with the Australia and New Zealand Banking Group Ltd., a large financial services conglomerate with, according to the Bankers Almanac, over 30,000 employees and $95 billion in assets worldwide.

through the interbank system with one of our correspondent

banks.283

In response to requests for information, European Bank provided

a list of about a dozen banks with which it has had a correspondent relationship since 1998. These correspondent banks

were licensed in Australia, Italy, the Netherlands, the United

Kingdom, Vanuatu, and elsewhere.

Bayer indicated that, for 4 years beginning in 1996, European

Bank’s primary correspondent relationship was with Citibank.

That correspondent relationship was managed by Citibank offices

in Australia, but European Bank maintained seven Citibank accounts, each in a different currency, allowing it to transact business in Australia, Canada, Hong Kong, New Zealand, the United

Kingdom and the United States, among other jurisdictions. Bayer

indicated that European Bank’s preferred currency was U.S. dollars and it carried out the bulk of its transactions through its U.S.

dollar account at Citibank. European Bank also completed transactions in such currencies as Australian dollars, Canadian dollars,

sterling and yen.

European Bank routinely transacts business in the United

States, using a variety of U.S. correspondent accounts. While its

most frequently used U.S. dollar account was at Citibank, European Bank also used U.S. dollar accounts belonging to its other correspondent banks, such as ANZ Bank (Vanuatu) Ltd. and Bank of

Hawaii (Vanuatu), both of which have U.S. affiliates. ANZ Bank

(Vanuatu) Ltd., for example, has a correspondent relationship and

U.S. dollar account with ANZ Bank (United States) which maintains a small office in New York, and European Bank routinely

transacted business through this U.S. account.284

While the Minority Staff investigation did not examine all of European Bank’s U.S. correspondent activities, it did conduct an indepth examination of the bank’s primary correspondent relationship with Citibank. This correspondent relationship lasted 4 years,

from May 1996 until May 2000, and ended only when Citibank

made a decision to reduce its correspondent activity involving certain South Pacific island nations. Although European Bank’s

Citibank accounts are now closed, it continues to transact business

in the United States through a variety of other U.S. correspondent

accounts.

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

European Bank operates out of offices in the capital city of

Vanuatu, Port Vila. Its offices are open to the public, since the

bank is authorized to take deposits from Vanuatu citizens as well

as international clients. The bank shares its office space and staff

with two affiliated companies, European Trust and PITCO. According to Bayer, the companies have a combined staff of about 60, of

which only about 8 persons work solely for the bank.

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285See chart entitled, ‘‘European Bank Monthly Account Activity at Citibank.’’ 286 Excerpts include the following:

—‘‘The purpose of this policy is to ensure that . . . European Bank . . . has adequate policies, practices and procedures in place, including strict ‘know your customer’ rules that

will encourage all staff of the Bank to promote high ethical and professional standards

in the financial and banking sector and prevent the Bank being used, intentionally or otherwise, by criminal elements.’’

—‘‘Transactions will only be undertaken for customers of the Bank, properly identified individuals or with authorized introductions from group associated entities.’’

—‘‘It is mandatory that before an account is opened, the Bank Officer is satisfied that he/

she ‘knows the customer’, and is satisfied with their bona fides. . . . The Bank requires

to know . . . where appropriate, the ‘beneficial owner’ of the account.’’ —‘‘[T]he following bank documentation must be obtained/completed: Signature Card. Account Opening Questionnaire[.] Money Laundering Prevention Questionnaire[.] Acknowledgment and Agreement form. Statutory Declaration. Beneficial Ownership form. . . .’’

From 1996 through mid 2000, the bank maintained an electronic

ledger and had its own wire transfer capability using software provided by Citibank. Documentation indicates a well developed set of

standard internal forms to track client accounts and bank transactions. Bank records are kept on site in Vanuatu.

The bank does not have a high volume of daily transactions nor

does it routinely deal in million-dollar transactions, although it occasionally facilitates large transfers of funds. In his interview,

Bayer estimated that the bank handles only about 5 to 10 transactions per day and an even smaller number of fiduciary placements. Citibank documentation indicates that over a 2-year period,

1998 and 1999, only a small number of European Bank’s transactions exceeded $2 million. During those 2 years, for example,

only one transaction exceeded $10 million; two transactions involved amounts between $5 and $10 million; and less than a dozen

involved $2 million or more. Nevertheless, European Bank moved

significant amounts of funds through its Citibank accounts. For example, in 2 years, the least active month, at its Citibank U.S. dollar account experienced more than $1 million in account activity,

while the most active month saw $50 million move into and out of

the account. Overall, European Bank’s deposits and withdrawals

from its U.S. dollar account at Citibank in 1998 and 1999 totaled

almost $192 million.285

European Bank’s Anti-Money Laundering Controls. European Bank provided the investigation with a copy of its July 1999

‘‘Money Laundering Prevention Policy.’’ In an interview, Bayer

stated that it was the bank’s first formal, written anti-money laundering policy statement, although the bank has long worked to prevent money laundering by getting to know its customers, monitoring accounts and reporting suspicious activities.

European Bank’s policy statement includes sections on the definition of money laundering, how to prevent money laundering, ‘‘client

acceptance criteria,’’ and anti-money laundering procedures instructing bank employees to ‘‘know your customer,’’ monitor transactions, and report suspicious transactions.286 The policy statement

also provides standard forms for reporting cash transactions and

suspicious activity.

The person charged with implementing the anti-money laundering policy is the bank’s operations manager, who also serves as

European Bank’s compliance officer. Bayer indicated during his

interview that, prior to July 1999, European Bank had not assigned anti-money laundering duties to a particular bank emVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00510 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
501

ployee. He said that the policy also led to the appointment of the

bank’s first official compliance officer.

European Bank’s 1999 adoption of a written anti-money laundering policy is an overdue, but important advance in its antimoney laundering efforts. While the policy has many positive features, it has at least two drawbacks. First, it assigns all antimoney laundering and compliance duties to the bank’s operations

manager, who already has substantial duties in the day-to-day operation of the bank. Bayer indicated in his interview that he

thought Kely Ihrig, the current operations manager, spent a very

small percentage of her time on anti-money laundering responsibilities. Second, while the policy statement requires ‘‘ongoing monitoring of transactions,’’ it appears to limit this monitoring to cash

transactions. The policy statement does not require, for example,

any monitoring of wire transfer activity, even though the vast majority of European Bank transactions take place through wire

transfers. The statement also fails to specify any monitoring procedures, whether manual or electronic, to be used in analyzing ongoing transactions and identifying suspicious activity.

(5) Regulatory Oversight of European Bank

Vanuatu has separate regulatory regimes for its onshore and offshore banks, with different statutory requirements and different

regulatory agencies. Onshore, domestic banks are regulated by the

Reserve Bank of Vanuatu, while offshore banks are regulated by

the Vanuatu Financial Services Commission. European Bank is

regulated by the Reserve Bank. Bayer is a long-serving member of

the Vanuatu Financial Services Commission.

Vanuatu has a mixed reputation with respect to its banking and

anti-money laundering controls. For example, the State Department’s International Narcotics Control Strategy Repo (‘‘INCSR

2000’’) identifies Vanuatu as a country of ‘‘concern’’ in terms of

money laundering, and describes a number of deficiencies in its

anti-money laundering laws. However, the United States has not

issued a formal advisory on Vanuatu nor is Vanuatu named in

FATF’s June 2000 list of 15 countries found non-cooperative with

international anti-money laundering efforts. On the other hand,

Vanuatu is named in the June 2000 list of 35 unfair tax havens

published by the Organization for the Economic Cooperation and

Development’s Forum on Harmful Tax Practices, and in the March

2000 list of offshore jurisdictions with relatively weak financial regulation issued by the Financial Stability Forum. In late 1999, several major banks, including the Bank of New York, Deutsche Bank

and Republic National Bank of New York, stopped processing wire

transfers involving certain South Pacific island nations, such as

Nauru, Palau Niue and Vanuatu. However, in early 2000, Vanuatu

was able to convince the banks to modify their wire transfer ban

as applied to Vanuatu so that it was limited, essentially, to

Vanuatu’s offshore banks, while allowing wire transfers involving

Vanuatu’s domestic onshore banks. Later in 2000, when Vanuatu

underwent its first evaluation by the Asia/Pacific Group on Money

Laundering (APG), a FATF regional affiliate, the evaluation identified both positive and negative features of Vanuatu’s anti-money

laundering controls.

502

287 Vanuatu’s five onshore banks are: (1) European Bank, the island’s only privately-owned,

indigenous bank, not licensed in any other jurisdiction; (2) National Bank of Vanuatu, which

is an indigenous bank owned by the Vanuatu Government; (3) ANZ Bank (Vanuatu) Ltd., which

is part of the Australia, and New Zealand Banking Group Ltd., a large regional conglomerate;

(4) Banque d’Hawaii (Vanuatu) Ltd., a wholly owned subsidiary of an established U.S. bank,

Bank of Hawaii which operates throughout the South Pacific; and (5) Westpac Banking Corp.,

which is part of a large Australian financial conglomerate. 288 According to Bayer, the Commission operates with three members, one of whom is a government employee and serves as the official ‘‘Commissioner,’’ while the other two serve as commission ‘‘advisors.’’ Bayer indicated in his interview that he has been a member of the Commission since its inception in the 1980s and is the only member who has continuously served on

the agency since it began. Bayer indicated in his interview that he perceived his role to be, in

part, to represent the interests of the private sector. The official Commissioner for a number

of years was Julian Ala, followed recently by Dudley Aru.

Vanuatu has five locally licensed, domestic banks which together

make up the Bankers Association of Vanuatu.287 These banks are

authorized to do business with Vanuatu’s residents and any foreign

citizen, and to complete transactions using the local currency, the

Vatu, as well as any foreign currency.

Beginning in 1999, the Reserve Bank of Vanuatu was assigned

responsibility for regulating these onshore banks. This regulation

is carried out by the Reserve Bank’s Bank Supervision Department. Bayer indicated in his interview that, to date, the Reserve

Bank has not issued any bank regulations, because the industry

has historically been self-regulated under rules issued by the Bankers Association of Vanuatu. Each onshore bank is required, however, to file monthly reports and an annual audited financial statement with the Reserve Bank. These filings contain information

about the bank’s capital, balances, major depositors, operations and

other information. The Reserve Bank is charged with reviewing

these reports as well as conducting bank examinations. Bayer indicated in his interview that European Bank had undergone a number of bank examinations over the years.

In addition to five onshore banks, Vanuatu has licensed over 60 ‘‘exempted’’ or offshore banks. Apparently, all are shell operations

run by persons or companies outside of the jurisdiction. Bayer indicated during his interview that about six were affiliated with banks

licensed elsewhere, while the remaining—more than 55—were offshore banks licensed only in Vanuatu. He indicated that most of

the offshore banks operated under restricted banking licenses

which permit the bank to accept deposits only from persons or entities specified on an approved list.

All of Vanuatu’s offshore banks are regulated by the Vanuatu Financial Services Commission. The current chairman of the Commission is Bayer, who serves in an advisory capacity.288 The Commission participates in both the licensing and monitoring of these

banks. The Commission also oversees much of the rest of Vanuatu’s

commercial sector, including the island’s international business corporations, trust companies, insurance firms, realtors and other

commercial enterprises. It used to oversee the island’s domestic

banks as well, until that responsibility was switched in 1999 to the

Reserve Bank.

According to Bayer, compared to its other duties, the Commission

has spent only a small fraction of its time on matters related to offshore banks. He indicated that, of the time spent on offshore bank

matters, most of the Commission’s efforts have involved obtaining

required fees and reports from the offshore banks, and reviewing

503

submitted filings. He said the Commission carried out its offshore

banking duties through an ‘‘Offshore Banking Supervision Unit.’’ He said the Commission did not, as a rule, conduct bank examinations. He indicated that offshore banks are not required to keep

records in Vanuatu, and most do not, which means offshore bank

examiners would have to travel to where the shell bank was operating or, alternatively, be limited to reviewing paperwork sent to

Vanuatu. Bayer said that, due to requests made by the international banking community, the Commission recently agreed to

examine six of its offshore banks suspected of having ties to Russian nationals and moving questionable funds. He indicated that

those examinations were being conducted by a retired bank auditor

from the U.K.’s Financial Services Authority, hired by Vanuatu to

examine the six banks. He said that Vanuatu had made no commitment to examine its other offshore banks, which currently number

more than 50. He indicated that there was an ongoing debate in

Vanuatu about whether offshore bank examinations were needed

and whether the cost of compliance would discourage bank applications in Vanuatu.

Bayer also said in his interview that, even though he is chairman

of the Vanuatu Financial Services Commission, he plays only a limited role in the licensing process because he is not permitted to see

bank ownership information. He said that, under Vanuatu law,

only the official Commissioner, a government employee, has access

to bank ownership information. He said that, because of this situation, he could not say with any certainty who owned Vanuatu’s offshore banks—even though he is a key regulator of them. He said

that it was his impression that most of the 60 offshore banks are

‘‘ego banks’’ owned by wealthy individuals or subsidiaries of private

companies seeking to operate a bank on behalf of a related group

of companies.

Bayer said that it is his impression from his Commission duties

that Vanuatu’s offshore banks are generally not very active. He

thought that they are also generally small operations with few formal procedures. For example, he thought that few would have formal anti-money laundering procedures. He said that it was up to

U.S. banks to investigate these banks prior to accepting funds or

opening accounts for them. When told that U.S. banks thought that

they should be able to rely on Vanuatu banking authorities to ensure the legitimacy of their licensed banks, Bayer disagreed and

said U.S. banks have their own due diligence obligations they need

to perform.

Although Bayer claimed there was no conflict of interest in his

serving on a Commission that oversees only offshore banks, evidence indicates that European Bank operates a correspondent account for at least one Vanuatu offshore bank called Nest Bank.

Nest Bank is one of the six Vanuatu offshore banks under examination for possible ties to Russian nationals. Citibank documents

indicate that, beginning in January 1999 and continuing throughout the year, European Bank allowed Nest Bank to move more

than $6 million through European Bank’s U.S. dollar correspondent account at Citibank. These funds suggest Nest Bank

may be a sizeable client at European Bank. The 1999 transactions

involved such entities as a fertilizer plant in Uzbekistan; a London

504

289For more information, see the description of the Taves fraud in the appendix. 290 Euro Bank is completely unrelated to European Bank in Vanuatu.

company that trades in oil, chemicals, and agricultural commodities in Russia; a company called Societe Generale S.A. in the

Ukraine; a company called Rusomax Ltd.; and International Bank

Astana, Ltd. which the investigation was unable to locate but appears to have ties to Moscow. While the investigation did not attempt to analyze European Bank’s relationship with Nest Bank,

the existence of this correspondent account raises possible conflict

of interest issues, since it calls for a private banker, Bayer, to oversee an offshore bank that is also his bank’s client. The potential for

conflict is made even more clear by the Commission’s ongoing examination of Nest Bank for alleged ties to Russia and possible

money laundering, since Nest Bank moved over $6 million in 1

year through European Bank’s correspondent account at Citibank.

(6) Money Laundering and Fraud Involving European

Bank

The Minority Staff investigation did not conduct an exhaustive

review of European Bank’s activities, but did conduct a detailed examination of two major accounts opened in 1999, which moved millions of dollars through European Bank’s U.S. correspondent accounts. Both accounts raise serious questions about European

Bank’s client oversight and due diligence.

(a) Taves Fraud and the Benford Account

In 1999, European Bank opened a bank account and accepted

$7.5 million on behalf of a Vanuatu corporation, Benford Ltd., that

was established by its affiliated trust company and about which the

bank had virtually no due diligence information. After learning

that the $7.5 million consisted of proceeds from a credit card fraud,

European Bank nevertheless fought for more than 1 year to prevent U.S. seizure of the funds from its correspondent account at

Citibank.

In April 2000, in civil proceedings filed by the U.S. Federal Trade

Commission to halt unfair and deceptive trade practices, a U.S. district court found that Kenneth H. Taves and his wife Teresa Callei

Taves, both U.S. citizens, had committed a massive credit card

fraud involving over $49 million.289 Imprisoned on civil contempt

charges for refusing to surrender certain assets related to the

fraud, Taves was indicted in February 2000 in separate court proceedings in two countries. In the United States, Taves was charged

with making false statements; in the Cayman Islands he was

charged with money laundering.

The U.S. court also authorized an FTC-appointed receiver to

track down and recover the fraud proceeds. The receiver found over

$25 million had been transferred to Taves-controlled accounts at

Euro Bank, a small bank in the Cayman Islands.290 The Cayman

Government charged three senior Euro Bank officials with laundering money from the Taves fraud and later ordered the bank

closed. In July 1999, in exchange for releasing the bank from damage claims, Euro Bank’s liquidators provided the FTC receiver with

‘‘information and documents in the Bank’s possession’’ related to

505

the Taves fraud. Using this information, the FTC receiver traced

$7.5 million in Taves fraud proceeds to a European Bank account

opened in the name of a Vanuatu corporation, Benford Ltd.

Benford Ltd. was incorporated by European Trust, and its bank

account was opened by European Bank. The company was established at the request of one of the Euro Bank employees later

charged with money laundering, who said he was acting on behalf

of an unnamed client. The incorporation and account paperwork

was handled by a shared senior employee, Susan Phelps, who was

working for both European Trust and European Bank. Phelps has

stated in a sworn affidavit that, throughout the incorporation and

account opening process, she never spoke with either the Euro

Bank employee or Benford’s beneficial owner, but relied entirely

upon faxed information to establish the corporation and open the

account.

Phelps incorporated Benford Ltd. within 24 hours of receiving an

application form faxed from Euro Bank with minimal information

about the company’s beneficial owner. The application provided no

more than the beneficial owner’s name, Vanessa Phyllis Ann Clyde,

a London address, a copy of her passport photograph, and a oneword description of her occupation as ‘‘business.’’ On the same day

Euro Bank wire transferred $100,000 to European Bank’s account

at Citibank in New York, for deposit into the Benford account. European Bank opened the Benford bank account, without any additional due diligence research into Clyde, the source of her wealth,

or the origin of the $100,000. Bayer indicated that all of the forms

were filled out in the usual way for bank accounts opened for companies formed by its affiliate, European Trust. In other words, it

was typical practice for European Trust to incorporate a new company within 24 hours of a request and then for European Bank to

open a bank account in the company’s name.

It was only after the Benford account was opened, that the Euro,

Bank employee and the company’s beneficial owner, Clyde who had

an American accent, actually telephoned Phelps to discuss the account. Clyde apparently indicated that she wished to keep the

Benford funds in U.S. dollars in a secure but liquid investment.

Over the next 2 months, the Benford account received additional

millions of dollars in deposits. The first transfer, for $2.8 million

on March 17, 1999, prompted European Bank to ask some questions about their new client. After Euro Bank did not volunteer any

additional information, European Bank’s senior vice president

asked someone he knew in the Cayman Islands about Euro Bank

itself. He received the following negative information about Euro

Bank:

Small locally incorporated bank, with a local banking licence,

20/30 people on the staff, corporate activities too, not a good

reputation locally, has its door open to business when other

doors are closed to it, very much lower end of the local banking

business, dubious, 3 months ago there were rumors that they

might fail, not well respected, advise caution when dealing

with them. Barclays would not accept a reference from them

and would certainly not do business with them.

506

291See Phelps affidavit and notes, CG 6509–11.

Despite this negative portrayal of the sole reference for the

Benford account, European Bank left open the account, accepted

additional funds, and chose not to try to verify any information

about Clyde or her assets.

By April 1999, the Benford account held about $7.5 million.

Bayer said that, by then, Benford was a ‘‘huge client,’’ whose deposits represented about 15% of the bank’s total deposit base of $50

to $60 million. In May, however, two incidents suddenly cast suspicion on the Benford funds. The first, on May 25, 1999, was a telephone call about the account from a Clyde who had an English accent, instead of an American accent. Bayer said it was the first

time European Bank appeared to have two different persons claiming to be the beneficial owner of an account at the bank. Later the

same week, European Bank received a fax stating that Euro Bank

had been placed into receivership and the $7.5 million previously

sent to the Benford account were proceeds of the Taves credit card

fraud.

In response, European Bank immediately froze the Benford account, transferred the funds internally into a new, non-interest

bearing account from which client withdrawals were prohibited,

and filed a report with the Vanuatu police. Despite moving the

Benford deposits into a non-interest bearing account within the

bank, European Bank decided to continue placing the $7.5 million

with the correspondent bank paying the highest interest rate on

the funds, so that it could continue to earn revenue from this large

deposit. European Bank did not, however, alert the correspondent

bank holding the funds to their suspicious origin.

At the same time, European Bank made another attempt to

learn more about the funds. In June 1999, Phelps asked the

English-accented Clyde in a telephone conversation about the origin of the funds. She wrote this summary of the conversation:

[Clyde] said I should have got this info from [the Euro, Bank

employee]. I said the funds had just arrived without supporting

documentation. . . . English was asked to open the a/c. Doesn’t

know when. . . . Doesn’t know how much. Wasn’t responsible

for putting funds in. Not her personal funds. Extremely uncomfortable. . . . If somebody had taken funds she doesn’t want to

be tarred.291

The evidence indicates that, within months of the $7.5 million

being deposited, European Bank had notice and evidence of their

suspect origin. Yet European Bank steadfastly opposed releasing

the funds to the FTC receiver seeking recovery of the money on behalf of the Taves fraud victims.

Litigation over the funds began in the summer of 1999, when European Bank and the FTC receiver filed separate suits in Vanuatu

to freeze the $7.5 million. In September, Clyde asked the Vanuatu

court to allow her to remit the Benford funds to the FTC receiver,

but European Bank’s nominee companies contested her control of

Benford Ltd. and opposed releasing the funds. The Vanuatu police

launched a criminal investigation and, in November, charged

Benford Ltd. with possession of property ‘‘suspected of being proVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00516 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
507

292 However, the INCSR 2000 report warns: ‘‘Case law in Vanuatu has shown that proving

the criminal origins of proceeds, especially of offenses committed abroad, is extremely difficult.

Linking criminal proceeds seized in Vanuatu with the offense committed abroad through a complex series of financial transactions conducted by related corporations operating in several offshore jurisdictions is all but impossible.’’ INCSR Report 2000 at 751.

ceeds of crime.’’ The police also obtained a criminal freeze order

preventing the funds’ release to the FTC or anyone else.

On December 10, 1999, after locating a document notifying

Benford Ltd. that its funds had been placed in an interest bearing

account at Citibank in Sydney, the FTC receiver filed suit in Australia, asking the Australian court to freeze the $7.5 million on deposit with Citibank. Unknown to the FTC receiver at the time of

its filing, European Bank had taken steps that same day to transfer the funds from Citibank to one of its correspondent banks in

Vanuatu. Before any transfer took place, however, the Australian

court froze the funds. Additional pleadings were filed by the

Vanuatu Government, European Bank and FTC receiver, each

seeking control over the $7.5 million. European Bank, which had

not told Citibank previously about the suspect origin of the Benford

funds, sent a fax to Citibank explaining the situation and complaining that the FTC receiver was trying ‘‘every trick in the book’’

to ‘‘force the monies to be sent to the USA.’’ The Vanuatu and Australian litigation continued throughout 2000.

Almost 1 year later, on November 29, 2000, a third set of legal

proceedings began in the United States. Acting at the request of

the FTC, the U.S. Department of Justice filed a seizure warrant

and took possession of the Benford funds from Citibank in New

York. It was able to seize the funds in the United States because

Citibank Sydney had always kept the Benford funds in U.S. dollars

in a U.S. dollar account in New York. In December 2000, the Justice Department filed a civil forfeiture action seeking to eliminate

any other claim to the funds. The complaint alleged that the funds

were the proceeds of the Taves credit card fraud, and the FTC receiver had ‘‘tried to obtain the funds from European Bank through

a Vanuatuan court proceeding, but failed to obtain relief in

Vanuatu.’’ It is unclear whether European Bank will assert a claim

to the funds.

During more than a year of litigation battles in three countries,

Clyde has supported sending the Benford funds to the FTC, but

European Bank has vigorously opposed it. When asked why, Bayer

gave three reasons during his interview: (1) the ownership of the

funds remained unclear, since Clyde had admitted in court that

they were not her funds and she did not know their origin; (2) the

allegation that the funds came from the Taves fraud should be established in Vanuatu court and, if true, the Vanuatu Attorney General could reimburse the fraud victims, rather than pay the monies

to the FTC receiver who might exhaust the entire sum through fees

and expenses; 292 and (3) European Bank had to defend itself from

the risk of inconsistent court decisions which might order it to pay

the $7.5 million twice, once to the Vanuatu Government in connection with the Benford money laundering prosecution and once to

the FTC receiver seeking funds for the Taves fraud victims. At

times, Bayer also argued that the $7.5 million deposit at Citibank

represented European Bank’s own funds, unrelated to the Benford

508

293For more information, see the description of the IPC fraud in the appendix.

matter, although at other times he acknowledged the Benford deposits made up the bulk of the Citibank placement.

The $7.5 million, now swelled with interest earnings to $8.1 million, is in the custody of the United States, while the litigation in

Vanuatu, Australia and the United States continues.

(b) IPC Fraud

In February 1999, the same month it opened the Benford account, European Bank opened another ill-fated account under a

credit card merchant agreement with a Florida corporation called

Internet Processing Corporation (‘‘IPC’’).293 As in the Benford matter, European Bank opened the account without a due diligence review of the prospective client. IPC used unauthorized credit card

charges to obtain $2 million in payments from European Bank and

then absconded with the funds. By the time it learned of the fraud,

European Bank was unable to locate IPC, the company’s owner, or

the missing $2 million. It ultimately suffered a $1.3 million loss

which threatened the solvency of the bank.

According to Bayer, the IPC account was one of about a half a

dozen new accounts that European Bank opened in 1999 in an effort to expand the bank’s business into credit card clearing. It

opened the IPC bank account within 1 week of being contacted for

the first time by the company. As with the Benford account, the

IPC account was opened based upon written materials and correspondence, without any telephone conversation or direct client

contact.

Despite the credit risk involved in a merchant account, European

Bank failed to conduct virtually any due diligence review of either

IPC or Mosaddeo Hossain, the company’s sole incorporator, registered agent, director and officer. IPC is a Florida corporation that

had been created 2 weeks prior to the opening of the account. It

claimed to sell travel packages on the Internet. Hossain was a

Bangladeshi national allegedly living in Florida. European Bank

did not inquire into the company’s ownership, double check its references, ascertain its capital or bank account balances, or verify its

physical address. With respect to Hossain, it did not inquire into

his business background, obtain any personal or professional references, check his credit history, or verify any personal or professional information about him. The bank also failed to notice that

the Bangladeshi passport he submitted as identification had expired 7 years earlier.

As soon as the account became operational in late March 1999,

Hossain claimed that IPC needed to process a number of pre-sold

travel packages and filed credit card charges totaling about $13

million. About 85% of these charges would later be disputed by the

cardholders who would refuse to pay them. In April 1999, European Bank processed about $3.5 million of the filed charges and

paid IPC over $2 million in four separate payments. Each payment

was made through European Bank’s U.S. dollar account at

Citibank and sent to IPC’s U.S. dollar account at a Florida bank,

called BankAtlantic.

509

On April 21, 1999, European Bank received an email from its

credit card processing company about ‘‘a possible fraud of cardholders of your merchant: Internet Processing Corp.’’ European

Bank immediately stopped all credit card processing and attempted

unsuccessfully to recall its latest payment to IPC of $728,000. It

later learned that, each time IPC had received a payment from European Bank, IPC had promptly directed BankAtlantic to wire

transfer the funds across international lines to a bank in either

Israel or Jordan. An accountholder would then withdraw the funds

from the bank, sometimes in cash. Despite urgent requests from

European Bank and Citibank, BankAtlantic failed to return the

$728,000, failed to promptly alert the banks in Israel and Jordan

to the IPC fraud, and failed to provide effective assistance in locating Hossain or IPC.

European Bank directly contacted the Israeli and Jordanian

banks, but neither returned any funds or provided investigative

leads. European Bank also alerted U.S. law enforcement, including

the Secret Service. To date, it has been unable to find any trace

of IPC, Hossain or the missing $2 million. After taking into account

IPCs security deposit and the limited credit card payments it received, European Bank determined that it actually lost about $1.3

million from the IPC fraud.

Citibank’s relationship manager for the European Bank account,

Christopher Moore, determined that the loss was substantial given

European Bank’s thin capitalization and required the bank to keep $1 million on deposit at Citibank until the IPC matter was fully

resolved. Bayer described the loss as a ‘‘very serious matter’’ which

could have resulted in bank failure, if the exposure had been greater. He said, however, that European Bank appears to have weathered the damage to its solvency.

(7) Correspondent Account at Citibank

Citibank’s due diligence efforts with respect to opening and monitoring the European Bank account were among the most careful

and conscientious witnessed during the investigation, but suffered

from the practical difficulties inherent in overseeing a small foreign

bank in a remote jurisdiction with weak banking and anti-money

laundering controls and a tradition of bank secrecy.

Citibank. Citibank is one of the largest banks in the United

States with over $700 billion in assets and operations in more than

100 countries. According to Christopher Moore, the Citibank Sydney vice president interviewed by the investigation, Citibank holds

two banking licenses in Australia, one for Citibank N.A. and one

for Citibank Ltd., a Citibank N.A. subsidiary. Both make up what

is referred to informally as ‘‘Citibank Sydney.’’ Citibank Sydney

also includes an entity variously called the ‘‘Citibank N.A. Sydney

Branch Offshore,’’ ‘‘Sydney Offshore Banking Unit,’’ which transacts business with persons residing outside Australia.

Citibank Sydney has an active correspondent banking business.

Most of its correspondent banking operations are handled by its

‘‘Financial Institutions Group,’’ which operates out of Citibank’s

Global Corporate and Investment Bank.’’ According to Moore, the

Financial Institutions Group manages about 50 correspondent relationships with financial institutions in Australia, New Zealand and

510

294See, for example, Citibank’s first Basic Information Report on European Bank, CG 3852–

61; first site visit report, CG 6155–57; and first credit analysis of the bank, CG 4203–07.

the South Pacific region. The group also oversees Australian dollar

accounts for another 200 financial institutions transacting business

in that currency. Despite this large customer base, Moore said that

the Financial Institutions Group operates with about four relationship managers. The relationship managers are supervised by

Moore, who is a vice president and longstanding employee in the

group, and its senior credit officer. Moore’s direct supervisors are

Citibank’s Australia country head and country credit officer.

Moore indicated in his interview that most of the financial institutions that Citibank Sydney works with also have U.S. dollar accounts. He indicated that, because of the frequency of U.S. dollar

transactions, the Financial Institutions Group was in regular contact with Citibank offices in New York. He indicated that all U.S.

dollar transactions take place in the United States, through

Citibank New York; U.S. dollars are not kept in Australia by

Citibank Sydney.

Initiating European Bank Relationship. Citibank Sydney

managed the correspondent relationship with European Bank.

Moore explained that, although he did not normally become involved in the details of a correspondent relationship, he took it

upon himself to act as the relationship manager for the European

Bank account. He said it was Citibank’s only account in Vanuatu,

which is seen in Australia as a questionable jurisdiction, and he

wanted to ensure that the initial due diligence and subsequent

monitoring efforts for the account were adequate.

In deciding whether to commit Citibank to a correspondent relationship with European Bank, Moore conducted a thorough and

painstaking due diligence effort.294 Among other measures, Citibank Sydney took the following steps:

—Citibank officials traveled to Vanuatu, visited European

Bank’s offices, inspected its operating systems, talked to the

staff, and met with the bank’s senior officers, including

Bayer.

—Citibank obtained copies of the bank’s incorporation papers,

banking license, audited financial statements and other key

documentation.

—Citibank asked Vanuatu banking regulators for their opinion

of European Bank. It also analyzed Vanuatu’s banking regulation and government.

—Citibank required European Bank to submit three written

bank references and followed up with personal calls to each

bank that provided a written reference. Citibank also spoke

with European Bank’s outside auditor

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

—Citibank inquired about and analyzed European Bank’s client base. Citibank made independent inquiries into several

clients that raised due diligence concerns, such as an AusVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00520 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
511

295See United States v. C–W Agencies Inc. (U.S. District Court for the Western District of

Washington Criminal Case No. CR99–454C), information (8/9/99) and plea agreement (8/24/99). 296See ‘‘European Bank Ltd. Customers Information,’’ (5/27/96), CG 3869–73. 297See ‘‘Call Report European Bank’’ (5/2/96), CG 6155; and 11/26/96 letter from Citibank to

European Bank, CG 6095. 298The bates designation for this document is CG 6138. 299 5/9/96 memorandum from William Ferguson to Moore, CG 6149. The memorandum’s reference to the bank’s ‘‘lack of institutional stability,’’ according to Moore, was a reference to the

bank’s small size and thin capitalization. The reference to Vanuatu’s ‘‘overall image,’’ he said,

was a reference to its image as a tax haven and an area that drew the attention of bank regulators.

tralian lottery and certain mail order companies. In the case

of the Australian lottery, Citibank checked with Australian

officials who apparently provided the company with a clean

bill of health, even though the company was then under

criminal investigation in the United States and later pleaded

guilty to illegal lottery solicitations.295 With respect to five

clients, including the Australian lottery, Citibank required

European Bank to submit a written declaration attesting to

the client’s reputation, competence and suitability.296 Moore

indicated during his interview that Citibank eventually realized that it did not have the resources to evaluate all of European Bank’s clients, and it would have to determine

whether it could rely on European Bank to conduct its own

client due diligence.

—Citibank directly and repeatedly discussed anti-money laundering issues with European Bank, including providing the

bank with a 90-minute video on the topic and inquiring

about the bank’s due diligence procedures.297 In one memorandum, Moore expressed concern about the bank due diligence procedures stating, ‘‘It’s clear to me that [European

Bank] [doesn’t] have a disciplined internal call file process.

The customer acceptance testing is done by Tom [Bayer] and

Robert [Bohn] and its apparently filed in their heads! I’m

sure they know what they are doing, but is that good enough

for us.’’ 298 In his interview, Moore could not recall whether

European Bank then had written anti-money laundering procedures, but said he was ‘‘confident’’ the bank was aware of

and sensitive to its due diligence and anti-money laundering

obligations. European Bank’s first written anti-money laundering procedures came, in fact, 3 years later in 1999.

Despite some deficiencies, the initial due diligence performed by

Citibank was much more extensive than due diligence inquiries observed in the other correspondent bank case histories. The thoroughness of the effort may have been due, in part, to reservations

about the relationship expressed by the person who was then head

of Citibank Sydney and Moore’s immediate supervisor. He wrote:

I have been thinking a lot about this proposed relationship and

while I appreciate your diligence in developing indepth information . . . I continue to have reservations about entertaining

this business. I am particularly concerned about the lack of institutional stability of the bank, the difficulty in monitoring

events from Sydney and the overall image of Vanuatu. . . .

[Y]ou should know that it will not be an easy sell.299

512

300 5/9/96 memorandum from Moore to Ferguson, CG 6150. 301The bates designation for these documents are CG 3852–61. 302See, for example, 4/30/97 memorandum by Moore, CG 6052–53.

In his interview, Moore said that he overcame these concerns by

gathering detailed information about the bank and forming a consensus with his Citibank Sydney colleagues that the account was

worth trying. Moore said that his meetings with the bank’s management and staff impressed him with the bank’s openness and

willingness to provide information, Citibank’s efforts to verify the

bank’s information were successful, and the regulators and other

references all seemed to depict a solid bank under credible management. In an internal memorandum, Moore wrote, ‘‘[A]s we have

step by step advanced this prospect with greatest caution and initial scepticism, we have been very impressed by the integrity and

process we have seen in European Bank and its people.’’ 300

Monitoring the Account. Citibank Sydney began its correspondent relationship with European Bank on May 22, 1996.

Over the next 4 years, Citibank provided European Bank with

seven deposit accounts, each in a different currency; an electronic

ledger and wire transfer software; check clearing services; check

issuance capabilities allowing European Bank to issue checks in

multiple currencies; foreign exchange services; limited credit lines

for overdrafts and foreign currency transactions; access to Citibank’s money market and other higher interest bearing accounts;

and access to Citibank’s bond and stock trading capabilities. The

relationship expanded slowly, but steadily. Although Citibank indicated that it considered European Bank one of its smallest clients,

the account statements show that, in 1998 and 1999 alone, European Bank moved $192 million through its Citibank U.S. dollar account.

Moore personally supervised the monitoring of the European

Bank account. In the first 6 months the account was open, he reviewed the bank’s monthly account statements and cash letter reports. The documentation indicates that, while the account was

open, Citibank personnel made regular site visits to the bank.

Moore reviewed, and at times contributed to, Citibank ‘‘call reports’’ summarizing contacts with European Bank, and various annual reviews of the relationship. In addition, when problems arose

over the Benford and IPC matters, Moore personally requested explanations and performed an independent analysis of the facts.

Citibank’s documentation of the correspondent relationship contains numerous reports and analysis. Citibank Sydney’s Financial

Information Group uses a standard form for each correspondent relationship, entitled ‘‘Basic Information Reports’’ (BIRs), to present

due diligence information, a risk analysis, transaction profile, overview of Citibank services and credit arrangements, account highlights, and an annual analysis for each relationship. The BIRs for

European Bank were completed for 1997, 1998 and 1999, and approved by Moore.301 While these reports failed to mention the

Benford or IPC matters or other specific account problems, they

provided a significant amount of information and evidence of

Citibank’s active, ongoing monitoring of the account. Citibank Sydney also prepared several call reports and credit analyses.302

513

303See ‘‘FI—Commercial Bank Individual Analysis’’ for European Bank (5/7/99), CG 4038–43

and 6063.

In May 1999, Citibank Sydney prepared a detailed analysis of

the entire correspondent relationship.303 Among other issues, the

analysis looked at European Bank’s ‘‘compliance risk,’’ ‘‘country

risk’’ and ‘‘financial risk.’’ It identified risks in all three categories,

but found them mitigated by the bank’s strong management. The

analysis stated, for example:

In light of Vanuatu’s tax haven status, there is the risk that

EB might be dealing with clients/funds involved in money

laundering/other abnormal activity. . . . Vanuatu’s no-exchange control and no-income tax environment makes it attractive to dubious individuals and businesses. . . . EB has a

small asset . . . and capital . . . base, making it vulnerable to

unexpected losses. . . . The relationship with EB is not critical

to Citibank’s franchise. However it has provided growing revenues for the minimal risk of the credit facilities. . . . [O]ur

dealings with EB are based on our assessment of the integrity

of the group and professionalism of its owners and management.

During his interview, based upon his personal experience, Moore

expressed the view that European Bank was both reputable and

competent. He also acknowledged that it had not produced the expected revenue for Citibank, and had experienced some unexpected

losses and troubling incidents.

With respect to the Benford account, Moore indicated that he had

never conducted a detailed review of the account opening documentation or process. After being shown the account opening documents and European Bank affidavits, he expressed surprise that

the bank had opened the Benford account prior to speaking to the

accountholder; he said that was ‘‘not the way Citibank would do it.’’ He also expressed surprise at the bank’s failure to obtain more due

diligence information prior to opening the account; he said that did

not comport with his understanding of European Bank’s due diligence practices. When asked how Citibank would have reacted to

the negative information provided about Euro Bank in March 1999,

Moore said they probably would have placed the Benford account

‘‘in suspense’’ at that time and performed additional research into

the origin of the funds. He also indicated that he had not been

aware of the ongoing litigation in Vanuatu over whether Clyde was

the true beneficial owner of Benford Ltd. Asked for his overall reaction to the Benford account opening process, Moore characterized

it as ‘‘sloppy’’ and expressed surprise that the bank had handled it

in the manner it did. He said it did not match his understanding

of how European Bank operated.

Closing the Account. At the end of its May 1999 review of the

European Bank account, Citibank had decided to continue the correspondent relationship. One year later, Citibank reversed course

and closed the account.

Citibank’s decision to close the European Bank account was not

based on profitability concerns or bank misconduct, but on a broader policy decision to join an effort by other multinational banks to

restrict correspondent banking activities in certain South Pacific isVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00523 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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304For more information, see the Bank of New York description in the appendix. 305The bates designation for this document is CG 3945. 306Moore email dated 1/24/00, CG 1053; see also Moore email dated 1/11/00, CG 1051.

land nations, including Nauru, Palau and Vanuatu. This effort,

which began in November 1999, was partly in response to the Bank

of New York scandal which raised awareness of money laundering

concerns in correspondent banking and partly in response to media

reports of $70 billion in Russian funds moving through shell banks

licensed in Nauru.304 Among the banks restricting correspondent

banking in the South Pacific were the Bank of New York, Deutsche

Bank, and the Republic National Bank of New York. In a November 25, 1999 email, Moore notified European Bank that Citibank

was considering adopting the same policy. On December 13, 1999,

the Bank of New York rejected a European Bank wire transfer due

to its association with Vanuatu. On December 17, 1999, Citibank

sent a letter to European Bank announcing its decision to close the

account.305 The account actually closed 5 months later in May

2000.

When asked about closing the European Bank account, Moore

sent an email to other Citibank colleagues explaining the basis for

the decision. He wrote:

We are exiting European Bank . . . a bank licensed and domiciled in Vanuatu, and owned by Vanuatu citizens, not because

of any concerns about European Bank directly. Unfortunately,

because of Australian Tax Office suspicions that Australian individuals use Vanuatu to evade taxes, Vanuatu attracts a lot

of attention from here. On top of that, the BONY action has

raised the profile of Vanuatu. . . . We just feel that the environmental risk, that something totally unexpected does bob up,

is more than we wish to take. The icing on this decision was

that our customer found itself with a deposit (from another

bank) that was subject to action in the USA as possible proceeds of crime. They did all the right things, including obtaining a Vanuatu court injunction to freeze the funds with them.

They also redeposited the USD with us, in the normal course

of banking, and the US receivers found this out and obtained

a freeze order on us. . . . [W]e are satisfied our customer is innocent of any complicity. . . . I have the highest regard for the

individuals who own and operate European Bank, and we are

exiting in [a] manner that causes least harm to their franchise.306

B. THE ISSUES

The European Bank case history raises at least two sets of

issues. First, it raises fundamental questions about how a correspondent bank oversees a respondent bank in a remote, jurisdiction with a tradition of bank secrecy and weak banking and antimoney laundering controls. Second, it provides a vivid demonstration of how a foreign bank can delay seizure of funds from its U.S.

correspondent account, even when the funds are clearly the product

of attempted fraud and money laundering.

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Correspondent Bank Oversight

Citibank Sydney went the extra mile in its due diligence efforts

with respect to European Bank. It assigned a senior bank official

to oversee the relationship. It conducted site visits, meetings with

management, financial analyses, and client evaluations. It monitored account activity and made inquiries into specific problems

like the Benford and IPC matters. It maintained a high level of

oversight for 4 years.

But in the end, it is far from clear that Citibank really knew how

European Bank was operating on a day-to-day basis. The evidence

is overwhelming that European Bank opened the Benford and IPC

accounts with little or no due diligence, contrary to Citibank’s understanding of the bank’s procedures. In both instances, European

Bank opened the account knowing little more than the name of the

accountholder. It made no inquiries into the accountholder’s background, source of wealth or origin of funds. When confronted, in

one instance, by negative information concerning the party who referred the Benford account,, European Bank simply averted its

eyes, left the account open, and hoped for the best. A more cynical

interpretation is that European Bank deliberately accepted the

large deposits without caring where they came from or about their

association with a disreputable bank. In neither case, did European

Bank undertake reasonable steps to know its customer.

The consequences for the bank have been serious. In the Benford

matter, European Bank is battling legal proceedings in three countries. The collateral damage from this litigation includes negative

media reports, diversion of bank resources, and ongoing legal expense. One case is litigating the basic issue of who is the true

owner of Benford Ltd.—a fact that European Bank should have established with clarity when it created the corporation, opened a

bank account for it, and accepted $7.5 million in deposits. Benford

Ltd. has itself been charged with possession of crime proceeds, and

European Bank’s reputation has been tarnished by its role in incorporating and managing this company. In the IPC matter, European

Bank lost $1.3 million. The bank’s chairman and part owner,

Bayer, had to cover the losses to prevent a bank failure. Citibank’s

confidence in the bank’s management was badly shaken, and it required the bank to post $1 million in deposits to secure Citibank

against possible future losses. European Bank decided to abandon

the credit card clearing business at least in the short term.

Yet there is no reason to believe that the Benford and IPC accounts were handled in anything but a routine manner. Both accounts were opened prior to any direct contact with the prospective

client, a situation which Bayer said was typical given Vanuatu’s remote location and time difference. Bayer indicated that the Benford

account opening forms were completed in the same way the forms

are completed for all clients referred by European Trust—providing

minimal client information, signatures from European Trust employees, and no disclosure of the true owner of the Vanuatu corporation opening the account. European Trust has indicated that it

routinely establishes new Vanuatu corporations within 24 hours of

a request, a time period which necessarily restricts how much due

diligence it can accomplish. The investigation found no evidence to

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307See ‘‘European Bank Ltd. Customers Information’’ (5/27/96), CG 3869. 308See United States v. C–W Agencies Inc. (U.S. District Court for the Western District of

Washington Criminal Case No. CR99–454C), information (8/9/99) and plea agreement (8/24/99).

indicate that the Benford and IPC accounts represented anything

but business as usual at European Bank.

Moreover, although the Minority Staff investigation did not conduct an extensive analysis of other accounts opened by European

Bank, documentation and interviews contain warning signs of lax

due diligence practices in other accounts as well. For example, for

years, European Bank maintained an account for the Australian

Lottery Federation International Ltd.307 At the same time the account was open, this company, its owner Randall Thiemer, and related companies were under criminal investigation in the United

States and Canada, which resulted in a 1999 guilty plea to conspiracy to conduct illegal lottery solicitations.308 Both Bayer and

Moore indicated they had been unaware of the U.S. proceedings.

Another instance involves the correspondent account that European Bank opened for Nest Bank in 1999. Nest Bank is an offshore

Vanuatu bank that, because of international concerns over suspect

Russian funds moving through South Pacific shell banks, is now

under review by Vanuatu authorities. Nest Bank moved more than

$6 million through its European Bank account in 1 year, most of

it with ties to Russia or countries formerly part of the Soviet

Union. Bayer indicated that he could not discuss the account due

to Vanuatu’s confidentiality requirements and the lack of publicly

available court filings disclosing Nest Bank’s ownership and activities. Moore indicated he had been unaware of the account.

In 1996, the head of Citibank’s operations in Australia expressed

concern about the European Bank account, in part due to ‘‘the difficulty in monitoring events from Sydney.’’ Vanuatu’s banks operate under a tradition of bank secrecy and weak banking regulation.

European Bank is Vanuatu’s only indigenous bank; no parent bank

audits its operations. It is owned and directed by an individual who

is a powerful player in Vanuatu’s economy and government. It

works closely with trust companies that have their own culture of

nondisclosure. For the two accounts examined in detail, Citibank

was given no negative information about the Benford account until

a third party filed suit in Australia, and it had no warning of the

IPC loss, even though Benford Ltd. and IPC were among European

Bank’s largest accounts.

The European Bank case history provides a powerful illustration

of the money laundering risks inherent in international correspondent banking. It demonstrates that, when dealing with a

small bank operating in a remote jurisdiction with weak bank oversight and uneven anti-money laundering controls, even a diligent

correspondent bank may be left in the dark about missteps leading

to money laundering charges, beneficial owner disputes, fraud, and

substantial losses.

Seizing Suspect Funds

The European Bank case history raises a second set of issues as

well. Through the twists and turns of litigation battles in three

countries, it demonstrates how a small foreign bank can delay seiVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00526 Fmt 6601 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
517

zure of funds from a U.S. correspondent account, even when the

funds are the product of fraud and money laundering. Ample evidence links the $7.5 million in the Benford account at

European Bank to the Taves fraud. The players involved, the timing, the amounts, the wire transfers—all are consistent with the

money coming from the unauthorized credit card billing scheme described in the U.S. court decision in the Taves case. Ample evidence also links the Benford account to Clyde, including her signature on the form asking to establish Benford Ltd., her passport

photograph and London address which match the materials in European Trust’s files, her possession of the Benford incorporation papers, and her past association with one of the individuals charged

with participating in the Taves money laundering effort.

For more than a year, in her capacity as the beneficial owner of

Benford Ltd., Clyde has supported remitting the Benford funds to

the FTC receiver. Citibank has repeatedly expressed its willingness

to transfer the funds in accordance with court order. But European

Bank has not been willing to transfer the funds to the FTC receiver. It has fought legal battle after legal battle to try to keep

control of the funds and ensure they were not ‘‘forced’’ to the

United States, but sent instead to Vanuatu authorities. The reasons for the bank’s actions are unclear.

Perhaps European Bank felt committed to defending Vanuatu

sovereignty. Perhaps it hoped to ensure that Vanuatu received a

portion of the seized funds, even though the Taves investigative

work was performed elsewhere and the monies were intended for

fraud victims. Perhaps European Bank wanted a portion of the

seized funds to reimburse its legal fees, even though much of the

legal wrangling followed its refusal to allow the transfer of the

funds to the United States in 1999. Perhaps European Bank wanted the interest earnings on the $7.5 million—exceeding $600,000 at

last count even though the bank would be profiting from illicit proceeds that it chose to move into a non-interest bearing account in

May 1999. Perhaps European Bank worried about having to pay

the $7.5 million twice, although it is hard to believe Vanuatu authorities would force one of its leading citizens to pay a sum that,

if already paid to the FTC receiver, would break the bank. Perhaps

European Bank wanted simply to best the FTC receiver, which

tried so many legal maneuvers to obtain the funds and, in the

bank’s eyes, would pay its own fees and expenses before reimbursing any fraud victims.

Whatever its motivations, European Bank mounted a resourceful

campaign to stop the transfer of the Benford funds. In Vanuatu, it

argued that no one really knew who owned the Benford money,

since Clyde had admitted they were not her personal funds and the

FTC had not proven in court they were from the Taves fraud. In

Australia, it contended that the $7.5 million on deposit with

Citibank was not Benford’s funds at all, but European Bank’s own

funds, placed in an investment account to earn higher interest. In

making this argument, European Bank drew on the legal status of

funds in a correspondent account. It claimed that the funds in the

Citibank account were the property of the accountholder—European Bank—and not the property of the bank’s clients, even if client funds were used to make the deposits.

518

309See 18 U.S.C. § 984(d). See also Chapter V(G) of this report. 310 United States v. $15,270,885.69 (2000 U.S. Dist. LEXIS 12602, 2000 WL 1234593 SDNY

2000).

The FTC receiver was equally resourceful in its litigation strategy. It began by filing suit in Vanuatu. When it found European

Bank reluctant to release the $7.5 million from the Benford account, it persuaded Clyde to file suit in Vanuatu seeking court approval to authorize her own company to remit the funds to the FTC

receiver. When the Vanuatu police appeared to be as reluctant as

European Bank to surrender custody of the $7.5 million, the FTC

receiver filed suit in Australia to try to obtain the funds directly

from Citibank. While European Bank argued the funds were not

actually in Australia, but remained in the Benford account at European Bank in Vanuatu, the fact is, when faced with the Australian

court’s freeze order, Citibank refused to transfer the funds at European Bank’s instruction. Clearly, the $7.5 million was under

Citibank’s control.

The FTC receiver’s next legal effort came when it convinced the

U.S. Department of Justice to seize the funds at Citibank in New

York as money laundering proceeds. After all, the $7.5 million had

always been in U.S. dollars in a U.S. dollar account. Despite appearing to travel from California to the Cayman Islands to

Vanuatu, the funds never actually left the United States—they just

moved from one U.S. bank account to another. The proof is that,

when confronted with the U.S. seizure warrant, Citibank delivered

the funds to the U.S. Government.

The U.S. Government’s seizure of the funds is not, however,

equivalent to forfeiture of the funds. The U.S. Justice Department’s

civil forfeiture action provides all interested parties with an opportunity to assert a contrary claim to the funds. If European Bank

were to assert ownership of some or all of the $8.1 million, the

United States might have to prove, under statutory provisions affording correspondent accounts special forfeiture protections,309

that European Bank ‘‘knowingly engaged’’ in the laundering of the

funds or in other criminal misconduct justifying seizure of the

bank’s own money. One recent U.S. district court has interpreted

this standard to mean that the United States has to demonstrate

a bank’s ‘‘knowing involvement’’ in or ‘‘willful blindness’’ to the

criminal misconduct giving rise to the seizure action.310 The questions in this matter would include what European Bank knew and

when, and whether it was willfully blind to criminal misconduct associated with the Benford funds.

The larger policy issues come into view with the realization that

European Bank keeps virtually 100% of its clients’ funds in correspondent accounts and conducts 100% of its U.S. dollar transactions through U.S. correspondent accounts. That means that

100% of European Bank’s funds in the United States benefit from

greater forfeiture protections than suspect funds in other types of

U.S. bank accounts. The same is true for all foreign banks choosing

to deposit funds in U.S. correspondent accounts. And it is not just

foreign banks who benefit, but also wrongdoers who ask the foreign

banks to keep their deposits in U.S. dollars. Taves, for example,

originally deposited his illicit proceeds in U.S. bank accounts in

California. He then sent the funds from the United States, through

519

two bank secrecy jurisdictions, the Cayman Islands and Vanuatu,

only to have the funds end up back in the United States, but in

a Citibank account which requires U.S. law enforcement to surmount additional legal hurdles to sustain forfeiture.

The European Bank case history is a cautionary tale about how

a small, determined foreign bank in a remote jurisdiction can delay

and perhaps ultimately frustrate U.S. law enforcement efforts to

seize illicit proceeds sent to the foreign bank as part of a money

laundering effort, so long as the laundered funds are deposited into

a U.S. correspondent account.

520

EUROPEAN BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK

January 1998-December 1999

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

January 1998 $51,600 $3,665,819 $3,696,455 $34,664

February 1998 $31,664 $1,821,760 $1,711,361 $145,064

March 1998 $145,064 $2,437,018 $2,415,062 $167,020

April 1998 $167,020 $1,622,284 $1,568,763 $220,541

May 1998 $220,541 $2,210,457 $2,102,815 $328,183

June 1998 $328,183 $1,722,647 $1,678,084 $372,746

July 19T8 $372,746 $2,714,000 $1,412,137 $1,134,609

August 1998 $1,134,609 $3,188,179 $3,888,629 $434,158

September 1998 $434,158 $5,572,689 $5,069,024 $937,823

October 1998 $937,823 $11,415,104 $11,938,224 $414,704

November 1998 $414,704 $5,033,054 $5,305,670 $142,088

December 1998 $142,088 $4,359,456 $3,987,909 $513,634

January 1999 $513,634 $3,588,709 $3,916,399 $185,944

February 1999 $185,944 $2,237,332 $2,320,974 $102,303

March 1999 $102,303 $8,505,525 $7,117,827 $1,490,002

April 1999 $1,490,002 $15,506,331 $10,170,361 $6,825,971

May 1999 $6,825,971 $3,284,932 $9,904,192 $1,016,711

June 1999 $1,016,711 $8,725,235 $7,472,331 $2,269,615

July 1999 $2,269,615 $51,826,202 $53,009,742 $1,086,075

August 1999 $1,086,075 $6,796,758 $6,937,332 $945,511

September 1999 $945,511 $18,641,703 $17,862,655 $1,724,559

October 1999 $1,724,559 $10,481,608 $11,783,867 $422,300

November 1999 $422,300 $5,159,706 $5,474,264 $107,742

December 1999 $107,742 $11,376,490 $10,907,139 $577,093

TOTAL $191,892,998 $191,651,216

Prepared by the U.S. Senate Permanent Subcommittee of Investigations, Minority Staff, December 2000

521

Case History No. 8

SWISS AMERICAN BANK

SWISS AMERICAN NATIONAL BANK

Swiss American Bank Ltd. (‘‘SAB’’) and Swiss American National

Bank Ltd. (‘‘SANB’’) are two banks with the same ownership that

were licensed in Antigua and Barbuda in the early 1980’s.

Throughout their history, these banks have been troubled by controversial leadership, questionable practices by bank officials, and

accounts that were repositories of funds from major financial

frauds and other illegal activities. This case study shows how major

U.S. banks that served as correspondents to these institutions were

at times unaware of even high profile frauds and controversies associated with the banks and were slow to take action on the accounts, at times maintaining the accounts for years after they

knew and were concerned about suspicious account activities and

management problems that afflicted the SAB and SANB.

The following information was obtained from documents provided

by the Government of Antigua and Barbuda, Bank of America,

Bank of New York, Chase Manhattan Bank, court pleadings, interviews of government officials and other persons in Antigua and

Barbuda, the United Kingdom, and the United States, and other

materials. Key sources of information were interviews with John

Greaves, former General Manager of Swiss American Banking

Group (1988-1995), conducted on July 24 and 25, 2000; Brian Stuart-Young, Chairman and Managing Director of Swiss American

Bank, conducted on October 11, 2000; relationship managers and

other officials from Bank of America (conducted July 10, 11, 31,

and October 24, 2000), Bank of New York (conducted August 10

and 30, 2000), and Chase Manhattan Bank (conducted August 2,

3, and 4, 2000). The investigation greatly benefitted from the cooperation and assistance provided by a number of officials of the

Government of Antigua and Barbuda, particularly the Executive

Director of the International Financial Sector Regulatory Authority

and the Director of the Office of Drugs and Narcotics Control Policy.

A. THE FACTS

(1) Ownership and Management

SAB and SANB were part of a financial group in Antigua and

Barbuda called the Swiss American Banking Group. It included the

two banks and a trust company, Antigua International Trust. SAB

is an offshore bank with a physical presence in Antigua and Barbuda. It was licensed to do business as an offshore bank in April

1983; as an offshore bank it is prohibited from doing business with

citizens of Antigua and Barbuda. SANB is a domestic Antiguan

bank, licensed in May 1981 to do business with citizens of Antigua.

All three entities had the same ownership, the same board, a common General Manager and for many years both banks shared the

same facilities and the same staff.

When they were licensed, the owner of both SAB and SANB was

listed as Swiss American Holding Company, a Panamanian company. The license application for SAB noted that Swiss American

522

1 It is uncertain whether Rappaport was the sole owner of Inter Maritime when SAB and

SANB were formed. In 1978, two internal memoranda of the Bank of New York, which established a relationship with Inter Maritime in 1969, reported that Inter Maritime officials stated

that the Gokal brothers, Pakistani businessmen who later became heavily involved in the BCCI

scandal, invested between $6 million and $8 million Swiss Francs in Inter Maritime for 20%

of the bank. Subsequent memos about Inter Maritime and the Swiss American banks do not

mention the Gokal brothers, and a memo in 1983 states that ‘‘almost all shares [of Inter Maritime] are owned or controlled by Bruce Rappaport.’’ 2 According to a 1983 internal Bank of New York memorandum, Rappaport held 7.5% of Bank

of New York stock and increased that percentage of ownership through the purchase of additional shares in 1983. 3 BYN–IMB’s ownership interest in Swiss American Holding Company remains uncertain. Recently BYN–IMB was dismissed from a case brought against it, SAB, and SANB by the U.S.

Government to recover drug/terrorist related assets that had been forfeited to the U.S. Government. BYN–IMB was dismissed due to lack of jurisdiction. BYN–IMB claimed it had divested

itself of Swiss American Holdings in 1988:

‘‘On December 28, 1987, BYN–IMB sold all of its shares of SAHC to an unrelated entity in

which BYN–IMB had no interest or control, in a transaction in which all of the obligations

of the parties were completed by December 15, 1988. . . . Since the end of 1988, BYN–IMB

has not owned any shares or held any interest in SAHC.’’ USA v. Swiss American Bank, L.,

Swiss American Holding Company S.A. of Panama, and Inter Maritime Bank, Geneva (U.S.

District Court for the District of Massachusetts, C.A. No. 97-CV-12811 (RWZ)), Motion of

Holding Company was wholly owned by Inter Maritime Bank of

Geneva, Switzerland, and Home State Financial Services, Inc. of

Cincinnati, Ohio. Each entity is listed as controlling a 50% share

of the holding company and the banks.

Inter Maritime Bank in Geneva, founded in 1966, was part of a

group of companies active in banking, shipping and the petroleum

industry. It was initially created to serve as the in-house bank for

shipping and other financial activities undertaken by its affiliates.

The founder and owner of Inter Maritime Bank is Baruch (‘‘Bruce’’)

Rappaport.1 Rappaport is an Israeli citizen who became very active

in the economic and political life of Antigua. He also owned 50%

of the West Indies Oil Company which owned a refinery in Antigua. In December 1997, Rappaport was named as Antiguan Ambassador to the Soviet Union. In 1989, the Bank of New York purchased 19.9% of Inter Maritime Bank. At that time, Inter

Maritime’s name was changed to Bank of New York-Inter Maritime

Bank. In July 1996 Bank of New York increased its ownership of

Inter Maritime to 27.9%. Bank of New York reported in February

2000 that Rappaport continued to hold the remaining shares Inter

Maritime.2 The remainder of this report, except when quoting material, will refer to Inter Maritime Bank by its current name, Bank

of New York-Inter Maritime Bank (‘‘BYN–IMB’’).

Home State Financial Services, Inc. was owned by Marvin Warner, who served as U.S. Ambassador to Switzerland in the mid-late

1970’s. In 1986, Home State Financial Services, Inc. was placed in

bankruptcy due to financial problems encountered by one of its

subsidiaries, Home State Savings Bank. Warner pleaded guilty to

misapplication of funds and securities violations for the role he

played in the financial downfall of Home State Savings Bank. As

part of the bankruptcy proceedings, the State of Ohio assumed control of Home State Financial Services, Inc. and, as a result, its

holdings in the Swiss American entities. BYN–IMB subsequently

purchased Home State’s holdings in the Swiss American entities

from the State of Ohio.

Documents made available to the Subcommittee suggest that

BYN–IMB owned Swiss American Holding Company and controlled

SAB and SANB at least until 1993.3 The current ownership of the

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Bank of New York-Inter Maritime Bank, Geneva to Dismiss or, in the Alternative, for Summary Judgment, April 1, 1998.

Yet, in correspondence submitted to both Bank of America and Nations Bank in March of

1993, David McManus, the Deputy General Manager of the Swiss American Banking Group

wrote that BYN–IMB controlled the Swiss American Banking Group, which directly contradicts what was reported in the BYN–IMB filing in April 1998: ‘‘Swiss American Banking

Group consists of Swiss American Holdings, SA, a Panamanian company which owns 100%

of Swiss American Bank Ltd., Swiss American National Bank of Antigua Ltd. and Antigua

International Trust Ltd. Swiss American Holdings SA is wholly owned by the Inter Maritime

Group in Geneva.’’

Swiss American entities is structured through a series of International Business Corporations (IBCs) and trusts. Swiss American

Holding Company is currently owned by Carlsberg (or Carlsburg),

S.A, a Bermuda corporation, which in turn is owned by a charitable

trust controlled by Rappaport. Two of the U.S. correspondents of

SAB and SANB that were interviewed by the Minority Staff did

not know the name of the charitable trust, and the Bank of New

York thought the name of the charitable trust is the Inter Maritime Foundation, but it was not certain. The Chairman and Managing Director of SAB was not able to tell the Minority Staff the

name of the charitable trust, either. The lack of information by the

correspondent U.S. banks with respect to the details of the ownership of SAB and SANB is troubling.

(2) Financial Information and Primary Activities

SAB has about 4,000 clients with 5,000 accounts and total assets

of $111 million (of which $103 million are deposits). The bank’s

main function is private banking, providing wealth management

services to its clients. According to SAB officials, approximately

4,500 of its 5,000 accounts currently have less than $50,000 in

value. Its customers are largely from Europe, and bank officials estimate that less than 15% of their customers are from the United

States. Bank officials have told Minority Staff that they are attempting to phase out their business in the United States. Bank

records indicate that in recent years a significant portion of SAB’s

business has been generated by Internet gambling companies or

entities that provided cash transfer services for Internet gambling

facilities. This issue is discussed in more detail later in the report.

SANB provides retail banking services to individuals and companies in Antigua and Barbuda and other Eastern Caribbean nations.

It also provides international banking services such as foreign currency exchange and letters of credit. It was recently sold to Antigua

Barbuda Investment Bank (‘‘ABIB’’), and will soon become part of

ABIB. ABIB, another domestic bank licensed to do business in Antigua and Barbuda, is affiliated with Antigua Overseas Bank, an

offshore bank.

(3) Correspondents

Correspondent banks of SAB in the United States have included

Nations Bank, Bank of America and Chase Manhattan Bank. Correspondent banks of SANB in the United States have included Citizens Bank and Southern International Bank (which later merged

with Sovran Corporation and then with NCNB National Bank to

become Nations Bank), NCNB National Bank (which later merged

with C&S/Sovran Corporation to become Nations Bank), Bank of

America (which later took over Nations Bank), Irving Trust ComVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00533 Fmt 6602 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
524

pany (which was later taken over by Bank of New York), Bank of

New York (which inherited the account from Irving Trust), and

Chase Manhattan Bank.

SAB and SANB currently have no correspondent relationships

with U.S. banks; SAB has correspondent banking relationships

with United Kingdom, Dutch and Canadian banks which presumably have correspondent relationships with U.S. banks. Through

these nested correspondent relationships, SAB still maintains access to U.S. banks. As noted above, SANB has been sold to Antigua

Barbuda Investment Bank.

(4) Operations and Anti-Money Laundering Controls

SAB officials told the Minority Staff that they have been making

efforts to improve the bank’s anti-money laundering controls. According to SAB materials provided the Minority Staff, the bank has

established a series of account opening requirements for personal

and corporate accounts. To open personal accounts, according to the

materials, clients are required to provide verified signatures, proof

of residence, proof of identity, a current bank reference, proposed

average monthly deposit value and information on the anticipated

source of funds. According to the SAB materials, applicants for corporate accounts are required to provide verified signatures, certificate of incorporation, memorandum and articles of association and

a current certificate of good standing if the entity is more than a

year old, proof of identity and at least one current bank reference

on each shareholder/director and authorized signatory. Proof of the

corporation’s registered office, proposed account activity including

anticipated average monthly deposit and anticipated source of

funds is also required, according to the materials. In the case of

bearer share companies, SAB says it requires an attestation by the

directors to identify true beneficial ownership. SAB officials told

the Minority Staff that in keeping with statutes enacted in Antigua

in early 1999, the bank has not accepted deposits in cash or in

bearer negotiable instruments since April 1999.

SAB officials told the Minority Staff that as part of its ongoing

monitoring program, all staff receives anti-money laundering training and management attends anti-money laundering conferences in

the United States. SAB officials said that the bank has invested in

computer monitoring software to track transactional activity. According to officials, the program is designed to monitor for suspicious activity in a way that would be compliant with U.S. Government anti-money laundering controls.

The Chairman and Managing Director told the Minority Staff

that they know the beneficial owners of 90% of the accounts and

that they have not received enough information on the beneficial

ownership of about 3% of the accounts.

(5) Regulatory Oversight

SAB is regulated by the Government of Antigua and Barbuda’s

International Financial Sector Regulatory Authority which was created in 1998. To date, no examination of the bank has been conducted. The bank is required to submit an annual audited financial

statement to the International Financial Sector Regulatory Authority.

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4 ‘‘Seeking Testimony in Pipeline Case: Immunity Given to a Secretive Swiss’’ New York Times

(March 6, 1988) Jeff Gerth and Stephen Engelberg; ‘‘Untangling what Pertamina owes—and to

whom’’ Business Week (February 7, 1977); ‘‘Key Player in BCCI fraud loses appeal’’ Guardian

(March 12, 1999) Dan Atkinson; ‘‘Pak millionaire appeals verdict in BCCI case’’ Hindustan

Times (March 10, 1999).

SANB is regulated by the Eastern Caribbean Central Bank,

which includes an annual bank examination.

(6) Money Laundering and Fraud Involving SAB/SANB

SAB and SANB have been identified as repositories of illicit

funds from several illegal operations. Such incidents were not isolated events. They have occurred on a continual basis throughout

the life of the institutions. In addition, bank officials engaged in

misdeeds and questionable activities. With respect to some frauds

and questionable activities that occurred through the accounts at

the banks, top officers knew or should have known what was occurring; yet they were slow to act to halt the activity or failed to act.

This succession of problems and questionable leadership (in addition to SAB’s offshore license and lack of any examination by regulatory authorities) qualifies SAB and SANB as high risk institutions. The following items illustrate these points.

(a) Controversial Leadership

The leadership of Swiss American Banking Group (the group

that includes SAB and SANB) has a history of involvement in controversial and questionable financial dealings and banking activities.

First, the history of controversial dealings involving Baruch

Rappaport, the beneficial owner of SAB and SANB, has been well

chronicled. It includes a series of oil tanker deals with Indonesia’s

government-owned oil company, Pertimina, which contributed to

the nation’s economic problems in the mid-1970’s; an oil deal with

Gabon (completed after one of Rappaport’s banks loaned money to

the President of Gabon, Omar Bongo, and the Oil Minister) that

had such highly favorable terms for Rappaport’s company that the

government won a subsequent arbitration award of $25 million; his

role as middleman in an effort to build an oil pipeline through Iraq;

and business associations with some key figures associated with

BCCI.4

Two members of the Board of Directors for SAB, Marvin Warner

and Burton Bongard, were connected with Home State Financial

Services, Inc. which initially was a 50% owner of SAB. Warner

owned Home State Financial Services, Inc.; Bongard was President

of Home State Savings Bank, a Cincinnati savings and loan that

was owned by Home State Financial Services. In 1986, Home State

Financial Services Inc. was placed in bankruptcy due to financial

problems encountered by Home State Savings Bank. In March

1987, Warner was convicted of six State criminal charges of

misapplication of funds and three securities violations for illegal activities that caused the collapse of Home State Savings Bank. He

was sentenced to 31⁄2 years in prison and ordered to pay $22 million in restitution. Bongard was convicted of 41 counts of willful

misapplication of funds and 41 counts of unauthorized acts. He was

sentenced to 10 years in prison and ordered to pay $114 million in

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5 In 1985, the SEC closed ESM Government Securities Inc., of Fort Lauderdale, Florida, because it had an undisclosed debt of over $300 million. The closure of ESM caused problems for

Home State Savings Bank and American Savings and Loan Association of Miami, Florida. (Warner owned 28% of American Savings and Loan and served as its Chairman). Both Home State

and American funneled millions of dollars worth of government securities into EMS, ostensibly

as collateral for loans from ESM. However, the government securities were worth far more than

what had been borrowed. ESM then raised cash by borrowing against the securities. At the time

of ESM collapse, Home State Savings Bank had over-collateralized its loans by about $144 million and American had over-collateralized its loans by approximately $50 million. Those institutions lost money when ESM was closed, and that caused a run on Home State that led the Governor of Ohio to shut down the bank. The collapse of the bank also exhausted all of the funds

in a thrift-owned insurance fund, causing a statewide crisis that resulted in a 3-day closure of

all State-chartered savings and loans.

The owners of ESM pleaded guilty or were convicted in State and Federal courts on fraud

charges. Warner was charged and pleaded guilty to misapplication of funds and securities violations for the role he played in the financial downfall of Home State Savings Bank.

As a result of these events, Warner declared bankruptcy. As part of the liquidation of Home

State Financial’s assets to repay the State of Ohio for bailing it out, the bank’s 50% share in

Swiss American Bank was sold back to BYN–IMB. See ‘‘Michigan Jury Clears Home State’s Warner of 18 Federal Charges’’ National Thrift News Inc. (June 29, 1987) Sharon Moloney; ‘‘Early Warnings About Home State Pushed Aside’’ Business First of Columbus Inc. (August 5,

1985) Dick Kimmins; ‘‘Risky Business: The Story of Home State’’ Business First of Columbus

Inc. (May 27, 1985) Mark Heschmeyer; ‘‘Final Suit Brings First Loss in ESM Fraud Case’’ South

Florida Business Journal, Inc. (January 22, 1990) Melinda Sisser; ‘‘Warner, Two Guilty on

ESM’’ National Thrift News Inc. (March 9, 1987) Sharon Moloney; ‘‘Jury Returns Verdict in

Case Stemming from Ohio’s Thrift Crisis’’ Associated Press (March 2, 1987) Bill Vale; ‘‘Securities

Firm Boss Gets 30 Years in Fraud’’ Chicago Tribune (October 18, 1986) Associated Press. 6 In December 1999, a special trial judge for the U.S. Tax Court determined that Kanter and

a number of his clients had engaged in a scheme to hide kickback payments that the clients

had received (some of which were paid to Kanter) and underpaid their taxes as a result. The

court’s 300 plus page decision contains a section entitled ‘‘Kanter’s Fraud,’’ which includes the

following:

. . . Kanter was the architect who planned and executed the elaborate scheme with respect

to the kickback income payments received . . . In our view, what we have here, purely and

restitution costs. In addition, he subsequently pleaded guilty to

four Federal felony counts of misapplication of funds and was sentenced to 6 years in Federal prison.5

Another SAB board member, Steven Arky was a son-in-law of

Warner, and counsel to ESM Government Securities. Clients of his

law firm, Arky, Freed, Stearns, Watson, Greer, Weaver & Harris,

lost millions of dollars that they had invested in ESM. They subsequently sued the firm, contending that the firm knew that ESM

was insolvent and that the clients’ investment could be lost and yet

failed to advise the clients of that fact.

William Cooper, discussed previously in this report, signed SAB’s

license application as the organizer of the corporation and as VicePresident of Swiss American Holding Company. Cooper was also

listed as a member of the Board of Directors. Cooper served as

General Manager of Swiss American Banking Group from approximately 1981 to 1984. In 1992, Cooper became owner of American

International Bank which is discussed in another chapter of this

report. Cooper is now under U.S. indictment for money laundering

activities associated with the operations of Caribbean American

Bank, a rogue bank that operated through American International

Bank.

Another long time member of SAB’s Board of Directors is Burton

Kanter, a controversial tax attorney from Chicago. The current

Chairman and Managing Director of Swiss American Bank estimated that Kanter has been a member of the Board for approximately 12 years. For the past 25 years, Kanter or his clients have

been the subject of numerous criminal and civil investigations and

complaints alleging tax evasion, money laundering, and securities

fraud.6 All of these matters generally involved offshore banks and

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simply, is a concerted effort by an experienced tax lawyer and two corporate executives to defeat and evade the payment of taxes and to cover up their illegal acts so that the corporations,

Prudential and Travelers, and the Federal Government would be unable to discover them.

. . . Kanter created a complex money laundering mechanism made up of sham corporations

and entities . . . to receive, distribute, and conceal his income, as well as [the other defendants’] income . . . Kanter’s use of the various sham entities made it difficult and sometimes

impossible to trace the flow of the money and is substantial evidence of his intent to evade

tax.

In addition, a number of trust arrangements structured by Kanter for his clients have been

challenged by the IRS and have resulted in settlements, with the defendants paying millions

of dollars to the IRS.

Kanter was also associated with an entity called Castle Bank and Trust Company, Inc., a Bahamian Bank that was the subject of a concentrated IRS investigation in the mid-70’s as one of the early Caribbean-based offshore banks for criminal accounts and tax evasion activities.

Castle Bank served as the trustee and repository for many of the entities established by Kanter

for his clients. 7 However, the Chairman and Managing Director of SAB told the Minority Staff that Kanter

was a non-executive director, and that he didn’t have any role in the day to day management

of the bank. 8 It has been reported to the Subcommittee staff that the Murray brothers and Fitzgerald were

also involved in the sale of weapons to IRA terrorists and that some, or even all, of the funds

deposited into the accounts at SAB and SANB were associated with the IRA.

offshore trusts structured to ‘‘avoid’’ U.S. taxes. Yet, as of 2000,

SAB, in a communication to another bank, still designated Kanter

as one of the ‘‘[i]ndividuals responsible for the bank.’’ 7

The General Manager of the Swiss American Banking Group

from 1984 to 1987 was Peter Herrington. Herrington established

and personally serviced the accounts of John Fitzgerald (discussed

below in this report). These accounts were seized by both the U.S.

and Antiguan Governments because the accounts contained funds

related to drug sales and the Irish Republican Army.

John Greaves, General Manger of Swiss American Banking

Group from 1988 to 1995, was involved in a number of controversial matters during his tenure at Swiss American Banking Group

and was in the leadership of two other banks and a management

firm that were engaged in a number of controversial activities, described in other parts of this report.

(b) The Fitzgerald Case—Drugs and Terrorist Money

From 1985 to 1997, SAB and SANB were significantly involved

in a money laundering case involving a man named John Fitzgerald. The involvement began when Fitzgerald, a money launderer

acting on behalf of the Murray brothers, leaders of a drug organization in Boston, deposited, between 1985 and 1987, approximately

$7 million into accounts that had been established at SAB and

SANB.8 Four of the accounts were in the name of bearer share

IBCs, that is, corporations whose ownership was vested in the individuals who controlled the certificates of the shares of the corporation. Two of the accounts (one at SAB and the other at SANB) were

in the name of Guardian Bank, a bank licensed in Anguilla in

1986. Those two Guardian Bank accounts eventually became the

repository for most of the funds deposited by Fitzgerald and other

members of the drug organization. Three bearer share IBCs were

listed as the owners of that bank.

The General Manager of the Swiss American Banking Group at

the time was Peter Herrington who assisted Fitzgerald with the

formation of all of the IBCs and the management of the accounts

at SAB and SANB. The formation of the accounts was handled by

Antigua International Trust. Herrington served as Director of all

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9This description is drawn from pleadings filed by the Department of Justice in association

with USA v. Swiss American Bank, LTD, et al. (op. cit.) and documents and correspondence related to that matter.

An October 1989 report by the Special Branch of the Royal Bermuda Police Force and the

U.S. grand jury indictment issued against Fitzgerald provide a description of the trail of the

funds that is instructive as to how the international banking system is used to move and launder illicit funds. In early 1985, Fitzgerald established a St. Lucian corporation by the name of

‘‘Halcyon Days Investments, Ltd.’’ and opened an account in that corporation’s name at the Canadian Imperial Bank of Commerce in St. Lucia. Between January and March 1985, Fitzgerald

and other members of the drug organization deposited $3 million into the account. In May 1985,

the account was closed and all of the funds (in excess of $3 million), were transferred to the

Guinness Marn and Company Bank in the Cayman Islands through a bank check issued to the

Guinness Bank. The total in the account subsequently grew to $5 million. In the Fall of 1985,

the $5 million in funds were wire transferred from the Guinness Bank account to Philadelphia

to Manufacturers Hanover Bank in New York to the Bank of Bermuda and on to SAB. The wire

transfer of $5 million was divided equally between two accounts at SAB (Rosebud Investments

and White Rose Investments). The funds were subsequently transferred into the accounts of

Guardian Bank (one at SAB and one at SANB). According to the police report, ‘‘not only is this

path murky, but subsequently Guinness Marn sold their subsidiary in Cayman because of their

embarrassment at the management. Regrettably Guinness Marn have chosen not to reveal why

they were embarrassed or the source of the money.’’

The Special Branch report also detailed the irregularities and lack of controls attendant to

the accounts and the operations of SAB/SANB during Herrington’s tenure:

One of the accounts (Rosebud Investments) received $450,000 in cash from the Bank of Bermuda. The funds appear to have come from a safety deposit box at the Bank of Butterfield.

In October 1985, Herrington used Swiss American’s relationship with the Bank of Bermuda

to influence the staff there to accept the cash deposit. When the funds were transferred to

the account at Swiss American, they were ‘‘held’’ until Herrington made the book entries.

Another account (Jones Enterprises) was used as a ‘‘feeder’’ account for some of the other Fitzgerald accounts. According to the police report, ‘‘[l]arge cash deposits were made into the acof the IBCs and Guardian Bank and performed transactions in the

SAB and SANB accounts.

Most of the funds were initially deposited into accounts at SAB

and then transferred into other accounts at SAB and SANB. By

mid-1987, the $7 million Fitzgerald accounts in the name of Guardian Bank constituted approximately one third of all deposits at

SAB. SAB owner Rappaport, concerned that an unknown party

controlled one-third of Swiss American Banking Group’s deposits,

asked Herrington to identify the beneficial owner(s) of Guardian

Bank. When Herrington refused to do so, he was immediately suspended and was dismissed from his position 1 month later (June

1987). Between the time of Herrington’s suspension and his termination, he notified Fitzgerald of Rappaport’s concerns.

At that time, Herrington resigned as the director of Guardian

and the IBC. When efforts to resolve the matter failed, the attorney

who claimed to be the new director of Guardian Bank filed a lawsuit in Antigua and Barbuda requesting the court to recognize him

as the director of Guardian and to authorize the withdrawal of

funds in the Guardian Bank accounts at SAB and SANB which

held Fitzgerald’s money. At that same time, Swiss American Banking Group officials began to investigate the accounts opened by

Herrington and hired an auditor to review the accounts. The review identified a number of irregularities. In addition, the Group

learned from law enforcement officials that the funds may be tied

to drug and arms trafficking. They contacted the Antiguan Government, and in June 1990, the Minister of Finance for the Government of Antigua and Barbuda instructed Swiss American Banking

Group to freeze the funds. In December 1990, the High Court of

Antigua ruled that Guardian Bank’s director did not have the proper corporate authority to file the suit, and the funds remained frozen at SAB/SANB.9

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count and later diverted to others but as the clients’ statements are missing it is not possible

at this stage to say where the cash originated.’’

Banks slips were written up as ‘‘cash’’ and ‘‘deposit’’ when money was being transferred from

one account to another as a way to disguise its destination. Only by checking other banking

records can the accountants identify whether true cash was handed over and frequently it was

not.

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

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

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

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

The police report also captures what appears to have been a general lack of concern about

illicit activities on the part of bank officials. The report notes that the Assistant Manager of

the Swiss American Banking Group, MacAllister Abbott, who with Peter Herrington was a

signator on the corporate accounts set up for Fitzgerald ‘‘thought Guardian was established to

hide the profits skimmed from casino operations. He thought Jack Fitzgerald had a controlling

interest and also thought that Herrington maintained a second set of books on behalf of the

company. Abbott has been described as a person who would turn a blind eye to tax evasion but

appears to have no knowledge of drug involvement.’’ Mr. Abbott is currently General Manager

of Antigua Overseas Bank. 10 Although the U.S. had been asking Antigua to freeze the funds since early 1994, it wasn’t

until November 1996 that Antigua informed the U.S. that the funds had been frozen on its (Antigua and Barbuda) order in June of 1990.

In May 1993, Fitzgerald was indicted for racketeering conspiracy

and money laundering, and in August 1993, he pleaded guilty to

the charges. As part of the agreement, he forfeited all of the proceeds of those illicit activities that had been deposited in the accounts at SAB and SANB. A final order of forfeiture was issued in

May 1994. In early 1994, U.S. authorities approached Antiguan officials to seek their assistance in freezing the funds, providing public notice of the forfeiture action and to facilitate the return of the

funds once the forfeiture notice was final. Negotiations lasted for

nearly 2 years.10 Finally, in November 1995, Washington, D.C.

counsel for the Antiguan Government informed U.S. authorities

that nearly 1 year before—sometime between December 1994 and

January 1995—approximately $5 million of the Fitzgerald funds

were transferred to the Antiguan Government by officials from the

Swiss American Banking Group. Counsel informed the U.S. officials that the funds in the Fitzgerald accounts had been transferred to the Antiguan Government, which had spent the funds to

pay pending debts and therefore the money was no longer available. At first, Antiguan officials maintained that the Swiss American Banking Group had unilaterally transferred the funds. In January 1998, Antigua wrote:

In 1994, prior to the payment, but after the U.S. Court order,

the Banks and the Government discussed the appropriate disposition of these funds. While the Banks initiated these discussions, the Government understood all of the facts and circumstances regarding this account and acting in the public interest of Antigua and Barbuda released the freeze order on the

funds and approved the disposition of the funds in a manner

agreed by the Banks and approved by the Government.

Swiss American Banking Group officials claim the $5 million

were transferred on January 23, 1995. The Antiguan Government

claimed the transfer occurred on December 28, 1994. The U.S. Government was later informed that the remaining $2 million of FitzVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00539 Fmt 6602 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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11 It has been alleged that the funds transferred to the Antiguan Government were returned

to the Swiss American Banking Group as repayment for outstanding debts that the Government

of Antigua and Barbuda owed to SANB. This included millions of dollars of promissory notes

that the Antiguan Government had issued to an enterprise called Roydan Ltd. Roydan Ltd. was

the company that owned and operated a melon farm in Antigua called Roydan Farms, that used

a high-technology tropical irrigation system. The operation was owned by an Israeli named Maurice Sarfati, and is discussed at length in a report, ‘‘Guns for Antigua’’ by the Commission of

Inquiry established by the Governor-General of Antigua and Barbuda to look into the circumstances surrounding the shipment of arms from Israel to Antigua. The report was issued

in 1990 by Louis Blom-Cooper QC, the appointed Commissioner. According to the report, Sarfati

received governmental approval for his agricultural project in August 1984, and operation on

the farm commenced in 1985. Throughout its inception and operation, the enterprise borrowed

heavily for startup and operation costs. Sources of funds included the U.S. Overseas Private Investment Corporation and SANB and SAB. The Government of Antigua and Barbuda issued a

series of promissory notes to Roydan Farms. In addition, SANB had extended an overdraft facility to Roydan Ltd., and has allowed it to escalate to over $1 million without any board resolution

or any collateral agreement. In March 1988, a receiver was placed in control of the venture at

the insistence of OPIC and the two Swiss American banks. By July 1988, Roydan Ltd. was $8

gerald funds had been retained by the bank. It is unclear whether

the funds were retained as a set off against outstanding Antiguan

loans or whether they were retained to cover expenses incurred by

the bank.

Moreover, the Minority Staff received a copy of a letter written

in early 2000 that alleged that $880,000 of the Fitzgerald funds

were ‘‘transferred between January 22–25, 1995, to Inter Continental Bulk Traders S.A. account #4763751 at Bank of Bermuda,

Hamilton.’’ The Minority Staff confirmed that the account does

exist at Bank of Bermuda and that a transfer of $880,000 did occur

in the January 22–25, 1995 time period. It has been reported to the

Minority Staff that those funds were paid upon a resolution of the

Swiss American Banking Group board as payment against a series

of invoices submitted by a number of people who, at the request of

Rappaport, had engaged in a review of SAB. One explanation offered to the Minority Staff regarding the transfer was that Inter

Continental Bulk Traders was an account controlled by Rappaport

and the funds were transferred to that account rather than directly

paying those who submitted the invoices, because Rappaport engaged the services of those people to provide an independent review

of the accounts at Swiss American Banking Group, which he controls. However, the ownership of the Inter Continental Bulk Traders account has not been confirmed, and that does not explain why

the payments would be made through the Inter Continental Bulk

Traders account rather than directly to those who performed the

services. Moreover, it has been reported to the Minority Staff that

the funds were transferred out of the account at the Bank of Bermuda in two tranches, which seems inconsistent with the contention that payments were made to a number of individuals. Without

confirmation from the Bank of Bermuda on the ownership of the

account and what happened to the funds in question, the fate of

the $880,000 remains unclear.

For the next 2 years—November 1995 to December 1997—the

U.S. Government continued to press for a detailed explanation and

accounting of the transfer of the funds, and records relating to each

of the Fitzgerald accounts. Although the Antiguan Government

identified the source of the funds that were transferred from SAB

and SANB, it informed the United States that the records of the

accounts were not available because they had been destroyed in a

hurricane.11

531

million in debt. At the request of the Antiguan cabinet, the banks agreed to conditionally revoke

the receivership for 90 days. By February 1989, Roydan Ltd. was no longer in existence.

However, its owner, Sarfati, was at the same time in the midst of brokering a deal for the

shipment of Israeli arms through Antigua to the Medellin drug cartel. The linkage was discovered after a raid on the Columbian farm of Medellin Cartel leader Jose Ganzalo Rodriguez

Gacha in December 1989. It was also discovered that one of the weapons included in the shipment was used to assassinate Colombian Presidential candidate Luis Carlos Galin.

The Commission of Inquiry was critical of Roydan’s management and the influence Sarfati

was able to exert within the Antiguan Government:

. . . [A] lucrative market around the world was quickly jeopardized by the management

structure of Roydan to enable it to service its loans, especially from an agency of the U.S.

Government, the Overseas Private Investment Corporation (OPIC).

. . . Throughout 1986 Roydan experienced continuous cash flow crises due to lack of management cost control systems and the use of antiquated accounting procedures. Financial

statements were tardily produced and reflected a superficial financial picture.

. . . [A] report in 1987 to a U.S. Congressman stated that ‘‘because of its demonstrated

helter-skelter system of spending, without any type of fixed controls, Roydan’s credit history

is devastating, both in the USA and in Antigua.’’ (p. 51)

. . . The story of the melon farm trail, and other incidental events, discloses a tale of insinuation and influence of a man with a remarkable talent for getting from a vulnerable

administration in Antigua almost anything he desired. (p. 121)

One of Commissioner Blom-Cooper’s recommendations was:

‘‘A judicial inquiry should be set up to investigate the dealings in 1985–1987 between Maurice Sarfati and the Government of Antigua. The enquiries currently being undertaken by

a firm of U.S. Attorneys are welcome but do not meet the justifiable demands of an inquiring public in Antigua and abroad. This should include the administration of Roydan Ltd

and the issue of promissory notes.’’ (p. 132) 12On August 8, 1988, Gherman left the country leaving notes to his clients apologizing for

his actions. Shortly before his departure, Gherman withdrew $4.4 million in cash from his corporate accounts at Commerce bank in Miami. On August 10, 1988, 25 creditors (some of

Gherman’s victims) petitioned the Dade County Circuit Court and secured the appointment of

a receiver and a freeze of Gherman’s corporate assets and the assets of his family. On August

28, 1988, the Federal Government filed a criminal complaint against Gherman, charging him

with wire fraud and the embezzlement of $9.8 million. A warrant for Gherman’s arrest was

issued on August 29, 1988. In October 1988, Gherman was arrested in Japan after having been

expelled from Taiwan.

In December 1997, the U.S. Department of Justice filed a civil

complaint alleging that SAB, SANB, Swiss American Holdings S.A.

and BNY–IMB intentionally seized and converted the $7 million in

illicit proceeds located in accounts at SAB and SANB that had been

forfeited to the U.S. Government.

In September 2000, the Federal District Court judge presiding

over the case dismissed the U.S. Government’s claim for lack of

personal jurisdiction over the defendants. The government is going

to appeal the matter.

(c) The Gherman Fraud

Henry Gherman served as a financial adviser to individuals and

medical practice pension funds in the Miami area. Between 1982

and 1988, while claiming to make purchases of Certificates of Deposit for his clients, Gherman transferred client funds to his corporate accounts which he controlled. The funds were wired to other

accounts or used for the benefit of Gherman and his family members.12

In February 1989, he pleaded guilty to the charges and received a 30 year sentence and was required to make payments of $12.9

million in restitution to the victims of his fraud. Authorities testified that Gherman never accounted for approximately $1 million of

the funds he embezzled.

A private investigator hired by some of Gherman’s victims discovered that Gherman had established an account at SAB. On August 31, 1988, two of Gherman’s victims petitioned the High Court

of Antigua and Barbuda and secured a freeze of all assets in any

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accounts controlled by Gherman. The court-appointed receiver for

Gherman’s assets also filed an action before the High Court on November 4, 1988, requesting that he be recognized by the Court as

the receiver for Gherman and to enjoin and require the turnover

of all funds, related documents and other assets in the possession

of SAB or its affiliates. However, because of Antigua’s bank secrecy

laws, when the victims filed with the High Court, they were unable

to confirm how many accounts Gherman held, how much was in

any account or even whether Gherman did hold accounts at the

bank. At that time, SAB neither confirmed nor denied the existence

of any accounts that belonged to Gherman. Cordell Sheppard, the

counsel for SAB stated:

We are willing to do anything we can, if we can do it without

breaking the law. If we do have any documents, and that is not

to say we do, we are prohibited by law from disclosing them.

After his arrest in Japan, Gherman wrote to SAB on December

6, 1988, and requested that the bank release all records of all of

the accounts at the bank that he controlled. He also requested that

all funds in the bank that he controlled be forwarded to the courtappointed receiver in the United States.

The efforts by law enforcement officials, Gherman’s victims and

the receiver resulted in a review of Gherman’s account at SAB. As

part of his fraud, Gherman had established an Antiguan IBC called

Chaska Trading and opened an account for the IBC at SAB, which

was used to launder the funds that Gherman had stolen from his

clients. Records and court testimony indicate that in a period of approximately 1 month—between July and August 1988—$3.2 million

in embezzled funds were deposited into the Chaska account at

SAB. Gherman told law enforcement officials that all of the deposits into the Chaska account at SAB were made with cash that he

or his brother personally carried to Antigua. Apparently, SAB had

no concern that a client would deposit $3.2 million into an account

within a 1 month time period. About $2.2 million of those funds

were subsequently transferred into an account established in the

name of Chaska Trading at Prudential Bache Securities.

At Gherman’s sentencing hearing his brother, Warren Gherman

testified that he (Warren Gherman) deposited funds into Henry

Gherman’s SAB account shortly before Henry Gherman left the

country by delivering the funds to a bank officer at SAB:

Q. Now, Mr. Gherman, on August 5th of 1988 you made a trip

to Antigua, did you not?

A. Yes, sir.

* * *

Q. Now, you didn’t walk down there—I am sorry—you didn’t

travel down there with a cashier’s check, did you?

A. No, sir.

Q. In fact, you had a suitcase full of money, is that correct?

A. I said this, yes.

Q. Could you describe how you made the deposit, who you met

with down there?

533

A. A bank officer. I don’t believe—I believe his name was Reeves

(phonetic).

* * *

Q. Did you declare the money when you left?

A. No, sir.

Q. Why didn’t you declare the money?

A. I didn’t put any thing down. I just signed—I travel around the

country and outside the country, and I just normally sign the document that I—where they ask you to sign on the paper.

Q. I am sorry. When you left the United States you didn’t declare

any Customs form that you were transporting $500,000 in cash?

A. No, sir.

Q. Did you read the Customs form?

A. I said I didn’t.

At the time of Gherman’s deposit, John Greaves was General

Manager of the Swiss American Banking Group. He informed Minority Staff that he did not recall any employee at SAB who had

a name like ‘‘Reeves’’ or a name that sounded like ‘‘Reeves.’’ And,

although Greaves’ name sounds like ‘‘Reeves,’’ Greaves told the

staff that he had no recollection of receiving $500,000 in cash from

Warren Gherman, noting that he would have remembered if he received such an amount. Greaves noted that at the time the deposit

took place—August 5, 1988—it was legal to accept cash deposits in

Antigua. On April 28, 1989, the trustee received $787,271.84 from SAB,

representing the balance of unrecovered funds that Gherman had

deposited in the bank, less amounts withheld by SAB as attorney

fees and handling charges. The trustee recalled that SAB charged

a rather large amount ($50,000–$100,000) as its costs.

(d) The DeBella Fraud

Between September 1986, and May 1990, Michael Anthony

DeBella was President and Chairman of the Board of Directors of

United Bank International (‘‘UBI’’) and owner of 45,000 out of

50,000 shares of UBI stock. UBI was an offshore ‘‘Class B’’ bank

located in The Valley, Anguilla. Its ‘‘Class B’’ license was an offshore license that allowed it to conduct banking business with customers other than citizens or temporary residents of Anguilla.

UBI was not a real bank. According to an attorney who investigated the bank on behalf of a client, it was nothing but a storefront office with one or two employees and a fax machine. The true

purpose of UBI was to serve as a front for financial frauds.

Through UBI, DeBella and his accomplices defrauded prospective

borrowers by issuing fraudulent letters of credit, lines of credit and

loans in return for the payment of advance fees. These advance

fees ranged from 1 to 12 percent of the face value of the amount

sought by the particular borrower. DeBella represented to various

victims that UBI had assets of $12,000,000 and deposits totaling

$16,000,000. Although pieces of paper purporting to be banking instruments were issued, UBI never produced any actual financing.

Between 1986 and 1990, DeBella and his accomplices defrauded

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13 U.S. v. Michael A. DeBella, Jr., et al. (U.S. District Court for the Southern District of Florida, Case No. 93–6081–CR–Hurley), Superceding Indictment and Transcript of Sentencing Hearing, 12/18/95. 14For example DeBella was the president and director of Atlantic Capital Corporation, a corporation chartered in the State of Florida, and was also the director of Atlantic Capital Corporation, Ltd., a corporation chartered in St. Johns, Antigua, British West Indies. DeBella held an

account at Commonwealth Savings and Loan Association of Florida under the name of ‘‘Atlantic

Capital.’’ DeBella also operated an unincorporated business known as Marlborough Village, a

mobile home park located in Marlborough, Connecticut, and held an account People’s Savings

Bank, West Hartford, Connecticut, under the name of Marlborough Village.

victims of approximately $2 million. At the sentencing hearing for

one of DeBella’s accomplices, an IRS investigator stated that he

was not aware of any legitimate business whatsoever conducted by

UBI. ‘‘I believe it was a front for a fraudulent enterprise,’’ he stated. ‘‘I am not aware of any successful transaction.’’ The presiding

judge stated, in accordance with the investigator’s statements,

‘‘This is not an example of a legitimate business that had one or

two fraudulent acts, but the whole business from beginning to end

is permeated with fraud. The business itself was the mechanism to

perpetuate the fraud.’’ 13

To add to the legitimacy of UBI, DeBella and his accomplices

claimed that UBI had correspondent relationships with other major

banks. UBI had an account at SANB which had a correspondent

account at Irving Trust Company. DeBella and his accomplices directed victims to wire transfer advance fees to the SANB correspondent account at Irving Trust Company (which was subsequently taken over by Bank of New York). These funds were then

credited to UBI’s account at SANB.

Testimony by the U.S. IRS agent who investigated the fraud provided a description of how criminals used offshore banks in secrecy

jurisdictions to hide the trail of the funds they had stolen. According to the agent, the money ‘‘would be wired from the victim’s bank

account to the Bank of New York where Swiss American National

Bank had an account. From there, the funds would be wired down

to Swiss American National Bank and placed in the account of

United Bank International.’’ After the funds reached the UBI account in SANB, ‘‘within a short period, the funds would be wired

back from Swiss American Bank up to the Bank of New York, and

placed into one of the accounts controlled by Mr. DeBella.’’

DeBella established companies in the United States and elsewhere and held accounts in the names of those corporations in

banks in Florida and Connecticut. Those accounts were used to

move funds acquired through the frauds in and out of the United

States and further hide the trail of those funds.14

In addition to the advance fee for loan frauds, DeBella also used

UBI to commit a theft involving approximately $800,000 worth of

shrimp. DeBella represented that UBI would finance the shipment

of shrimp from a company in China (China Foreign Trade, a company that was, at least in part, owned by the Chinese Government)

to a company in the United States (Imported Meats, Inc.). As a result of this agreement, China Foreign Trade shipped the shrimp to

the United States and Imported Meats, Inc. made seven wire transfers totaling $873,762.54 to SANB’s correspondent account at the

Bank of New York for further credit to UBI between December 18,

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15The wire transfers totaled $873,762.54. On November 21, 1989, DeBella prepared a UBI

cashier’s check in the amount of $935,225.61, payable to China Foreign trade. However, on December 18, 1989, UBI stopped payment on the cashier’s check. On December 22, 1989, UBI

wired only $77,014.08 from the account of Swiss American National Bank at the Bank of New

York to the account of China Foreign Trade at Citibank, Shenzen, China. On December 27,

1989, China Foreign Trade transmitted a copy of a telex from Shenzen, China to UBI refusing

UBI’s payment. After this date, UBI made no further payments to China Foreign Trade. However it continued to receive wire transfer payments from Imported Meats, Inc. through SANB’s

correspondent account at the Bank of New York. U.S. v. Michael A. DeBella, Jr., et al., (U.S.

District Court for the Southern District of Florida, Case No. 93–6081–CR–Hurley), Superceding

Indictment.

1989, and February 23, 1990. DeBella sent only $77,000 to China

Foreign Trade.15

An attorney was retained by China Foreign Trade to recover the

$800,000 in funds owed to it by UBI. He discovered that UBI was

nothing more than a storefront operation, as described above. He

also discovered that UBI’s banking license was revoked by

Anguillan Ministry of Finance on May 29, 1990. In the Notice of

Intended Revocation, issued on April 4, 1990, the Minister of Finance declared that the license was being revoked because UBI

was ‘‘carrying on business in a manner detrimental to the public

interest.’’ The revocation notice identified nine separate frauds that

had been perpetrated through UBI by its owners between 1987 and

1989.

After his discovery, the attorney contacted the General Manager

of the SAB, John Greaves. The attorney told Greaves about the

fraud that had been perpetrated against his client by UBI and

DeBella. The attorney also informed Greaves that UBI’s license

had been revoked by the Government of Anguilla. The attorney followed up the phone conversation with a letter to Greaves at SAB

and a letter to Rappaport at the headquarters of his Swiss Bank,

BNY–IMB in Switzerland.

On June 25, 1990, Greaves responded to the attorney’s letters.

He wrote:

‘‘In reply to your letter 22nd June, addressed to Mr. Bruce

Rappaport, could you please take note that neither Mr. Bruce

Rappaport nor the Inter Maritime Bank in Geneva has any

connection with the Swiss American group, either as shareholders or directors and that future enquiries or correspondence should be addressed directly to the undersigned at the address below.

To now refer to your enquiry, the bank in question did have

a small banking relationship with us, and during the course of

this relationship, we, on occasions, effected transfers out

through our correspondent banking network on their behalf

and received payments in. The turn over on the accounts has

never exceeded a low five-figure.’’

There were a number of misstatements and misleading information contained in the portions of Greaves’ letter cited above. As

noted in an earlier portion of this report, Rappaport was the owner

of Swiss American Banking Group. However, the ownership chain

was hidden through a series of offshore corporations and trusts. In

536

16 Rappaport personally hired Greaves as Herrington’s replacement. Greaves told Minority

Staff that he would regularly fly to Geneva to meet with Rappaport and discuss the operations

of the Swiss American Banking Group.

addition, he was directly involved in the operations of the banks.16

The paragraph left the impression that Rappaport had no ownership or control of the Swiss American Banking Group when, in fact,

he clearly did. Greaves told Minority Staff that Rappaport had directed that similar language be included in all letters addressing

the issue of his relationship to the Swiss American Banking Group

because Rappaport did not want his association with the group to

be known.

In addition, records obtained by the U.S. Government show that

Greaves’ characterization of UBI’s account at SANB was incorrect.

The letter stated that UBI ‘‘did have a small banking relationship’’ with SANB. In fact, although the letter referred to the account in

the past tense, the account was still active during and after the

date of Greaves’ letter.

Greaves also told the attorney that ‘‘the turnover on the accounts

has never exceeded a low five-figure.’’ The records obtained by the

Subcommittee related to UBI’s activity that took place through its

account at SANB shows that between early 1987 and late 1990,

UBI received deposits totaling over $1.1 million, including some

transfers that were greater than $100,000. The record of UBI’s activity through SANB’s correspondent account at Irving Trust and

Bank of New York shows that between April 1989 and September

1990 UBI had 25 outgoing wire transfers totaling over $400,000,

with 4 transactions of $50,000 or more. These figures are more

than the ‘‘low five figure’’ amount cited in Greaves’ letter.

Even after Greaves and SANB had been advised of the fraud

against China Trade and that UBI’s license had been revoked by

the Government of Anguilla, SANB allowed the UBI account to remain open, and processed transactions—including withdrawals— through it. Records show that SANB processed 11 transactions

worth over $160,000 involving UBI after June 22, 1990.

Moreover, officials at the Swiss American Bank Group allowed

DeBella and one of his accomplices to open three additional accounts at SAB after receiving notification of the China Foreign

Trade fraud and the revocation of UBI’s license. One of the accounts was in the name of Commonwealth Investment Corporation.

This account served a conduit through which DeBella defrauded

additional victims after he abandoned the UBI scheme.

In one of the frauds run through the Commonwealth Investment

Corporation account, DeBella defrauded one victim of $600,000. In

February 1993, a criminal complaint was sworn out against

DeBella and his accomplices for their activities related to the

frauds committed through UBI in the late 1980’s and 1990.

DeBella was taken into custody in February 1993. In April 1993,

DeBella falsely represented to an English engineer by the name of

Anthony Craddock that DeBella’s company, Atlantic Capital Corporation, Ltd., had received, in its capacity as a fiduciary,

$120,000,000 from the Nigerian Government, which had been deposited into the Commonwealth Investment Corporation account at

SAB. DeBella represented to Craddock that he could release the

funds after a payment of $600,000 in disbursement fees. On April

537

17On April 13, 1993, the funds were incorrectly wired to SANB for credit to the account of

Commonwealth Investments Corporation. Bank officials realized the account was actually at

SAB and credited the account at that bank on April 14, 1993. Another $50,000 from another

fraud was wired into the SAB account in March 1993. Anthony J. Craddock, Craddock (UK)

Limited v. Michael A. DeBella, Jr., Atlantic Corporation Limited, Commonwealth Investment

Corporation and Swiss American Bank Ltd. (In the High Court of Justice, Antigua and Barbuda,

Suit No. 213/1996), Affidavit of Brian Stuart Young, and Exhibits, March 18, 1997. U.S. v. Michael A. DeBella, Jr., et al., (U.S. District Court for the Southern District of Florida, Case No.

93–6081–CR–Hurley), Superceding Indictment.

13, 1993 Craddock wire transferred $600,000 into the Commonwealth Investment account at SAB.17 However, no funds were ever

disbursed to Craddock, nor were the ‘‘fees’’ repaid to him. Between

April 15 and April 20, 1993, DeBella withdrew most of the

$600,000.

On May 6, 1993, DeBella and two accomplices (Sandra Ann

Siegel, also known as ‘‘Sandy DeBella,’’ and Joseph Macaluso) were

indicted on a range of offenses related to the advance fee for loan

fraud, including conspiracy, mail fraud, wire fraud, money laundering, bank fraud, and tax evasion. A superseding indictment was

filed on January 6, 1994, to incorporate the Craddock fraud.

The Atlantic Capital and Commonwealth Investment accounts at

SAB were closed between the months of July and September, 1993.

DeBella was convicted of the charges in May 1995. In December

1995, he was sentenced to 51 months in prison and ordered to pay

$600,000 in restitution to Craddock and $69,500 to the IRS.

In his continuing efforts to recover the $600,000 he paid to

DeBella, Craddock wrote to SAB seeking return of his funds and

filed a claim against the bank in the Antigua High Court of Justice

in 1996. Craddock also wrote to SAB’s correspondent bank, the

Bank of New York, about the fraud. When the Bank of New York

inquired about the matter in 1996, SAB provided the following response:

Michael DeBella, a U.S. citizen, has been jailed in the U.S. for,

among other things, defrauding Craddock of $600,000. It would

appear that in a Nigerian-type scam, DeBella promised Craddock a handsome share of $120 million from the Nigerian Ministry of Finance if he participated in whatever the deal was.

This in itself does not speak well for Craddock.

In any event, Mr. Craddock has been bombarding our board

members and management with numerous letters requesting

the return of his funds (which we do not have) and, only yesterday, we sent copies of his correspondence to an attorney in

the USA for him to examine and determine whether there is

sufficient cause for a cease and desist order.

Unfortunately, because of local offshore banking legislation, we

are not in a position to advise Mr. Craddock whether or not

any part of the funds he is trying to trace is on deposit with

us as that would probably put an end to the matter.

SANB’s reply to the Bank of New York did not mention the fact

that SAB opened accounts and processed transactions for DeBella

long after its General Manager, Greaves, had been made aware of

frauds that DeBella perpetrated through UBI and that the license

of DeBella’s bank, UBI, had been revoked for activity detrimental

to the public interest.

538

18This fraud was examined as part of the Subcommittee’s investigation into Internet fraud.

See ‘‘Fraud on the Internet: Scams Affecting Consumers,’’ Hearing before the Permanent Subcommittee on Investigations, February 10, 1998 (S. Hrg. 105–453). 19 According to U.S. enforcement personnel, the Prosper Trust was a holding account for a

number of clients that were trusts. Presumably the assets of each trust was held in a separate

sub-account. In June 2000, the Minority Staff discovered a Web site for an entity called the

Prosper International League Ltd. (‘‘PILL’’), a Bahamian entity offering Belize offshore trusts

called Prosper Trusts, stressing the secrecy and the tax evasion potential of the trusts. The organization also markets a Ponzi investment scheme similar to that offered by the Fortuna Alliance. It is owned by individuals operating out of Florida. Material included on its web site indicates the organization has been in existence at least since 1994. The web site for PILL states

that the trust funds are held by Swiss American Bank in Antigua. It may be the case that PILL

controlled a large account at SAB, and the Prosper Trust account beneficially owned by the principles of the Fortuna Alliance was actually a sub-account of the larger Prosper Trust account. 20The FTC’s estimate was based on records obtained from wire transfer requests originating

from Whatcom State Bank in Washington, where the Fortuna Alliance held an account. The Minority Staff reviewed the monthly statements of SAB and SANB’s account at Chase Manhattan

Bank. The staff identified $5.3 million [This figure is a correction by Subcommittee staff of the

figure that appears in the original publication of this report in February 2001.] that had been

sent from the Whatcom State Bank, by order of the Fortuna Alliance, to Fortuna’s two accounts

at SAB during the March-May time period. Another $1.65 million had been sent from the

Whatcom State Bank, by order of the Fortuna Alliance, to a Prosper Trust account at SANB.

During that same period, an additional $24,000 [This figure is a correction by Subcommittee

staff of the figure that appears in the original publication of this report in February 2001.] was

wired into the SAB accounts at Chase for further credit to the Prosper Trust from other U.S.

and foreign banks. SAB officials told Minority Staff that they eventually secured a cease and

desist order against PILL.

Minority Staff asked Greaves about the inconsistencies in his

June 1990 letter and why SAB would open and service additional

accounts for DeBella after learning of the frauds DeBella perpetrated through UBI and that UBI’s license had been revoked for

activity detrimental to the public interest. Greaves informed the

staff that ‘‘mistakes had been made’’ at Swiss American, including

mistakes at the senior management level and including mistakes

by himself. He would not elaborate further on the case of DeBella

and Swiss American’s role in it.

(e) The Fortuna Alliance Fraud

The Fortuna Alliance was a Ponzi scheme that attracted its victims by marketing over the Internet.18 Labeled as a multi-level

marketing plan, the scheme promised investors large returns on

their initial investment as new members were recruited into the

program. For example, promoters told investors that they would receive $5,200 for a one-time investment of $250. Higher investments

would earn even higher monthly returns according to the promoters. The program operated between November 1995 and May

1996, when the Federal Trade Commission secured a court order

halting the program. The FTC estimated that during its operation,

the Fortuna Alliance scheme collected over $7.5 million from victims. The FTC documented that the perpetrators of the fraud had

established two accounts at SAB in Antigua in the name of two

trusts—the Fortuna Alliance Trust and the Prosper Trust 19—and

had forwarded at least $5.5 million of victims’ funds into those accounts between March and May 1996, utilizing SAB’s correspondent account at Chase Manhattan Bank.20 The perpetrators

of the fraud also used credit cards issued by SAB that drew from

the Fortuna Alliance Trust account.

The FTC filed its complaint against the Fortuna Alliance and

four perpetrators of the scheme—Augustine Delgado, Libby

Gustine Welch, Donald R. Grant and Gail Oliver—in the U.S. District Court for the Western District of Washington on May 23,

539

1996. The court issued a temporary restraining order on May 24

and a preliminary injunction on June 12. Both orders prohibited

further marketing of the scheme or any related program, froze Fortuna’s assets, appointed a receiver for Fortuna and ordered the defendants to ‘‘direct that Swiss American Bank of Antigua transfer

to Fortuna Alliances’s bank account at Whatcom State Bank all

funds previously transferred by or from Fortuna Alliance, Augustine Delgado or Libby Gustine Welch to that bank.’’ At the same time that the FTC sought to obtain a restraining

order in Washington, the Department of Justice filed a claim in the

High Court of Antigua to freeze the funds in the accounts controlled by the Fortuna Alliance and its principles. On May 29,

1996, the High Court issued an order freezing the two Fortuna Alliance accounts and all other related accounts.

The principals of the Fortuna Alliance failed to return the funds

that they had forwarded to the two SAB accounts. On June 12,

1996, the U.S. District Court for the Western District of Washington issued a contempt citation against the defendants for failing

to return the funds from SAB and refusing to provide an accounting of the funds. When they continued to defy the court’s initial

order in the preliminary injunction, the court issued civil arrest

warrants against three of the defendants on June 27, 1996.

Although SAB officials told Minority Staff that they cooperated

with the U.S. efforts to secure the return of the funds, the bank

appears to have been less than cooperative. The U.S. Government

had named SAB as a neutral party in the freeze petition. This is

a normal occurrence in seizure actions in the United States, and

the banks that are named in such suits generally cooperate with

the court order. SAB, however, actively fought the United States in

the recovery process. According to U.S. Government officials negotiating a return of the funds in the SAB accounts, SAB officials were

initially uncooperative in negotiations. SAB officials would not tell

U.S. representatives how much money was in the accounts, citing

Antigua’s bank secrecy laws. This made it difficult for the government to know the exact amount of money in the accounts because

additional funds may have been wired into the account from different banks, and principals of the Fortuna Alliance had been

drawing down against one of the accounts to pay credit card bills.

SAB officials also demanded that the U.S. Government pay the

bank $1 million of the funds in compensation for the costs the bank

had absorbed in dealing with the issue, the damage to its reputation caused by the suit, and the interest lost from the account because it was frozen.

On September 10, 1996, SAB joined with some of the principals

of the Fortuna Alliance and asked the court to remove the freeze.

In its filing, SAB claimed that it was an innocent third party; that

if the freeze continued, it would affect SAB’s normal course of business; that the U.S. Government had failed to provide any evidence

that any of the funds in the Fortuna Alliance accounts were in fact

those of the principals, that the principals were signatories of the

account, or that the assets were at the disposal of the principals.

On October 22, 1996, Delgado, the owner of Fortuna Alliance,

wrote to the manager of SAB and expressed his deep frustration

with the continued freeze of his funds. In the letter, Delgado admitVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00549 Fmt 6602 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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21The sources of the $5.5 million are as follows: $2.2 million in uncashed checks returned to

investors; $2.8 million returned from accounts at SAB; $350,000 in assets frozen in U.S. banks.

ted that he was a beneficiary of the accounts that had been frozen

and claimed that SAB had accepted additional funds for the Fortuna Alliance accounts after the freeze was imposed by the High

Court of Antigua and SAB was on notice of questionable activities

by the beneficiaries of the account:

As you are aware I am a beneficial party for certain funds held

in Fortuna Alliance Trust. . . . In addition to these there are

other funds held in suspense that have come to your bank after

the injunction (August 9th from the Netherlands).

I am formally requesting that you arrange a loan to me

collateralized by these funds held by you that does not violate

your banks policies or the injunctions.

The SAB manager’s response included the following:

Management has given serious review to the circumstances related to your request, and guided by fiduciary responsibilities

and relevant legalities, we are unable to register as security for

a credit facility the funds held either in the Trust account or

for the Trust account.

We appreciate the grave concerns raised in your letter to us,

and have sought to identify legal means by which we could respond to your request. On the one part, we are bound by order

of the Court and, on the other part, the fact that funds are

held for a trust account carry further responsibility for the

bank to ensure that there is no breach of trust. The only authority for the custody of the funds is the stated trust, and a

Trustee has no implied power to borrow.

At this time we have no means to respond to your request, we

will however continue to press for the legal resolution of this

matter. We share your concerns over the length of time taken

to address the matter and the adverse impact it has on your

business. We are powerless to influence these events of the

court, and can only act in compliance with its orders.

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

Finally on February 24, 1997, the FTC and the Fortuna principals entered into a settlement agreement providing for the return

of $2.8 million from SAB and requiring the Fortuna principals to

make additional funds available to pay all claims. According to

U.S. officials, even after the principals of the Fortuna Alliance

agreed to the settlement, SAB officials balked at sending the funds

back to the United States, insisting that they be paid part of the

funds. SAB eventually settled for $50,000.

By May 1, 1998, the FTC had refunded approximately $5.5 million to over 15,000 victims in 70 countries throughout the world.21

However there were still $2.2 million in additional claims that

were outstanding. Under the terms of the February 1997 settlement, Fortuna was obliged to pay those additional funds. However,

the defendants refused to fulfill their obligations and did not supply additional funds. Instead, Delgado and other members of the

541

original Fortuna Alliance opened another Ponzi operation similar

to the first scheme, called Fortuna Alliance II. On June 5, 1998,

the U.S. District Court for the Western District of Washington

issued a civil contempt order against Fortuna Alliance and its

owner, Delgado, for failure to make the payments as required

under the settlement agreement and for failure to abide by the

agreement not to engage in similar activities.

Bank records reviewed by the Minority Staff indicate the For- tuna Alliance wired at least $6.9 million [This figure is a correction

by Subcommittee staff of the figure that appears in the original

publication of this report in February 2001.] into its SAB and

SANB accounts, but the settlement agreement called for only $2.8

million to be returned from SAB and SANB. After the $2.8 million

had been returned to the U.S Government, it is likely that substantial sums still remained in the accounts and presumably were

available to the principals of Fortuna Alliance, perhaps to perpetrate their second Ponzi scheme.

(f) Other Frauds/Questionable Accounts

In 1997 or 1998, Robert Burr, an accomplice in the Cook fraud

(described in the appendix to this report), opened two accounts in

the name of two foreign trusts (Right Hand Investments and Silver

Search International) at SAB. Burr instructed SAB that all funds

transferred into the Right Hand Investments account should be immediately transferred into the Silver Search International account.

Given the bank secrecy laws of Antigua and Barbuda, the mechanism employed by Burr would effectively hide the trail of his funds.

An investigator working with the SEC appointed receiver attempting to recover the funds stolen by Cook told the Minority Staff that

it has been established that Burr attempted to use these trusts to

prevent law enforcement officials from seizing assets he acquired

through the fraud.

Peter Berney, a U.S. citizen who has been indicted in both New

York and Nevada for stock fraud and money laundering apparently

ran millions of dollars through an account at SAB during 1999.

The issues discussed above raise serious questions about the adequacy of the initial due diligence and ongoing monitoring conducted

by both Swiss American banks. In some instances, these frauds evidence possible complicity of SAB and SANB bank employees or officials. SAB officials have told Minority Staff that they have recognized past problems and have made a concerted effort to improve

their management and anti-money laundering policies. One law enforcement official also reported improved performance. However,

over the past few years SAB has taken on accounts from entities

involved with Internet gambling activities, which raise additional

money laundering and legal concerns for correspondent banks.

(g) Internet Gambling/Sports Betting

Antigua is one of a number of countries that have legalized Internet gambling, and it has become one of the most popular locations

for such enterprises. For a licensing fee between $100,000 and

$75,000, an Internet gambling operation can purchase a license in

Antigua and Barbuda. Approximately 100 Internet gambling licenses have been issued by Antigua and Barbuda. As noted in anVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00551 Fmt 6602 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
542

other section of this report, Internet gambling is vulnerable to

money laundering, and it is illegal in the United States. This has

caused some U.S. banks to refuse accounts from Internet gambling

clients and correspondent relationships with foreign banks that accept such clients. When offshore banks with Internet gambling clients open correspondent accounts with U.S. based banks, the

money laundering vulnerability of the correspondent bank is increased, because it is not just dealing with unknown customers of

the client bank, it is also handling the customers of the Internet

gambling establishments who have access at the client bank. Moreover, the correspondent bank is in the position of facilitating a possible crime by accepting funds for activities that are illegal when

carried out within the United States.

SAB services a large number of Internet gambling accounts. A

brief search of the Internet disclosed hundreds of Internet gambling entities that advertised SAB as their bank and directed clients to wire funds to their SAB accounts through one of SAB’s U.S.

correspondent banks. In 1998 and 1999, wire transfers directed to

Internet gambling entities flowing through SAB correspondent accounts grew to millions of dollars each month. The Internet gambling clients of SAB included World Sports Exchange, whose coowner Jay Cohen was recently convicted and sentenced to 21

months in prison in the United States for violation of the Federal

Wire Act, which prohibits interstate or foreign gambling via telephone or telegraph.

In addition to SAB’s U.S. based correspondent accounts, SAB’s

correspondent accounts at non-U.S. based banks, such as Toronto

Dominion in Canada and BNY–IMB in Geneva were also advertised as places where gamblers could send funds for SAB’s gambling clients.

Moreover, the money laundering vulnerabilities of correspondent

accounts that are compounded by the combination of correspondent

banking and Internet gambling clients are further magnified

through the proliferation of E-cash operations such as Totalnet,

InterSafe Global, Ecashworld, Electronic Financial Services. E-cash

operations are intermediaries for the transfer of funds between consumers and merchants. Many Internet gambling operations are

using such services. Individual bettors are instructed to open accounts at, and send their funds to, the E-cash intermediary, which

then deals with the gambling company. This further hides the origin of funds.

The Web sites of a number of on line casinos contained the exact

same description of one of the E-cash companies, ‘‘InterSafe Global,’’ and described how the casinos utilized its services:

InterSafe Global LLC is a Nevada based company that operates the E-cash service for Casino on Net. InterSafe specializes

in secure Internet transaction processing. They provide a vital

link between Internet customers and merchants. When our clients want to make a deposit to their casino bankroll, this is

done through InterSafe. The credit card is charged to InterSafe

Global LLC, and this is the name that will appear on your

credit card statement.

543

The Internet casinos using InterSafe instruct clients who wish to

make wire transfers into their casino account to forward the transfers to ‘‘InterSafe Global LLC, Account number 1641101, Swiss

American Bank.’’

These intermediaries further obscure the source and extent of

Internet gaming that may be taking place through a bank that

services such accounts, and makes it even more difficult for correspondent banks to know which and how many gambling entities

may be using one of their client banks. The gambling entities are

nested within the E-cash company account.

SAB recently announced it would no longer use its U.S.-based

correspondent accounts for Internet gambling clients. However, it

is not clear whether SAB will continue to service the accounts of,

and accept wire transfers for, the E-cash companies that accept deposits for Internet gambling companies.

(7) Correspondent Accounts at U.S. Banks

(a) Bank of New York

SANB established a correspondent relationship with Irving Trust

Company in December 1981. The relationship was continued by

Bank of New York (‘‘BNY’’) when it acquired Irving Trust Company

in 1988–1989 and was terminated in June 1999. Little information

is available about the structure and operating procedures of Irving

Trust’s correspondent banking department at that time. A December 1981 memo by the relationship manager indicates that Irving

Trust was introduced to SANB through its courier in Antigua and

Barbuda, who was the brother-in-law of SANB’s Assistant Manager, McAllister Abbott.

Minority Staff interviewed the BNY relationship manager who

was responsible for the account from October 1993 through its termination in April 1999, and the head of the Latin American Division who has held that position since 1990.

The Correspondent Banking Department is located within the

International Sector Division, headed by the Vice-Chairman of the

bank. The International Sector is divided into four geographical regions—Europe, Asia, Middle East/Africa and Latin America. The

Latin American Division is headed by a Division Head, a Senior

Vice President of the bank. The Division is divided into two Districts. The Caribbean Region is located in District Two. District

Two has two relationship managers and a District Manager. The

Latin American Division has four representative offices in the region. The duty of the relationship managers is to sell products and

services to clients. However, relationship managers are also responsible for following the activities of their clients and events in the

countries in which they operate. The administrative, back office activities are handled by a group called deposit services. The Latin

America Division has 200–225 correspondent banking relationships, with a total of 480 accounts. The relationship manager who

handled the SANB account had 30–35 clients with 40–45 accounts.

Representatives of BNY told Minority Staff that to open a correspondent account at BNY, a bank must submit a request in writing; provide a letter from its regulatory authority that it is licensed

to do business; three letters of reference including a letter from the

544

Central Bank of the country and if possible two from U.S. banks,

and a list of all of the owners, directors and management; identify

the type of products and services it would like to use; and indicate

the expected volume of activity. Relationship managers are required to visit the site of the bank. The relationship manager, the

District Manager and the Division Head review the application and

make the decision whether to accept the account. If a potential client plans to conduct business with, or utilize services of, some

other division of the bank, representatives of that division will also

be in on the review process. The Compliance Division for the bank

is a separate unit, but a compliance officer is assigned to the International Services Sector.

BNY representatives told Minority Staff that as part of BNY’s

ongoing monitoring program, relationship managers in the Caribbean Division have a goal of visiting clients at least once a year

and in highly sensitive areas the District Manager is required to

meet with the clients. After returning from a site visit, relationship

managers are required to write a country report and a client visit

report. Client banks are required to supply audited financials annually. Monthly statements are not reviewed. However, BNY has

a monitoring system that can follow trends in account activity and

produce monthly reports on unusual activity. Relationship managers are required to review the reports and provide a written explanation of the activity in question.

According to the client contact memos produced by BNY, which

include Irving Trust memos from the beginning of the account, the

relationship managers did not identify any serious problems or concerns with the SANB account until about 1995. Significant frauds

that utilized SANB were not addressed by the relationship managers. For example, when Peter Herrington was dismissed in 1987

as General Manager of the Swiss American Banking Group for involvement in the Fitzgerald matter noted above, the reports from

the relationship manager stated: ‘‘Peter Herrington has left and

Andrew Barnes is the new G.M. (Apparently Herrington did not

leave on very amiable terms).’’ The relationship manager apparently did not obtain any information regarding the Fitzgerald case.

Similarly, although the SANB account at Irving Trust Company

and then BNY were the conduit for the flow of funds involving the

DeBella fraud in 1989 and 1990, there is no mention of the matter

in any of the files provided to the Subcommittee. IRS agents had

subpoenaed account records from BNY during its investigation, discussed the account with BNY representatives and addressed the

matter in the trial and sentencing of DeBella, which lasted through

1995. There is no indication that BNY relationship managers were

advised of this issue by other divisions within BNY, or that relationship managers made any inquiries of SANB to understand

SANB’s role in the matter. As noted in the review of the DeBella

fraud contained above, documents and information made available

to the Subcommittee indicate that the General Manager of the

Swiss American Banking Group, John Greaves, continued to allow

DeBella to utilize SANB accounts after he had been provided with

information and documentation alleging DeBella’s involvement in

fraudulent activity. The Division Head and the Relationship manVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00554 Fmt 6602 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
545

22 A standby letter of credit is a financial guarantee against non-performance. It is similar to

a surety bond. Generally when such an instrument issued by a offshore bank or a bank that

is not internationally known, the party who is relying on the standby letter will demand that

a larger, better known financial institution ‘‘commit to,’’ or back, the letter. Often, the small

bank will ask its correspondent bank to commit to the standby letter of credit. Committing to

the letter places the bank at risk if the small bank does not honor the letter. Generally, to eliminate its exposure, the correspondent bank will require the respondent bank requesting the commitment to provide collateral equal to the value of the pledge that the correspondent bank is

making. Thus, the correspondent bank has no risk of loss. This is what BNY did with its standby letter of credit arrangements with SANB. 23Material obtained from the SANB correspondent account at Nations Bank indicate that in

1993 Nations Bank became involved in a controversy with the Deputy General Manager of the

Swiss American Banking Group, David McManus, that revealed more information about Banco

de la Union and raised questions about the bank and the individuals associated with it. A letter

Continued

ager interviewed by Minority Staff indicated that the account was

quiet until about 1995.

In 1995, BNY memos indicate that personnel began to notice

questionable transactions occurring in the account. In 1993, SANB

issued and BNY confirmed two standby letters of credit to Banco

de la Union in Costa Rica.22 Ostensibly, the letters of credit guaranteed the capital reserves the bank was required to maintain. In

April 1994, Banco de la Union authorized another bank to collect

on the letters of credit. However, SANB instructed BNY not to pay.

In late 1994, attorneys for Banco de la Union threatened to sue

BNY. Yet, for a long period of time, SANB failed to respond to numerous requests by BNY for SANB to explain its position on the

matter, and to provide the name of its legal counsel in New York.

Around the same time as BNY confirmed the letter of credit in

1993, Bank of America (BOA) (at that time, a correspondent for

SAB) received a similar request to confirm a standby letter of credit that SAB wanted to issue to Banco de la Union. The stated purpose of the standby letter was the same as the letter of credit

backed by BNY: To serve as a guarantee for the capital requirements that bank was required to possess in order to meet Costa

Rican licensing requirements. Although BNY backed the standby

letter, BOA refused. In an internal memo, the BOA credit manager

expressed his concerns:

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

—We don’t know the client or the type of bank we are guaranteeing. —This is not trade related.

—This is not a specific transaction in the sense that client is

going to have this SBLC as long as it continues business in

Costa Rica and we are going to be asked to continually

renew. —The pricing of 50 BPS is not attractive.

The principle reason of those above is that we would be guaranteeing and support liquidity needs of a bank we don’t even

know and don’t know that we would want our name associated

with that entity or its principals. Therefore, from a policy perspective this is turned down.

Documents associated with SANB’s correspondent account at Nations Bank also raise questions about Banco de la Union and the

wisdom of approving a letter of credit for Banco de la Union.23

546

and memorandum from a Nations Bank Vice President described the matter. Two foreign insurance companies that were clients of SANB were attempting to expand their businesses into the

United States and were looking for a U.S. Trustee to hold funds to pay insurance claims filed

by U.S. citizens. McManus recommended the companies to Nations Bank. Before Nations Bank

ever made a decision about accepting the trust fund, McManus sent Nations Bank 2 million

shares of a Nevada corporation to be used to fund one of the insurance companies. In performing

due diligence on that company, Nations Bank discovered that the owner/recordholder of the

stock was Banco de la Union; the company whose stock was sent to Nations Bank had its charter terminated nearly 6 months earlier; the stock was a restricted offering that under U.S. securities laws was required to be held outside the United States, and a Ronald Seale, who identified

himself as a financial advisor to the insurance company, told Nations Bank that he was a shareholder of Banco de la Union and in that capacity had allowed the insurance company to use

the name of the bank to hold title to the stock. Seale had eight separate complaints filed against

him in Florida for selling discounted letters of credit related to oil business ventures. It turns

out that the BNY documents on the Banco de la Union issue reveal that Seale had been a minority shareholder in Banco de la Union; became its President in August 1993; and was involved

in the letter of credit controversy that involved BNY and the SANB correspondent account.

Additionally, SANB reported to BNY that a number of forged checks totaling $53,000 had been written against SANB’s account

at BNY. Nine months after the checks had been cleared, SANB informed BNY of the forgeries and asked that its account be credited

$53,000. The relationship manager discussed these matters with

John Greaves, the General Manager of Swiss American Banking

Group during a visit to SANB in April 1995. According to the relationship manager, SANB officials refused to tell him who it was

that issued the checks and the circumstances surrounding their

issuance. BNY did not press SANB on the matter. The relationship

manager and the Division Head stated that these incidents raised

concerns about the account.

By 1996, Swiss American Banking Group had replaced Greaves

with a new General Manager and the SANB account was of such

concern to the BNY Division Head that she discussed the matter

with other BNY officials, including the head of credit policy. A decision was made to have a set of meetings with SANB to pursue the

issues more aggressively. There was some discussion of closing the

account, but the new Swiss American Banking Group General

Manager made the representation that he had a mandate to improve operations at the bank and requested the help of BNY to do

so. BNY made a decision to give him the opportunity to improve

the condition of SANB.

In February 1996, the relationship manager addressed a number

of frauds and suspicious transactions (including those addressed in

the April 1995 meeting) with the new General Manager. These included $90,000 in forged checks in 1993; a fraud involving the

Bank of Scotland and a SANB client; efforts to wire cash deposits

made at BNY to SANB; and the $600,000 stolen by DeBella in

1993. The issues were discussed at the meeting and the Swiss

American General Manager followed up with a letter to BNY addressing the matters.

Once again, the answers from SANB were incomplete and some,

as the relationship manager described, were ‘‘total contradictions.’’

For example, SANB acknowledged that the $53,000 in forged

checks involved the SANB employee who was responsible for reconciling the checks (i.e., confirming that the checks debited to the

SANB account matched the record of disbursements in the SANB

ledger), but would provide no additional information to BNY. SANB

told BNY that the individual who controlled the account involved

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24 In 1995, after DeBella was convicted in Federal Court, Craddock, the victim of a $600,000

swindle perpetrated by DeBella in 1993, wrote to BNY, advised the bank of the conviction and

asked for assistance in securing the return of his money. BNY wrote back to Craddock and informed him that the funds had been deposited though Barclays Bank and did not involve

SANB’s relationship with BNY. However, there is no indication that BNY made any connection

between this matter and the DeBella frauds that earlier used the SANB account at Irving Trust

and BNY. Although BNY questioned SANB about the Craddock funds, it made no inquiries

about the SANB relationship with DeBella.

carcerated and the account number had been re-issued to another

party. The re-issuance of the account number was described as ‘‘unusual’’ and ‘‘something I didn’t like’’ by the relationship manager.

In discussing the DeBella fraud, SANB acknowledged that DeBella

had been defrauding a number of people, but SANB made no mention of the long and extensive use that DeBella made of accounts

at SANB to perpetrate his frauds even after SANB was on notice

that DeBella was involved in questionable activities.24 Regarding

the attempt to wire transfer cash deposits to SANB, BNY asked

SANB to confirm that the account no longer existed and provide

the closure date. SANB officials refused to provide BNY with any

details of the entity whose account was in question except to write

that ‘‘we have no account, nor have we ever had an account in the

name [of the account in question].’’ The General Manager of Swiss

American Banking Group then proceeded to suggest that the matter involved an account at SAB, and was being handled by Bank

of America, which was a correspondent for SAB. No additional information was provided. The relationship manager described this

response as ‘‘total contradictions,’’ adding that it was one more factor in the process that led to the decision to eventually close the

account.

When asked by Minority Staff why BNY did not press to receive

more complete answers to these matters, the relationship manager

noted that in the early 1990’s banks were more concerned with

credit risk than anything else. There was not much of that type of

business in the Caribbean. Security and money laundering were

not the high priority because BNY was not involved with a lot of

offshore banks. He noted that when banks talked of exposure and

risk, they were more concerned with losing money. The relationship

manager noted that the nature of banking is changing and the

international efforts to battle money laundering has shifted the

focus of the banks. Meanwhile, however, BNY’s relationship with

SANB continued.

During this period of time, SANB had been BNY’s largest revenue producer in Antigua for a number of years. However, both the

relationship manager and the Division Head stated that SANB was

a relatively small account, and that its revenue position would not

influence any decision whether to close the account. The relationship manager noted that BNY officials told him they would support

a decision to close the account if that was his decision. He noted

that in 1996, he wrote a memo recommending that BNY not accept

additional accounts in some areas because of weak regulatory controls and it was approved by his superiors. The relationship manager reiterated that he wanted to give the new Swiss American

General Manager an opportunity to improve operations at the

bank.

548

In May 1996, the Division Head again met with senior officers

of the bank to alert them to activities and issues related to SANB.

She recognized the matter could be a sensitive issue because of the

position of Rappaport as a major shareholder of BNY and the sole

owner of Swiss American. According to the Division Head, upper

management supported her approach and the relationship with

Rappaport did not factor into the decisions affecting SANB. Rather,

the decision was made to treat the SANB relationship at arms

length and not give it any special treatment.

The Division Head asked the relationship manager to provide a

summary of all of the cases involving SANB. The memo noted that

‘‘all the subpoenas and check forgeries are really concentrated between 1993 and 1995.’’ After reviewing the cases, the relationship

manager concluded by writing:

Clearly, all these cases at Swiss American occurred during the

administration of Mr. John Greaves the former General Manager, who resigned last summer September and still resided on

the island. . . . [T]he new GM, has been brought by the Board

of Directors to clean the record of the institution.

Even though this relationship has been very frustrating during

the past 3 years we should try to extend a grace period to Mr.

Fisher and his new team.

He informed Minority Staff that he believed the new General

Manager was making an effort to improve the situation at SANB.

At that point, the Division Head instructed the relationship manager to continue to follow the situation and keep her informed.

In November 1996, the Division Head and the relationship manager again met with the General Manager of Swiss American

Banking Group. The Division Head informed Minority Staff that

she had a lot of issues she wanted to discuss and hear from the

General Manager in detail on each of the items. The Division Head

wanted to stress to the General Manager that these matters were

receiving the attention of senior management at BNY and that ‘‘we

have to get to the bottom of this.’’ The Division Head also wanted

to size up the General Manager and estimate the prospects of his

ability to improve matters at SANB.

The report of the meeting prepared by the relationship manager

underscored the serious tone of the meeting:

Taking in consideration all the problems the Bank of New York

has been experiencing with this relationship, ‘‘our meeting

went very well.’’

Ken told us that his priority was to review and clear the institution of all of its problems and finally bring back Swiss American to profitability. He mentioned that most of the problems

were due to the mismanagement of the previous administration. Problems ranged from, as he said to [sic] ‘‘under-reported

or mis-reported’’ non performing assets to the Board of Directors and the Eastern Caribbean Central Bank to suspicious offshore accounts at Swiss American National Bank.

. . . [The Division Head] strongly restated to Mr. Fisher that

we would close the account if there was no improvement in the

way Swiss American conducts its businesses. The Bank of New

549

York received five subpoenas regarding Swiss American from

various U.S. agencies, during the past 16 months.

The memo concluded by noting, ‘‘We will keep monitor[ing] the

account very closely.’’

When asked by Minority Staff why BNY continued to maintain

the relationship in light of the concerns it had, the Division Head

said it was due to a number of factors: The new General Manager

appeared to be trying to turn things around and she felt BNY was

having some success with him and that he was making progress;

as a professional courtesy, BNY wanted to help him succeed; no

one likes to terminate a client; and BNY faced some potential

losses if the account was terminated and BNY wanted his help to

mitigate those.

The Division Head informed the Minority Staff that around the

same time as the November meeting, the SANB account was put

on the ‘‘refer’’ list, meaning the wire transfer and cash letter transactions of the SANB received more monitoring and manual intervention, and credit activity (such as clearing large checks or wire

transactions when funds may not be immediately available to cover

the amount of the transaction) had to receive the approval of the

relationship manager.

BNY was unable to locate any documents (other than monthly

statements) that addressed the relationship during 1997. There are

no documents to indicate any knowledge or inquiries by BNY of the

Fortuna Alliance fraud that affected both SAB and SANB, despite

the wide attention it received. However, in February 1998, BNY

was notified that the U.S Government had sued SAB, SANB and

BNY–IMB for recovery of funds related to the Fitzgerald case. Both

the Division Head and the relationship manager were surprised by

the news of the civil action and concerned. The Division Head was

upset that SANB had not advised BNY of what was a long term

controversy. As the Division Head noted, it became a major topic

during BNY’s visit to SANB a few weeks later. According to the relationship manager, the BNY representatives received another surprise when they arrived at SANB. They learned that the General

Manager of Swiss American Banking Group had left and SANB

had a new General Manager. BNY had not been advised of the

change. According to the relationship manager, the new General

Manager ‘‘sounded the same’’ as the previous GM as he laid out his

mandate for the BNY officials.

Regarding the lawsuit filed against the banks, the new General

Manager told the BNY representatives that SAB was not at fault.

He provided the history of the funds and noted that SAB and

SANB were caught between conflicting demands of the Antiguan

and the U.S. Government. According to the report of the meeting

written by the relationship manager, the General Manager concluded his presentation of the Fitzgerald funds by saying ‘‘currently

nobody knows where these funds are!! The Antiguan Government

claims they do not have them anymore!!!’’ [emphasis included in

original]

The Division Head offered a similar account to the Minority Staff

and characterized the claim as ‘‘highly improbable.’’ The Division

Head was upset that SANB did not notify BNY of the lawsuit, but

550

25 Another issue raised by the General Manager also raised concerns. According to the relationship manager’s report:

SANB is still lending to the Antiguan Government, financing its deficit. However, [the general

manager] told us confidentially, all of these loans to the government are guaranteed by the

West Indies Oil Company, the local company owned 50% by the government and the rest by

SANB’s principal shareholder. A percentage of the taxes paid by the consumers on each gallon

is allocated to SANB [confidential].

According to the Division Head, this raised another question about Rappaport’s involvement

with the bank and the Antiguan Government. Although BNY officials had been told that

Rappaport was distancing himself from Antigua, the information supplied by the SANB General

Manager contradicted that. The information also raised concerns that Rappaport may be using

financial institutions under his control to further his own interests.

noted that the General Manager explained that he thought BNY

would have known of the suit because of its part ownership of

BNY–IMB. Clearly, the BNY Correspondent Banking Department

had not been notified by its own bank, either. The Division Head

indicated that as a result of the matter and the way it was handled

by SANB, she was seriously considering terminating the relationship.

Other information presented by the General Manager at the

meeting raised additional concerns for the BNY representatives.

The relationship manager’s meeting report describes another controversial matter raised by the SANB General Manager:

10.) [The General Manager] see [sic] future growth in Antigua

is in Internet Gambling. This new industry in Antigua works

as follows:

1. When there is a sport event—boxing, football, soccer, etc.

especially in the U.S.

2. People will place their bet through the Internet to an offshore company in Antigua.

3. Wire funds to Antigua via remittance company, Western

Union, for example.

4. The company will mail checks to the winner—these checks

issued by local banks are usually drawn on U.S. banks (BNY,

Nations Bank, etc.).

Another offshore activity which will generate a lot of questions

on the part of the U.S.25

The Division Head told the Subcommittee staff that BNY had already been hearing a lot about Internet gambling, she wanted no

involvement with Internet gambling proceeds being processed

through the BNY account, and she made that very clear to the

General Manager. Although the General Manager responded that

the activities were being conducted through the offshore banks and

not the domestic banks in Antigua and Barbuda, she was concerned that it would be difficult for the Swiss American Banking

Group to limit the activity to its offshore bank because of the tie

in ownership between SAB and SANB.

The relationship manager told the Minority Staff that when the

General Manager spoke about Internet gambling, he made up his

mind to recommend that the account be closed. Before he could

process his recommendation, Swiss American Banking Group installed another General Manager, and then BNY identified a series

of suspicious checks that had been written against the SANB account.

551

When the Division Head returned from the February 1998 trip

to SANB, she wrote up a memo and had a discussion with the

Head of the International Banking sector and an Executive Vice

President of the Bank. The Division Head’s intention was to bring

her concerns—including the lawsuit—to the attention of the Executive Vice President. Her inclination was to close the account. She

wanted the Executive Vice President to discuss the matter with

more senior members of the bank and the BNY Board members

who also sat on the BNY–IMB Board. The Division Head and the

relationship manager then waited for some response for senior

management. In October 1998, the Swiss American Group hired

another General Manager, the third in a 1-year period.

In December 1998, nearly 10 months after the meeting in Antigua at which the U.S. lawsuit and Internet gambling were discussed, the relationship manager reported to the BNY compliance

department that SANB had issued six checks in series, two for

$9,900 and four for $9,000 each. All of the checks were drawn on

SANB’s account with BNY. The relationship manager wrote:

Even though Swiss American authorized the payment, we believe, like California Bank and Trust, that these drafts are

highly suspicious and must be reported to the proper authorities. We are almost sure the negotiating bank will do the same

soon.

According to both the Division Head and the relationship manager, this was the event that triggered the closure of the account.

In addition, SANB had again failed to notify BNY that a new General Manager had been hired. According to the Division Head, she

discovered the change when SANB submitted a notice to the administrative office that it wanted to add the signature of the new

General Manager to the authorized signature card for its account.

At that point, the Division Head notified the Executive Vice President of her intention to close the account and also, as a courtesy,

told the BNY Board member who sat on the BNY–IMB Board of

her intentions.

In reviewing the account to determine how long the termination

period should last, the relationship manager wrote the following:

I conducted a preliminary survey of SANB relationship with

The Bank of New York, and I have to admit to you the relationship has been more extensive than we thought. BNY is

subject’s primary clearing bank in the U.S. It is going to take

more than 60 days to close it down, especially SANB has currently two stand by letters for $500,000 and $300,000 assigned

to Visa and Mastercard.

These slc’s [standby letters of credit] guaranteed SANB’s credit

cards in the Caribbean Region. In addition, SANB has an average of 300 checks issued and drawn on BNY floating around

the market, a monthly average of 250 payments going through

the account and finally they send 3,000 cash letters every

month.

On January 9, 1999, the relationship manager wrote the new

General Manager and informed him that BNY would close SANB’s

correspondent account effective March 31, 1999. SANB did not

552

transfer out the balance of its account by the closing date of March

31. On April 8, the Division Head wrote the General Manager:

Even though a 3-month deadline to March 31, 1999, was extended for an orderly transition to another U.S. Commercial

Bank, to date no actions have been taken by your staff to reduce the number of payments and checks in your account and

the transfer of the Visa and Master Card standby letters of

credit.

The Division Head told the General Manager that within 10 days

BNY would cease clearing any checks; would not process any payment instructions; and would notify Master and Visa Cards that

BNY would not renew the stand by letters of credit when they expire.

The Division Head instructed the General Manager to ‘‘Take all

appropriate measures to transfer the balance of your account by

Friday, April 23, 1999.’’

The account was closed on June 1, 1999. The memo closing out

the account stated:

Latin America and The Caribbean Division closed the accounts

of Swiss American National Bank as a result of a series of suspicious transactions and payments during 1997, 1998 and

1999. The division actually received five subpoenas during this

period from the U.S. Government concerning different cases of

money laundering and other illegal activities.

The Caribbean Desk decided to close the account at the end of

1998, when 50 [sic] checks were issued for $9,900 each in favor

of one individual.

Both the Division Head and the relationship manager told the

Minority Staff that they should have closed the account sooner.

When asked why no decision was made until December 1999, nearly a year after the meeting in Antigua, the relationship manager

told the Staff that he didn’t know what to say, that it was a lapse

on his part. He said closure of the account was definitely something

he should have done in 1998. The Division Head said that in hindsight, the account should have been closed down sooner, right after

she returned from the February trip to SANB.

There were other aspects of the SANB operation that BNY did

not pursue. In two of the meeting reports, the relationship manager wrote that the General Manager noted that Swiss American

Banking Group board members were from New York and Chicago.

When asked if they knew who the board members were, the relationship manager and the Division Head told the Minority Staff

that the general managers never gave the names of the board

members. Eventually, BNY learned the name of the board member

in New York. When asked if they ever learned the name of the

board member in Chicago, the Division Head told the Minority

Staff that she and the relationship manager were never given the

name of that board member. The relationship manager asked for

the name a number of times and the Division Head kept telling the

relationship manager to go back to SANB and get the name. She

said that the situation was frustrating and that BNY should have

known the name of the board member and SANB should have told

553

BNY when asked. The board member from Chicago is the controversial tax attorney Burton Kanter.

In addition, BNY was not sure of all of the entities in the ownership chain of SANB. Internal memos describe the ownership of

SAB and SANB as: ‘‘Swiss American Holdings (Panama), which is

owned by Carlsberg (Bahamas), which is owned by a private Trust

controlled by Rappaport.’’ BNY informed the Subcommittee that it

believes the name of the private trust is the Inter Maritime Foundation, but it is not sure. Although BNY knew the true owner of

the bank, it did not have a complete understanding of the entities

that comprise the ownership chain.

BNY records related to the SANB correspondent relationship reveal a number of visits and exchanges, starting in mid-1995 and

continuing through 1998, in which BNY representatives questioned

SANB management about a number of specific suspicious transactions and other controversial incidents involving the bank. In

some cases, SANB officials failed to share all of the information

they had on a matter with the BNY representatives. In some instances, SANB did not provide an accurate description of the transactions. Both the relationship manager and the Division Head told

Minority Staff that these events and SANB’s response raised concerns about the bank and its management. Yet, for a prolonged period of time, even though BNY closely monitored the account and

its problems, and was concerned about the relationship, it allowed

SANB to continue to maintain a correspondent relationship.

(b) Bank of America

SANB established a correspondent relationship with Bank of

America in April 1987. The account was terminated in June 1991

when it was replaced by an account in the name of SAB. The SAB

account was closed in June 1999. This section focuses on SAB’s correspondent relationship with BOA.

The structure of BOA’s International Banking Department and

its Caribbean division, and its due diligence policies and ongoing

monitoring programs are detailed in the case study on American

International Bank. Minority Staff interviewed the BOA relationship manager who was responsible for the SANB and the SAB accounts from 1990 through the termination of the SAB account in

July 1999, and senior officials from the correspondent banking and

compliance departments of BOA.

Prior to establishing a relationship with SAB, BOA records show

that it had concerns about its correspondent relationship with

SANB as far back as 1990. In August 1990, the relationship manager for the account wrote a call memo (a report on a visit with

or call to the client bank) which stated: ‘‘This is a privately owned

bank with poor financials and obvious operating problems. . . .

Follow-up: . . . Nothing more until financials improve measurably.’’ When asked why BOA kept the account if it had the problems described, the relationship manager stated that BOA only

performed transactional business for SANB, and the memo only

meant that BOA needed to keep an eye on the account, not that

SANB had violated any laws.

In 1991, BOA established an automatic investment account for

SANB, which allowed SANB to receive more interest on assets on

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deposit in its account. In the memo establishing the account, the

administrative officer who handled the account noted, ‘‘As per Tom

Wulff watch this bank very carefully.’’ The relationship manager

explained that he was notifying the administrative officer that the

bank was not well managed and should be watched, but that he did

not believe that the bank was engaged in anything illegal. He believed that SANB was not sharp operationally and wanted the administrative officer to watch the account to make sure SANB did

not do anything to hurt BOA.

A few months later, in June 1991, SANB wrote to the account’s

administrative officer in New York:

Confirming our recent conversation, we wish to close out the

account of Swiss American National Bank of Antigua and

initiate a new account in the name of Swiss American Bank

Ltd. . . .

We are making this change because the time has come to better divide the activities of the two entities and as the transactions that have been handled through Bank of America traditionally have been more oriented towards Swiss American

Bank Ltd., we feel that we should have the account in that

name.

SANB included Articles of Association, financial statements and

approved signatory lists for itself and SAB. No additional account

opening material accompanied the letter and the relationship manager observed that it appears as if the SAB account was opened

without anyone at BOA first making a determination if they wanted SAB to open an account. Yet, as an offshore bank, SAB potentially had a much different clientele and engaged in different banking activities than SANB, which was a domestic, commercial bank

and it was regulated by a different authority. Domestic banks (such

as SANB) are regulated by the Eastern Caribbean Central Bank.

Offshore banks (such as SAB) are regulated by the jurisdiction licensing the bank. To the extent that the two institutions shared

anything in common, it was the management and administration,

about which BOA had already expressed concerns.

The 1989 audited financial statements for SAB contained the following auditor’s comment:

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

debit.

A similar disclaimer was included in SAB’s audited financial

statement for 1990. A BOA senior official agreed those disclaimers

should have raised questions, noting that the amount cited in the

1989 financial statements ($1,931,627) represented approximately

20% of all deposits. There was no indication in the documents provided to the Subcommittee that the BOA relationship manager at

the time noted or followed up on this matter.

Another cautionary call memo was written in July 1991:

The private ownership of this bank is known to be legitimate

although General Manager David McManus was recently

555

linked to a minor bank scandal in Anguilla when he made calls

there with clients of the bank later found to be of questionable

reputation.

. . . [T]here is an ongoing investigation by the Gov. General’s

office in Anguilla concerning alleged questionable banking

practices by their client. Reportedly, the issue relates to the

unauthorized solicitation of funds. David understood and

agreed that until these issues are officially resolved, it would

not be prudent to explore further business opportunities between our banks.

The next day, the relationship manager sent a message to the account officer in New York, stating: ‘‘I am sending you a separate

copy of my 7–18–91 call memo on this bank. We need to keep an

eye on the activity in this account.’’

When asked by Minority Staff if he was concerned that BOA was

getting involved in a banking relationship that it did not want to

be in, the relationship manager noted that it was a long standing

relationship, that it was not obvious that SAB was a different bank

from SANB, and that the change in bank accounts was just a bookkeeping matter.

Again in 1992, the relationship manager commented on the problems of SAB:

This remains an outwardly unimpressive, disorganized and

cluttered operation, plagued by turnover and seemingly weak

management.

The bank is nevertheless liquid, and frequently keeps very

good CD balances with BINY [Bank of America International

New York].

It remains to be seen, however, if they can generate sufficient

volumes to attain profitability on what must have been an extremely expensive start-up operation.

When asked why BOA kept the account after recognizing ongoing

problems at the bank for a number of years, the relationship manager replied: ‘‘Why not? It was not a problem for me. They needed

someone to clear for them. We were set up to do that. We had been

doing that since 1987. Those [problems addressed in the call reports] weren’t aspects of the bank that we were concerned with.’’

When asked if the problems identified in the memos could lead to

other kinds of problems, the manager noted that is why he asked

the administrative officer to keep an eye on the account—that the

problems were not illegal activities, but operational difficulties.

In 1993, the relationship manager sought approval to establish

a small revolving line of credit for SAB that would be used to issue

commercial letters of credit and standby letters of credit on behalf

of private banking customers. The credit line would be

collateralized by certificate of deposits placed with BOA. The credit

manager denied the request, noting:

—We know little about the parentage of this bank. The structure appears designed to isolate the real owners and to take

advantage of tax and regulatory havens in Panama and Antigua.

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

—Who controls or monitors activities?

—We are being asked to issue SBLCs guaranteeing activities

of their private banking clients. We don’t know these clients.

We don’t know the beneficiaries. We don’t even know at this

point what kinds of loans or non payments we would be

guaranteeing. Our standby’s could be all over the place. . . .

The potential for being blind-sided is quite pronounced and I

am not in favor of the presentation. If we knew more about the

parentage, respectability, integrity of the bank I would be willing to consider trade finance but I would continue to believe

we should not extend credit to service their private banking clients.

The relationship manager stated that although he disagreed with

some of the comments made by the credit officer he did not file a

reply because the issue was not worth fighting. He did confirm that

BOA knew that the bank was owned by Rappaport.

In 1993 and 1994, the relationship manager’s call memos indicate that SAB appeared to turn the corner financially (although not

operationally) and maintained good balances with BOA. At the

same time, BOA began to receive reports of questionable activities

involving accounts at SAB. BOA records show that between 1993

and 1995, SAB accounts were associated with fraudulent bills of

exchange, sports betting activities, and suspicious wire transfer activity. Then in March 1995, a member of BOA’s control and compliance department sent the relationship manager a fax with the message: ‘‘This afternoon additional evidence of another scam where

Swiss American Bank name is used in conjunction with their account at BINY.’’ The information included in the fax related to a

pyramid scheme operating through accounts established at SAB

that encouraged victims to send funds to SAB’s correspondent account at BOA. A notation on the fax cover sheet signed by the relationship manager states: ‘‘Discussed closure of account with John

Greaves, i.e. ceasing of ck writing and cash letters. He agreeable

will give progress ck tomorrow.’’ In May 1995 the relationship manager reported to the Vice President of BOA’s International Deposit

Services that major services provided to the SAB account were

being terminated:

I met with this bank [Swiss American] last week. They are

well underway to replacing all of our facilities with Chase, and

agreed that May 31 would be the deadline for the discontinuance of drafts drawn on us, cash letters to us, and Microwire

and telex transfers outgoing.

Other than the documentation cited above, there was no documentation on the reasons for, or the processes that led to, the decision to terminate the services or close the account. The relationship

manager told the Minority Staff that he believed that the basis for

the action was the discovery of the pyramid scheme. A senior BOA

official told the Minority Staff he believed that the decision was

less related to money laundering and more related to sloppy banking, which, in his opinion, may explain why BOA moved more slowVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00566 Fmt 6602 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
557

26The current Chairman and Managing Director of SAB told the Minority Staff that while

European Union Bank had a corporate account at SAB, it never had a correspondent account

at SAB.

ly on completely closing the account. As a result of the actions

taken, the account services offered to SAB were significantly reduced, as was the flow of funds through the account.

Less than 2 weeks later, the relationship manager authored another negative memo about SAB:

Since our decision a month ago to ask Swiss American to find

another correspondent bank, their operation appears, if anything, to have worsened.

. . . This poorly managed bank which seemed to be especially

lacking in controls on new relationships, was constantly preyed

upon by con artists and during the visit, it was noted that

their account balance was inflated by approx $250M in checks

apparently being returned unpaid, and this was rectified with

BINY.

At the same time, another issue presented itself when representatives of an entity called European Union Bank, an Internet bank

licensed in Antigua that subsequently defrauded depositors of millions of dollars, approached BOA about opening a correspondent account. The relationship manager’s call memo reported:

This bank had written asking for an account relationship and

during the visit, provided extensive documentation attesting to

their status as a duly authorized offshore bank in Antigua.

Ownership, however, was referred to as a group in the Bahamas on which they had no readily available information, quarters were new, unfinished and occupied mostly by computers

and their customers are mostly ‘‘European investors’’ who they

reach thru ‘‘International publications’’ and the Internet. This

appears to be an example of what we do not want to get near.

The material presented to BOA by European Union Bank representatives indicated that it had a correspondent account with

SAB. This apparently did not result in any further inquiries or

cause any further reevaluation of BOA’s relationship with SAB.26

The account manager doesn’t recall if it caused additional concerns,

noting that he already had enough reason to terminate the relationship with SAB. A senior BOA official commented that BOA

simply failed to make the connection between European Union

Bank, its relationship with SAB and, as a result, its connection

with BOA.

Approximately 1 year later, in July 1996, the SAB account was

still with BOA and still the object of negative assessments by the

relationship manager:

It has been a year since we requested Swiss American to find

another correspondent as the result of their continued operational problems, and they have at least finally managed to redirect their cash letter and payments business, although they

still maintain a sizeable demand balance and are the recipients

of a considerable volume of in-transfers. We agreed to 90 days

for them to notify remitters and close the account totally as we

558

clearly did the right thing in getting rid of this relationship although again, we cannot move too abruptly lest we be accused

of damaging their business without apparent cause.

. . . [T]hey also admitted to problems with their ECCB [Eastern Caribbean Central Bank] audit which resulted in their petitioning that bank for some relief, citing their previous management problems and steps to clean up in the meantime.

Problems apparently included mis-classification and hidden

loans, complicated by inadequate followup.

The relationship manager noted the situation showed that with

banks that have a high volume of activity, it is difficult to stop the

flow of funds from clients. He noted that the termination of check

clearing and wire transfer services stopped the potentially most

harmful activities and that the volume of funds through the account was very low. However, the account remained open.

In August 1997, more than 2 years after BOA had asked SAB to

find another correspondent, the relationship manager wrote a more

favorable memorandum about the client:

Swiss American seems to have made great strides in getting

their house in order with this, their offshore bank, now physically separated from the local bank and the previous management now long departed.

. . . At our insistence as a result of some past dubious transactions which passed through their account, they also long ago

discontinued their cash letter and electronic payments business

with us and have since maintained just a deposit account

through which they receive approximately 50 incoming payments monthly, and for which they are very appreciative. This

seems to be a reasonable compromise as I had been hesitant

to force them to totally close their account as we really had no

defensible grounds.

There is no evidence in the documentation related to the SAB account that BOA was aware of the major frauds involving accounts

at Swiss American Bank, such as the Fortuna Alliance fraud,

which was receiving a great deal of public attention at the time.

The relationship manager told Minority Staff that in retrospect he

had to admit some bad judgment at the time he wrote the memorandum cited above. He said he should not have been so easy on

SAB and that it was not a sharp operation, but he never thought

the bank had done anything that was illegal.

In February 1998, BOA learned of the complaint filed against

SAB by the U.S. Government regarding the Fitzgerald account. At

first, the relationship manager once again agreed to continue the

relationship with SAB:

This is an old issue going back to the 1980’s, also includes the

Antiguan Government. As we have done in other cases, it was

my intention to tell him to go find another correspondent bank,

explaining that it would be in our mutual interest to avoid the

possibility of later embarrassments should compliance issues,

etc. arise. Also as before, it is difficult to be more forceful as

no guilt has been proven, etc.

559

Stewart Young [the Manager of Swiss American Bank] was totally cooperative while describing this situation as something

which occurred long ago before the bank purged its management, includes heavy involvement of the local government

which largely initiated the problem and is an issue in which

the current bank is cooperating fully and hopeful will be shortly resolved.

The bank has totally changed management and has managed

its DF account with us in an entirely satisfactory manner for

the past 2–3 years. It uses us only for limited transactions not

including cash letter or funds transfers and has been totally cooperative with respect to the clean up of earlier processing

problems. I therefore agreed to table this issue for now, while

making it a matter of record.

The relationship manager said that it was the first illegality involving SAB that he encountered and sympathized with the position of SAB, seemingly caught between conflicting orders of two

governments. A senior BOA official pointed out that at that time

it was BOA practice to rely heavily on the judgment of the relationship manager. With an account for a small bank, such as SAB,

BOA gave great discretion to the relationship manager, and there

would not be a lot of other people looking at, or asking questions

about, the account. He told the Minority Staff that is one reason

why BOA was revamping its policies and practices.

In March 1998, the relationship manager received a memo from

the BOA legal department detailing a number of inquiries that

BOA had received about SAB and its clients. According to the relationship manager it was then that he realized that ‘‘we had a mess

beyond operational problems.’’ At that point, he reported that he

had asked SAB to close its account with BOA:

‘‘I had long ago required Swiss American to discontinue their

cashletter (clearings) and wire transfer (Microwire) activities

with us as some transactions appeared suspect, although seemingly as the result of poor management. With a complete

change of management and cessation of those activities, their

DF account had remained open to facilitate in-transfers. We

now have the 1/98 issue of Money Laundering Alert describing

a possible precedent settling civil lawsuit by the U.S. authorities against Swiss American Bank and others, involving the

Antiguan Government, and accusing collaboration with money

launderers. As above, Mr. Stewart Young has today been asked

to close their BA New York branch DF account.

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

I have copied you on call memos noting that I today asked each

of the banks above to close their accounts with us at their earliest convenience. Please monitor these balances accordingly

and let me know if they do not close within 30 days. As per

the memos, this is the result of continued money laundering

related inquiries.

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

560

The last of our overseas bank relationships in Antigua, Swiss

American will now be transferring the remainder of their deposit balances with us to their existing Chase account, as per

my earlier request. Although a very bland US $73MM balance

sheet reflecting little more than the arbitrage of local deposits

to offshore and a relationship otherwise satisfactory, the bank

had been involved in some litigation between the U.S. Government and the local authorities concerning the ownership of

funds in a situation which although not necessarily wrong, was

typical of the offshore industry in Antigua and we had elected

to terminate this account relationship. Stewart Young was understanding and admitted he had been slow to move as he had

enjoyed the benefits of reciprocity.

In June 1999, the account was still open. The relationship manager, meanwhile had retired from BOA. He told Minority Staff that

when he retired he thought the account had been closed. However,

it had not been closed and the merger with Nations Bank brought

in an account that SAB had with Nations Bank, so the size of the

account had grown, although the limitations on account services remained in place.

Throughout the 1990’s BOA appears to have been unaware of the

frauds and controversies (such as those described at the beginning

of this case study) that plagued the Swiss American Banking

Group. The relationship manager noted that the history of the account does show that when he became aware of problems, he did

try to stop them. A senior BOA official noted that the decision to

completely terminate the relationship with SAB in 1999 did not involve the relationship manager and was more of a business decision and was not based on the problems previously discussed.

According to the official, the account had little activity, was not

generating much income for BOA and there was no reason to bear

the time and expense of keeping it open. He indicated that it

should have been closed a long time ago, and was not the type of

account that BOA wanted.

On June 16, 1999, the account was finally terminated.

This is another example of a bank that was slow to terminate a

correspondent relationship even when it had questions about the

client. The records of BOA’s relationship with SAB show that over

many years, BOA representatives had ongoing concerns about the

management and organization of the bank. Serious questions about

the ownership and purpose of SAB were raised by the credit department early in the relationship. Yet even after being confronted

with questionable account activity and other controversial incidents, BOA curtailed but did not terminate the relationship; instead, it was allowed to continue for another 4 years.

(c) Chase Manhattan Bank

SANB established a correspondent relationship with Chase Manhattan Bank (‘‘Chase’’) in October 1981; however, BNY was the

main correspondent for SANB. SAB established a correspondent relationship with Chase in April 1995. Chase was a major correspondent for SAB. This section focuses on Chase’s correspondent

relationship with SAB. Both accounts were terminated in 2000,

during the Minority Staff’s inquiry into the account.

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27The sales representative told the Minority Staff that the reason for so little justification in

the memo may have been the fact that Chase had an existing relationship with SANB. He also

speculated that there may be a missing call memo because SAB was an offshore bank and he

usually would have questions on financials and fund flows and would have put the information

in a memo. However his memo cited above indicates that he relied on the existing relationship.

The structure of Chase’s International Banking Department and

its Caribbean Division, and its due diligence policies and ongoing

monitoring programs are detailed in the case study on American

International Bank. Since the debt crisis that affected Latin America in the early 1980’s, Chase did not pursue credit relationships

in many Latin American and Caribbean nations. In those areas

Chase often did not assign relationship managers to serve as point

of contact for the financial institutions in those areas. Instead, the

countries were served by sales teams that marketed non-credit,

cash management products. Between 1994 and 1996, the unit assigned to cover Antigua as well as some other Caribbean and Latin

American countries was headed by a credit risk management official who supervised one and then a second account officer. Two of

the accounts handled by the unit were SAB and SANB. After 1996,

the credit official left the unit and the account officers worked

under the direction of a sales team leader. Sale representatives sell

services and products to clients but do not act as a relationship

manager for an account. As a result, there was no main contact

who was responsible for coordinating all of the responsibilities associated with the SAB account. The credit risk manager continued

to monitor the account and, for nearly 4 years, raised questions

about the relationship. However, the vacuum created by the lack

of a single relationship manager for the SAB account delayed a coordinated and informed assessment of the SAB relationship.

The account opening documentation for SAB contained little information on the institution other than the annual report supplied

by SAB. Even though SAB was designed to be a completely different type of bank than SANB, with different clientele and a different regulatory authority (local Caribbean banks are regulated by

the Eastern Caribbean Central Bank and offshore banks are regulated by the jurisdiction that licensed the bank), the sales representative relied on Chase’s existing relationship with SANB to

justify establishing a relationship with SAB. He wrote: ‘‘Given that

there is a DDA already opened in our books in n/o Swiss American

National Bank of Antigua (DDA #001–1–87985), no further account

justification comments are included.’’ 27

In September 1995, the credit risk manager asked one of the account administrators to initiate a daily item-by-item review of all

debits and credits to the accounts of SAB and SANB, including all

cash letters. By October, the review identified what the credit manager described as deposits that did not seem consistent with the

business of a private offshore bank—deposits more appropriately

deposited into SANB, the onshore bank. In October, the credit

manager issued a memo that the Legal Department was considering filing a criminal referral with the U.S. Government on the

matter.

As a result, the sales representative informed the Minority Staff

that on his next visit to SAB in January 1996, he asked about the

banks’ anti-money laundering policies. He wrote:

562

During our meeting, I raised the subject of money laundering

and asked what procedures SAB had in place to deter it. They

said this matter was of utmost concern to them, and cited requirements embedded in account conditions delivered to every

new customer (in fact, they provided me with a copy). They

also said this subject is covered in internal guidelines to marketing officers. In general, I found that the threat of money

laundering is explicitly recognized and guarded against by Antiguan bankers. They tend to put it in the context that it is not

worth risking the legitimate offshore business; tax avoidance

and asset protection, for the huge downside of taking on the illegitimate offshore business; drug-related.

The sales representative who managed the SAB and SANB accounts from 1995 through September 1996 and again from February 1999 through their closure in 2000, stated that issue was the

only questionable activity he had heard of regarding the SAB accounts during the 1995–1996 period.

The sales representative told the Minority Staff that to him

money laundering always had the connotation of money from drug

trafficking. He viewed offshore activity as a means for individuals

to set up entities (IBCs, trusts) and accounts that would enable

them to deposit funds so that they would be immune to foreign exchange violations.

In March 1996, the credit officer wrote a memo to the sales representative regarding the owner of SAB:

My sources tell me that ‘‘international financier’’ Bruce

Rappaport, the alleged owner of Swiss American, is an Israeli

shipowner who established Maritime Bank in Switzerland, now

BONY-Maritime with Rappaport still the Chairman. We once

had credit lines to Maritime, but we became ‘‘uncomfortable’’

and canceled them (this all happened before BNY bought into

the operation).

Rappaport is a controversial figure—his supporters would

probably characterize him as aggressive, innovative and entrepreneurial. His detractors would probably choose far less kind

words to describe him. As best as I can tell, however, he could

be called a ‘‘Donald Trump type’’, but not a ‘‘Robert Vesco

type’’, i.e. he’s a wheeler-dealer but has no known involvement

with any truly nefarious activities (e.g., drugs). Obviously, our

colleagues at BNY seem to consider him a respectable partner.

The sales representative stated that he probably knew that

Rappaport was the owner of SAB when he called on the bank in

1995, but he would not have known the significance of the name.

He stated that he probably noted in a call report who the owner

was, but if no one reading the memo knew anything about

Rappaport, it would have had no bearing on the decision to open

the account. The sales representative who was responsible for the

account from September 1996 through February 1999 said she

learned of Rappaport’s ownership of SAB during a meeting with

Business Development Manager of Swiss American Banking Group

in October 1997.

563

In June 1997, Chase received a subpoena for documents and

statements related to the SAB and SANB accounts. When the credit risk manager learned of the subpoenas in October of that year,

he again raised questions about the client to the compliance officer

and operation risk manager for cash management services:

You may remember that we recently closed the DDA of American International Bank, Antigua, and I was surprised that

there was no concurrent government investigation of Swiss

American (which was the inspiration for American Int’l).

Looks like somebody is interested.

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

The credit risk manager told the Minority Staff that he recalled

that AIB was closed because of the general nature of its activities.

He understood that AIB was started by former SAB people trying

to replicate SAB and he thought SAB would also be investigated

because of its size and similarity of marketing strategy. He noted

that although he had no specific responsibility for the SAB accounts at that time, in addition to the subpoena, he had heard of

some incidents over a period of years where SAB was mentioned

as having been involved in situations where their customers were

alleged to have been involved in questionable activities, and used

SAB accounts as repositories for illicit funds. He said the incidents

involved a fraud, an investment scheme, a theft of funds from a

U.S. bank, and an incident involving German customs. The credit

risk manager observed that he could not state whether the incidents were significant given SAB’s size, but he was trying to be

pro-active.

The sales representative who took over the SAB and SANB accounts in September 1996 was copied on the internal e-mail regarding the subpoenas, but did not recall the matter and did not perform any follow up on the issue. Other than the credit risk manager’s memo cited above, there is no indication that the subpoenas

occasioned any review of the SAB accounts or any follow up with

the client.

In 1996 and 1997, the Fortuna Alliance fraud received national

attention. Millions of dollars taken in the fraud moved through

SAB’s account at Chase. In fact, in the months of April and May

1996, the amount of funds wired by the Fortuna Alliance into the

SAB account at Chase represented 31% and 18%, respectively, of

all deposits into the SAB account ($3.4 million of $10.7 million in

April and $1.6 million of $8.8 million in May). Yet, there is no indication in any of the documents provided to the Subcommittee by

Chase that indicate that those responsible for the account were

aware of the fraud or that anyone in Chase followed up with SAB

on the matter.

In August 1998, a member of Chase’s fraud prevention unit

wrote to the sales representative to report that he was informed by

another U.S. bank that a client of SAB had fraudulently transferred money out of the U.S. bank and into its account at SAB. The

U.S. bank contacted Chase to see if Chase could assist in obtaining

564

a return of the funds from SAB. He concluded his message with the

following:

Our records show that Swiss American has been suspected of

money laundering. Can you tell me whether this is an account

that Chase will continue to maintain.

The sales representative told Minority Staff that she was not

aware of any records that showed that SAB had been suspected of

money laundering and said there was no specific proof that SAB

was involved in money laundering with respect to the funds that

were transferred out of the U.S. bank and into SAB. The sales representative reported that SAB claimed the funds were already gone

and had liability concerns about returning the funds to the U.S.

bank. She also wrote to the credit risk manager:

I explained to [the member of the Fraud Prevention Unit] that

SAB may not necessarily be consciously money laundering but

was used as a conduit by their customer just as some Mexican

banks recently involved in money laundering had used Chase

as a conduit. In addition, I explained that the revenue from

this account was at least $100k per annum and we are not

going to make a rush to judgment to close the account immediately.

The credit risk manager noted that revenue of $100,000 is moderately attractive but not huge and that if someone had truly challenged and substantiated shortcomings in the integrity of a customer, he could not imagine that any of his colleagues would use

revenue as a reason to keep the client if trust had been broken.

In October 1998, Chase officials initiated a follow up on the U.S.

Government’s legal action against SAB regarding the Fitzgerald

case. The U.S. Government filed a complaint against SAB and

some of its related entities in December 1997. By February 1998,

the news of the case had been widely circulated and, as described

above, BNY and BOA, began to follow up with SAB on the matter.

Chase did not respond until later. The sales representative told the

Minority Staff that SAB’s business manager notified her of the

matter in June 1998. She told the Subcommittee staff that she decided to wait for the outcome of the case and see what needed to

be done at that time. She noted that the matter did not really involve Chase. As a result, she did not pass the matter on to legal

investigations. The August 8 memo by a Fraud Prevention official

alluding to allegations of money laundering (cited above) may reflect an awareness of SAB’s connection to the Fitzgerald case, but

it is not certain. However, there are no indications in the documents supplied to the Subcommittee that Chase had pursued the

issue with SAB until October 1998, about 10 months after the legal

action was initiated.

According to the sales representative, the credit risk manager

called her in October, after a Wall Street Journal article announced

the case had been dismissed. At that point, the credit risk manager

began to look at the matter, and called the sales representative.

The credit risk manager recalled that he first became aware of

the matter when he learned that the case against SAB had been

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28The credit risk manager told the Subcommittee staff that he believed that the date when

he first learned of the issue was in July 1998, when the case had been dismissed. However,

the case was not dismissed until October, and this is when the sales representative recalls being

contacted by the credit risk manager. So it may be that the credit risk manager did not learn

of the issue until October 1998. 29This account is not accurate. As described above, SAB initiated the transfer to the Government of Antigua and Barbuda. It was not ordered to do so.

dismissed.28 It also drew the attention of his superiors. He noted

it was not clear whether SAB was unjustly accused or still under

suspicion, and he asked the sales representative for some underlying information. According to the sales representative, this request coincided with one of her periodic trips to SAB and she questioned the Managing Director about the incident when she visited

the bank in November 1998. She reported that the Managing Director told her that the United States tried to collect the funds

from SAB after it had unsuccessfully tried to collect the money

from the Antiguan Government. However, SAB turned the funds

over to the Antiguan Government at the request of the government.29 The sales representative reported that the Managing Director provided documentation to her and she forwarded it to risk

management. According to the sales representative, there was no

additional action taken by Chase after the information was received from the Managing Director.

Notes from the sales team leader, written in November 1998,

state:

‘‘Call 11/15/98 Ken Brown . . . his boss is furious about the

news published in the Wall Street J. on the U.S. Gov’t losing

the case against SAB for lack of merit . . . He wants to close

the account. I tell him no unless we have a universal policy in

the region, but it is up to them. . . . A couple of days later the

boss reluctantly relented. For the time, at least, they are ok.

. . . The pressure from the U.S. Gov’t is likely to keep increasing, so these kind of accounts are very likely to die anytime

soon, anyway, because of the cost of complying with rules, if

nothing else.’’

The credit risk manager stated that he received SAB’s explanation from the sales representative, and it appeared to him as if

SAB had stepped in and saved the funds and that the situation

was another case of a fraud perpetrated by customers but nothing

to suggest any complicity on the part of the SAB. When he conveyed that information to his superior, the account was allowed to

remain open.

When asked if Chase should have known about this incident earlier than it did, the credit manager told the Minority Staff that if

the relationship with SAB had been a credit relationship, or there

was a relationship manager for the account, the information would

have conveyed earlier and Chase would have expected SAB to pass

the information on earlier. Since it was a non-credit relationship

and there was no relationship manager, it was not a situation

where Chase would expect SAB to give it news. Since there was no

relationship manager, the sales representative was the logical contact point but it was not her job to be the focal point for the relationship.

566

In November 1998, the credit risk manager made a series of internal inquiries about the SAB account. He told Minority Staff that

because there was no relationship manager for the account and he

was the credit risk manager, he was receiving a lot of piecemeal

information about the SAB account, some of which identified incidents involving SAB. He told the Minority Staff that concern about

the relationship was growing because it had to be viewed from a

big picture. The account had been solicited under circumstances

and a marketing strategy that no longer existed at Chase. Chase

solicited the client and SAB had terminated or reduced relationships with other U.S. banks because of the interest that the Chase

sales force showed to it. According to the credit risk manager, because of that Chase could not in good conscience just terminate the

account because of unease with the relationship if SAB was making

reasonable efforts to make sure its clients were appropriate. The

credit risk manager stated that when the account was opened,

Chase knew that SAB would have to take extra precautions because of the nature of its business and the potential clients it

would attract. Chase had been led to believe that SAB was extra

cautious, but the growing number of incidents led him to question

if SAB was taking the precautions. He decided to take the responsibility to coordinate the collection of information on SAB to pull together a more complete picture of the client and the relationship.

The credit risk manager made inquiries in a number of Chase

departments about the account. One hand written note of a conversation with the fraud prevention and investigations unit reads:

‘‘Generally bad rep. But not on anybody’s hit list.’’

He also asked the fraud department to identify instances where

the SAB account had caused some concern. The official in the fraud

department who followed up on the credit risk manager’s request

wrote the following memo:

Inquiry initiated upon request of [credit risk manager], Treasury Solutions, who was undertaking a review of our relationship with captioned bank in light of recent publicity regarding

laundered money being turned over to the Government of Antigua and Barbuda by Swiss American. Inquiry revealed that

captioned bank has come to official attention as a suspected repository of proceeds of con games; however, there is no present

indication that the bank is currently considered a money laundering institution. We are aware that in several instances,

phony wire transactions have designated customers of Swiss

American as beneficiaries, and in at least one such instance,

the beneficiary was suspected of operating a scam in the past.

Considering the difficulties in determining actual ownership of

the bank, its location, the operating environment of these offshore banks, and the questions raised above, recommend that

we exercise especial caution dealing with this entity if a decision is made to continue our relationship at all. [Credit risk

manager] advised.

According to the credit risk manager, the response he received

identified incidents that were small relative to other frauds, and

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cording to the credit risk manager there was nothing to indicate

that SAB had been anything but an innocent victim. He noted it

did not have a perfect system to screen account holders, but no one

did. Chase was aware that SAB was soliciting business broadly and

that it had accepted a lot of clients who were not from Antigua and

it was difficult to obtain references on such clients. The issue was

whether SAB had been less than prudent in accepting clients. He

concluded that nothing he saw suggested the bank had been less

than honorable.

He stated that at the time he considered sending the results of

his research to the sales representative with instructions to get all

of the information on the relationship collected and out in the open

so that an informed and coordinated decision could be made on the

account. However, he said at the time it did not seem illogical to

conclude that SAB met Chase’s standards, so he did not go to the

sales representative. Eventually, he did take that step.

However, the reports provided to the credit risk manager did not

address some of the major controversies involving SAB, such as the

involvement of SAB officers in money laundering and frauds such

as the DeBella case. Nor did it mention the Fortuna Alliance fraud

which did involve the Chase correspondent account.

Other issues began to arise with respect to SAB. During a site

visit to SAB in November 1998 (when the U.S. legal action against

SAB was discussed), the sales representative learned that SAB was

serving Internet gambling accounts. She told Minority Staff that

she had noticed that there was an increase in the volume of checks

issued by SAB each month and when she inquired about the matter she learned of the gambling accounts. In her call memo, this

issue was discussed as part of a proposal to supply SAB with a new

service to speed the issuance of checks:

—CPS—Check Print—Proposal was sent prior to the visit. . . .

Check issue is now close to 2,000 per month and likely to

double in 1999. Part of the volume is coming from checks

issued to winners of the virtual casino players on the Internet; their customers instruct payee to be paid via fax and an

indemnification is provided. Virtual casino is licensed in Antigua. An article from the Interactive Gaming Council titled

‘‘Congress Strips Internet Gaming Prohibition From Final

Budget Bill’’ dated October 21, 1998 was given to us (dated

October 21, 1998).

The sales team leader who accompanied the sale representative

on the visit also noted SAB’s Internet gambling accounts:

The reason behind the increase in transactions with us, mainly

paper checks, is because they are conducting the payments for

casinos in the island, especially those that use the Internet.

They are very careful to send winners’ checks immediately, via

mail, directly from the island to the beneficiary, as soon as

they are so requested, to avoid damaging the casino’s image.

The way this works is that the gaming occurs by debiting a

credit card, and winners get a refund of winnings the same day

as the original debt; any positive balance, or wins over current

account, are sent via check.

568

30 It is possible that the credit risk manager first learned of the gambling connection in late

1999. In November 1999, Chase noticed a series of payments going to several Antiguan concerns

that appeared to be gambling establishments. It was subsequently confirmed that the entities

were gambling institutions. The credit risk manager was involved in the effort to identify the

institutions. In March 2000, there was an inquiry regarding SAB’s projections that it would

need 10,000 checks per month. It was determined that the volume was due to gambling-related

payments. The credit risk manager was also involved in that inquiry.

As noted in a previous section that discusses Internet gambling,

it is illegal in the United States to place wagers by the Internet.

In addition to the questions of legality, there is an increased risk

of money laundering. The sales representatives who handled the

SAB accounts were not aware of these issues. The sales representatives who learned of SAB gambling-related accounts in 1998 told

the Minority Staff that she did not know the activity was illegal,

that it was based on licensed Antiguan entities, and she never received any feedback from her superiors that gambling-related accounts were a problem or a concern. She noted that the General

Manager of SAB had provided her with notice that Congress had

defeated attempts to make Internet gambling illegal. When asked

if it raised concerns from a money laundering perspective, the sales

representative said no because it was legal in Antigua and not illegal under U.S. law.

The sales representative who took over the SAB account in February 1999 learned that SAB was servicing gambling-related accounts when he took over the account and read the memo of the

sales team leader. He told Minority Staff that he did not discuss

the issue with SAB because he believed that everything Chase

needed to know about the matter was already on record and he did

not think Internet gambling was illicit. The sales representative

said it did not cause any concerns for him, the information had

been recorded by his boss (the sales team leader), and if it didn’t

cause his boss any concern he didn’t see why it should raise a concern for him.

He also did not recall anyone raising a concern about Chase

being a correspondent for a bank that serviced gambling-related accounts. He was unaware that Internet gambling companies were

instructing their clients to forward their funds through SAB’s correspondent account at Chase. However, he said that even if he was

aware of that activity, it would not have caused a concern for him

unless he had prior knowledge that the activity was illegal, and he

did not know that.

The credit risk manager believed that he became aware that SAB

was servicing gambling-related accounts in early 2000, when he assisted in answering an inquiry about why SAB was projecting that

it would use 10,000 checks per month and it was determined that

the increased volume was related to issuing checks to customers of

gambling institutions.30 He didn’t receive or read the sales representative’s November 1998 memo on the matter. He noted that

he is still unaware if anything SAB did with respect to Internet

gambling is illegal, and he presumed it to be legal. He did not recall discussing with anyone whether it was legal or not and doesn’t

know if anyone had made an inquiry on that matter. He did not

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31The credits totaled for each month were only the credits that were registered for, the benefit

of entities that the Subcommittee could clearly identify as being related to Internet gambling.

There may have been additional gambling-related deposits not included in these totals because

the name of the beneficiary of the funds was not clearly identifiable as an Internet gambling

entity. Monthly debits were more difficult to total because many of the pay outs were to the

individual bettors, not to the gambling firms.

dering because so many of the checks were small and there didn’t

seem to be any substantial movement of money.

He noted that one of the duties of a relationship manager would

have been to follow all customer activities and put all of the pieces

of the puzzle together. Because the SAB account did not have a relationship manager, this did not happen.

From the responses of the Chase personnel and the lack of any

attention to this matter in the account documents provided to the

Subcommittee by Chase, it appears that the legal and money laundering issues associated with Internet gambling received little, if

any attention. Yet, there was clear evidence that this activity represented a significant part of SAB’s business and the SAB correspondent account at Chase was a major vehicle for the flow of

those funds. As noted above, both the sales representative and the

sales team leader identified Internet gambling as the reason behind SAB’s increased transactions through the Chase account; inquiries about payments made through the SAB account identified

Internet gambling activity and accounts at SAB in 1998; and in

1999, Chase was advised that SAB’s monthly use of checks would

expand significantly due to Internet gambling-related payments.

Beyond those items already noted, the size of the monthly statement for the SAB account at Chase suddenly expanded from approximately 50 pages per month to about 150 pages per month. By

late 1998 the size of the monthly statements had grown to approximately 400–450 pages and over 500 pages long by the end of 1999.

A significant portion of the increase appears due to the increased

number of transactions related to collection and payments of funds

related to Internet gambling activities. The Subcommittee staff reviewed five monthly account statements from 1998 and 1999. The

amount of funds deposited into the SAB account for further credit

to entities that were clearly identified as Internet gambling enterprises were $1.5 million (January 1998); $938,000 (May 1998); $3.1

million (November 1998); $6.3 million (May 1999); and $6.9 million

(September 1999).31 These figures represent 10%, 5%, 20%, 30%

and 22%, respectively, of the total deposits into the SAB correspondent account at Chase during those months. In March 1998,

the U.S. Attorney for the Southern District of New York indicted

21 owners, managers and employees of 11 Internet sports betting

firms for collecting wagers from U.S. citizens over the Internet.

One of those indicted was Jay Cohen, one of the owners of World

Sports Exchange (‘‘WSE’’), an Internet sports betting operation.

Cohen was tried and convicted in Federal District Court in New

York in 1999 for criminal violation of the Federal wire act for engaging in gambling over the Internet. WSE was a client of SAB.

Many transactions processed through the SAB account at Chase

were for the WSE. Chase records were subpoenaed for the trial and

a Chase employee provided testimony at the trial about check and

wire transfer activity in the SAB account at Chase that involved

WSE. In July and August 2000, the Minority Staff searched the

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32 In addition to the request by SAB and SANB to open foreign exchange accounts in London,

the credit risk manager saw newspaper accounts that reported on possible ties that Rappaport

Internet and identified hundreds of Internet gambling sites that instructed clients to wire funds to the SAB account at Chase Manhattan Bank.

Yet, there is no evidence that any of these incidents caused any

concerns or raised any questions within Chase or resulted in any

question of SAB activity or clients until the account was finally terminated in August 2000.

In early August 2000, the Minority Staff informed Chase personnel of recent U.S. Federal and State court determinations that

betting over the Internet is a violation of U.S. law, and that the

staff had identified hundreds of Internet gambling web sites that

instructed customers to forward funds through the SAB account at

Chase. On August 18, 2000, the sales team leader wrote to the

General Manager of the Swiss American Banking Group to reaffirm that the Swiss American accounts at Chase would be closed

on September 14. In that letter he also wrote:

Moreover, it has come to our attention that customers of yours

have created websites on the Internet, numbering in the hundreds, in which they advertise Internet gambling services, and

in some instances plainly link these sites to sites offering pornographic materials, and include Chase’s name and at times

incorrectly identify Chase as your affiliate. This unauthorized

use of Chase’s name on public websites is unacceptable, and we

insist that you inform your customers who operate such sites

to remove Chase’s name from them. More importantly, Chase

has learned that at least one U.S. Federal court has recently

determined that conducting Internet gambling operations within the United States is a criminal violation of U.S. law. I am

sure that in light of this you agree with me that it would be

inappropriate for your accounts with us to continue to be used

by your customers who operate Internet gambling sites to either receive funds from or send funds to persons within the

United States, and we expect that you will immediately advise

your customers who conduct Internet gambling operations of

that fact and that such transmissions will cease.

In September 1999, the credit risk manager learned that the

Chase compliance department had been using the flow of the Fitzgerald funds through SAB and SANB as an illustration of a money

laundering scheme in its training materials. The illustration involved SAB and SANB and noted the relationships between the

two banks as well as Rappaport. When asked, if the fact that the

banks were used as examples in Chase’s anti-money laundering

training raised additional concerns about the bank’s correspondent

relationship with Chase, the credit risk manager noted that the

SAB had been cleared of the case used in the training illustration

and no one in compliance had told him that SAB was doing something wrong and should not be a client.

In the Fall of 1999, two events occurred that caused the credit

risk manager to conduct another review of the SAB and SANB relationships. SAB asked Chase to open foreign currency accounts for

SAB and SANB in London.32 Because the accounts allowed withVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00580 Fmt 6602 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
571

and his bank, BNY–IMB, had with some of the individuals and companies associated with the

flow of billions of dollars of Russian money through BNY, some of which may have passed

through Rappaport’s bank, BNY–IMB. The press attention also focused on past controversies involving Rappaport. As a result of such reports, the credit risk manager sent a memo to a Chase

employee in Europe who followed the BNY–IMB correspondent account at Chase. He wrote asking what actions, if any, Chase might be taking with respect to the BNY–IMB account. He noted

that Chase was reviewing the relationship with SAB/SANB:

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

The credit risk manager later reported to colleagues that the employee in Switzerland reported that she expected the account to be closed. At the same time, the credit risk manager

asked the sales representative to ask SAB about its ownership and relationship with BNY–IMB.

When asked why Chase did not already possess such information about a client, the credit risk

manager told Minority Staff that the information is something Chase would ask for when opening a relationship, but it is not something it would ask for during a relationship because there

is no annual review of a non-credit relationship.

The sales representative reported back that SAB and SANB were owned by Swiss America

Holdings Company and that Swiss America Holdings Company was owned by Carlsberg. However there was no mention of the charitable trust that owned Carlsberg.

The sales representative also reported some information on the relationship of Rappaport to

BNY–IMB, but some of the information he reported was incorrect. He concluded his memo to

the credit risk manager by writing:

My conclusion is that we MAY have some indirect, common ownership by Rappaport in

Swiss American and Intermaritime. However, whereas his ownership of Swiss American is

full and unquestionable, it is unclear whether he even has principal or controlling interest

in Intermaritime Bank of New York. Brian Stuart Young can address the Swiss American

ownership details, but it would be unreasonable for me to press him for details on the Intermaritime side of the ledger.

Thus, basic information about the ownership structure of its correspondents SAB and SANB,

and important information about other banking interests of the owner of SAB/SANB were not

fully known to Chase years after it established relationships with SAB and SANB, and the sales

representative was reluctant to inquire about them.

Also in the Fall of 1999, the credit risk manager notified his colleagues that there were ‘‘numerous accounts of Caribbean and other non-U.S. banks’’ that had been established by Chase

divisions, other than the division that normally handled correspondent banking relationships.

He noted that two Antiguan banks—Antigua Overseas Bank and Worldwide International

Bank—had been opened by the United Nations Branch of Chase. In a follow up memo, he noted:

Just wanted everyone to be aware that there are DDA’s residing elsewhere in CMB which

are outside my Team’s ‘‘jurisdiction’’ and thus not subject to our screening or monitoring. [emphasis in original]

One colleague replied:

Obviously, ‘‘know your customer’’ policies, presumably have been covered off and someone

looks after them. Also, I believe that the SCO’s [senior credit officers] should be aware of corporate and institutional names in their respective countries.

Another colleague wrote:

My own unscientific rating of certain geographic locations includes the presumption (biased,

obviously) that anything from Antigua or Tortola is probably diseased and contagious and

should be avoided like mosquitos in Queens. I hope that KYC criteria have been followed

here—as the UN branch has dealt with int’l accounts for a long time, hopefully they were

on the ball in these cases. Meanwhile, my head is going back into the sand on this one.

Chase officials told the Minority Staff that the individual who wrote the memo meant that

because Antigua Overseas Bank and Worldwide International Bank were not in his department,

they were not his responsibility and he didn’t know anything about them.

drawals in different currencies, there was a possibility that the account could be overdrawn. This type of account required a credit

rating and approval by a separate credit risk group. In an attempt

to avoid writing up a new memo, the sales representative asked the

credit risk manager to vouch for the account. The sales representative told Minority Staff that he realized that Chase was reaching

a new juncture with the account and would have to make a decision whether to move ahead with it. He believed that if the credit

risk manager signed off on the new account, the credit risk group

would also approve it. He also believed that the credit risk manager wanted a strong recommendation from the sales team. If that

was provided, the sales representative believed that the credit risk

572

manager would sign off on the expansion of the account. He wrote

to his sales team manager seeking advice:

I spoke with the on-shore affiliate [SANB] [in the] morning,

and they asked me to open FX accounts in London. Then, now

in the afternoon, . . . the offshore [SAB] also asked me to open

up the same. . . .

What I see coming at Chase is a situation similar to [another

account], where we operate with no eventuality with what exists, but when it comes to open a new account[s], there are

complications, since they require that Risk Management approve, etc. I don’t know what the [credit risk manager in London] will ask, but he will certainly want something from the

client manager (???), and whom will we ask to guarantee the

name?

What should we do? [A Swiss American official] is going to be

in Miami. . . . Is it time to tell him frankly that opening a new

account would give us a lot of problems? . . . [W]hich makes

me think . . . I just sent them a proposal [for a check disbursement account]. Now I’m asking myself if [the credit risk

manager] will authorize that account? What do you recommend?

(Just recently [the credit risk manager and someone from compliance] have been asking about the nature of a client at SAB,

because of a series of MO’s [money orders] that had passed

through the account and whose name they did not recognize).

The sales team manager responded:

Talk with [the credit manager] and suggest the theory that as

long as Chase doesn’t decide otherwise, they are a ‘‘client in

good standing’’ and there’s no reason to deny them service. I

will speak with [another Chase official] on Tuesday if it’s not

going well. If [the credit risk manager] says no (I don’t see why

he would be more papist than the people) you and I will talk

to him together on Tuesday, what do you think?

The sales representative told the Minority Staff that he realized

that the account was at that time ‘‘wounded.’’ It had been tainted

because of some of the previous incidents and attention given to it.

When asked if he wanted to keep the account open, the sales representative told the Minority Staff that the account was important

to him ‘‘revenue wise’’. It was important for him to get clear direction from his boss to close it, and he said that he was getting the

opposite—SAB was a citizen in good standing, so why close it. He

then pressed the credit risk manager for a memo vouching for the

account. In late December 1999, the credit risk manager responded:

PRIVATE/CONFIDENTIAL/OFF THE RECORD

SAB is getting too much bad press—it’s even used as a Case

Study in our Money Laundering Training. It must be rigorously examined without further delay. If Credit raises the

issue, they’re ‘‘under attack’’ from the outset. If you raise the

issue (‘‘the best defense is a good offense’’), you may still have

a shot. [And if we all do nothing, we will all look like idiots,

573

plus any request for new accounts/services will most probably

be denied.]

Here’s what I suggest:

A) Lay out the background on SAB

B) Describe what you want to do, and

C) Describe how you propose to ‘‘police’’ them.

D) Get Skea’s support (since Ken Lay is lame duck at this

point)

E) Seek concurrence of John Stevens and Chris Carlin

By ‘‘background’’, I mean a succinct but honest listing of the

pluses and minuses, such as (not necessarily complete):

PLUSES:

We solicited them, not them/us.

DDA has been conducted properly—no issue whatsoever.

Good revenue generator.

I’ve reviewed their Cash Letters—nothing suspicious.

To best of our knowledge, their strategy (soliciting PBI types

via Frequent Flyer magazines and Website) is completely

legal—probably no different from our own PBI activities.

Per their statement, customer base is about 80% US/Canadian;

20% European; only 2% Latin American (i.e., not the Medellin

Cartel).

Only 15 customers have accounts > $500M; only 4–5 > $1MM

(again, not exactly major drug dealer profile).

Management completely open with us.

They themselves have been quick to pull the plug on suspicious

customers.

MINUSES:

Not a ‘‘strategic’’ customer.

Their domicile (Antigua) lax.

They’ve been drawn into several frauds/money laundering incidents but were cleared.

Their strategy undoubtedly attracts individuals evading taxes

in their home countries.

Ownership (Bruce Rappaport) is controversial.

By ‘‘what you want to do’’ I mean:

Absolutely no credit facilities (I presume)

Maintain existing business plus accept new accounts (I presume)

By ‘‘how do you police them’’ I mean:

CMB visits

Other conditions, controls, informational requirements, etc. (for

example, continuing to review Cash Letters, getting info on

customer base, etc. on a periodic basis)

The credit risk manager told the Minority staff that there were

individuals throughout the organization who were expressing concern about the relationship (and he would even include himself in

that group). He told the sales representative that without a relationship manager to handle the account, the sales representative

should assume the responsibility to pull all of the information

about the account together have a comprehensive analysis of the

574

relationship. The credit risk manager felt if Chase officials could

satisfy themselves that SAB was an innocent victim, then they

might be convinced that it was still an acceptable client. The credit

risk manager felt that it was necessary to achieve some consensus

on the account.

The sales representative told the Minority Staff that after the

credit risk manager’s memo was issued, there was no need for the

sales team manager to speak with the credit risk manager. Instead, he needed to speak to more senior officials in sales. It was

clear that the credit risk manager wanted the sales team to sign

off. The sales manager said he encouraged the sales team leader

to speak to more senior sales officials, but the sales team never

signed off.

In early January 2000, the sales representative spoke with an official of SAB and noted that he told the SAB official that,

‘‘[W]e will not move to open FX accounts for them in London

until we are able to re-position SAB internally as regards risk

management.’’

The sales representative told the Minority Staff that opening

new accounts would require introducing a whole new set of people

at Chase to SAB and the history of the account and would require

a whole new initiative and the support to do that did not exist at

the current time. He told the SAB official that they could revisit

the issue in 6 months.

In March 2000, a new check disbursement account was opened

for SAB. The sales representative told the Subcommittee staff that,

unlike the new accounts discussed in December and January, the

checking disbursement account was an offshoot of the existing DDA

account that SAB held in New York. He told Subcommittee staff

that he was not required to go through a new account opening

process for that service (as he was with the foreign exchange accounts discussed above) and he was not sure that he was required

to go through risk management. He noted that it appeared that the

credit risk manager was not sure either. He said that the fact that

news of the new service never got to the credit risk manager until

after it was opened is a function of how custom service felt it had

to route the program to get it into the system.

He said the credit risk manager never spoke to him about the

issue, nor did he ever hear that the credit risk manager was concerned or frustrated that the account had been opened up.

The credit risk manager agreed that additional accounts for U.S.

corporate names can be opened by the sales representatives without additional sign off from the risk management department. He

noted that the sales representative had mentioned the new service

a few months earlier and advised it would provide Chase with

greater control over the disbursement of checks. The credit risk

manager believed it was a logical explanation, but had advised the

sales representative to complete the analysis he outlined in his December 21 memo before any new accounts were opened. When he

learned that a new account had been opened, the credit risk manager told the Minority Staff that he felt he had asked that the future of the SAB account be discussed before any new accounts were

opened. However, he did not feel that the sales representative was

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33The sales representative told the Minority Staff that he is not sure where the projected

monthly volume of 10,000 checks originated. He was not sure that was the number he gave to

the administrator. He said that based on earlier conversations with SAB, the number 10,000

would be a lot less and he questioned the validity of the 10,000 figure.

trying to go around him, since he would inevitably receive notice

that the new account was being established.

As noted above, however, the opening of the account did draw

the attention of Chase officials when it was noted on the account

form that SAB was projecting a monthly volume of 10,000 checks.33

The credit risk manager told the Minority Staff that it was during 2000 that Chase officials from the credit, sales and compliance/

risk divisions discussed the SAB and SANB accounts. The concern

was that given the publicity around the account and the man hours

that Chase had devoted to the relationship, it was no longer a good

fit for Chase. The officials decided to terminate the relationship.

On April 28, 2000, the sales representative wrote to Swiss American Banking Group and informed it that Chase was going to terminate its accounts due to a ‘‘lack of strategic fit.’’ The sales representative told the Minority Staff that he did not participate in

any conversations that presumably led to the decision to terminate

the accounts. He was asked to communicate the decision to the client and wrote the letter. He noted that he had a general conversation with the sales team leader about the terminations of the accounts and the leader noted that they could not defend the account

any longer, the pressure was building.

Initially, Chase asked SAB to close the account within 30 days.

According to the credit risk manager, SAB retained counsel who

approached Chase and informed Chase that SAB was trying hard

to find a new correspondent, but could not meet the 30-day deadline. The counsel suggested that if Chase shut down the account

before SAB could locate elsewhere, SAB might sue Chase. The

sales team leader told Chase officials that SAB was working to find

a new correspondent and should be able to close the account within

a matter of weeks. Chase told SAB that if it ceased all activity in

the account, it would extend the account to clear outstanding

checks.

In August 2000, the account was still open. On August 14, the

sales team leader wrote to SAB and told bank officials that Chase

would close the accounts by September 14 unless they were closed

sooner by SAB. SAB requested a 30 day extension of the September

14 date. Chase refused and the accounts were closed on October 5,

2000.

Efforts were made by the credit risk manager to monitor the relationship with SAB. However, his efforts were hampered by a

number of factors. Because of the non-credit nature of the relationship, there was not a single individual who served as the relationship manager or central point of contact for the account. SAB was

slow to convey information to Chase. Sales representatives did not

closely monitor the relationship and at times did not act on important information that they received. The bank was unaware of controversial activities that were associated with the account, and was

slow to respond to the proliferating account activity related to

Internet gambling. These factors precluded a complete and coordiVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00585 Fmt 6602 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
576

nated review of the relationship. As a result, the relationship was

maintained until late in the summer of 2000.

B. THE ISSUES

SAB and SANB have had a long history of controversial leadership, questionable activity by corporate officers, accounts that

served as repositories for funds from frauds and other illicit activities, and a reluctance to fully cooperate with efforts of enforcement

officials to seize the proceeds of illicit activities that were in the

bank. More recently, SAB has serviced accounts that are related to

Internet gambling, an activity that is vulnerable to money laundering and illegal in the United States.

Despite this history, until recently SAB and SANB have been

able to maintain correspondent accounts at some of the largest and

most prestigious U.S. banks, including Bank of New York, Bank of

America, and Chase Manhattan Bank. These relationships can be

characterized by failure of the U.S. correspondents to respond more

quickly and decisively to patterns of problems and questionable activities in the relationship and inadequate due diligence and ongoing monitoring.

Throughout their relationship with SAB and SANB, the U.S.

banks were continually confronted with, or making inquiries about,

problems and questionable activities associated with the SAB/

SANB accounts. Yet, the relationships were allowed to continue for

long periods of time—even years—after the problems began to surface. One bank—BNY—even experienced occasions when SANB

was slow, or simply refused, to provide information relevant to important issues related to the correspondent banking relationship.

The relationship managers for BOA and BNY stated that they

should have terminated the relationships earlier than they did.

The banks’ failure to act more quickly and decisively stemmed in

part from what appears to have been a general convention throughout the correspondent banking field—a reluctance to sever a relationship once it is established. This reluctance stems from both a

sense of customer loyalty and a concern about liability for damages

that may result from severing a relationship. When a correspondent account is also a significant revenue generator, there is

even more incentive to give the client an opportunity to correct its

problems before terminating a relationship. While there is no indication that the banks in these relationships knowingly ignored illegal behavior, these factors will often cause correspondent banks to

repeatedly give their client the benefit of the doubt and to continue

relationships in the hope that clients will correct problems, or repeatedly extend termination dates to allow clients time to find new

correspondents. While this practice may be changing as the nature

of international finance and the business strategies of major banks

shift, it was certainly a factor in the SAB and SANB relationships.

Chase was slow to address SAB about the large amount of

Internet gambling proceeds that were flowing through SAB’s

correspondent account at its New York branch, even when numerous Internet gambling firms were indicted by U.S. Government officials and a Chase employee was called to testify at a

criminal prosecution involving one of the Internet gambling establishments that used the SAB correspondent account.

577

BNY apparently did little or no follow up on illegal activities

through the SANB correspondent accounts at its New York

branch, even though their personnel were directly contacted by

prosecutors involved in the DeBella case.

BOA made a determination to terminate its correspondent relationship with SAB in 1995. While it significantly reduced the

services it offered to the bank at that time, the relationship

continued for an additional 4 years after that decision was

made.

BNY–IMB, a foreign affiliate of BNY, has been serving as a

conduit for SAB’s Internet gambling clients, even though BNY

does not want to service Internet gambling business.

All three U.S. banks accepted SAB and SANB’s account of

their dispute with the U.S. Government regarding the Fitzgerald affair, with little or no effort to independently verify the

facts.

The history of the relationships with SAB and SANB also reveal

weaknesses in the due diligence and ongoing monitoring practices

of the U.S. correspondents. Fundamental issues regarding the management and structure of the banks appear to have been unknown

to the relationship managers. While all three banks reviewed in

this case study followed up on matters that came to their attention

and one bank attempted to be pro-active in reviewing the relationship, initial due diligence and ongoing monitoring failed to identify

key issues and major problems and controversies that involving

SAB and SANB, resulting in an incomplete information base from

which to assess the relationship.

Chase and BOA initiated a correspondent relationship with

SAB with little or no due diligence, relying on their previous

connections with SANB. The banks failed to recognize the fact

that SAB was an entirely different type of bank than SANB,

with different clientele, different purposes and a different regulator. It presented a potentially different type of correspondent

relationship from SANB and a different set of money laundering vulnerabilities.

Although the banks knew that Rappaport was the beneficial

owner of SAB and SANB, they did not know the identity of all

of the entities in the ownership chain, nor did any inquire why

the ownership of the bank was structured through a series of

trusts and IBCs that were formed in secrecy jurisdictions.

The banks apparently were unaware of the controversial history and activities of a number of board members of SAB and

SANB, and made no inquiries about them.

Banks appear to have been unaware of many of the major

frauds and other illegal activities that used SAB or SANB as

repositories for illicit funds, even when their own institutions

had been used as the conduit for the flow of funds from a particular fraud to SAB or SANB.

Chase was unaware that hundreds of web sites of Internet

gambling clients of SAB were instructing customers to send

578

wagers through the correspondent account at its bank, even

though Internet gambling in the United States is illegal under

U.S. law.

Interviews with the correspondent banks related to the SAB and

SANB relationships once again highlighted a pattern present in

many of the case studies included in this report: non-credit foreign

bank relationships do not receive the same level of attention and

scrutiny as credit relationships, contributing to lapses and oversights in the due diligence and ongoing monitoring process.

For example, the credit risk manager at Chase stated that the

monitoring of non-credit relationships is generally reactive.

Even when an attempt was made to be pro-active in the monitoring of the SAB account, because of the non-credit nature of

the relationship there was not a single person who served as

the focal point for the relationship. The result was that Chase

did not receive timely information from its client, questionable

activities and frauds associated with the account were not

identified and the effort to conduct a coordinated and fully informed review of the relationship was hindered.

The relationship manager at BNY explained that the bank did

not press SANB to get more information about questionable account activity because in the early 1990’s banks were more

concerned with credit risk than vulnerability to money laundering.

The discrepancy in the level of scrutiny given to the different

types of relationships is underscored by the memo written by a

BOA credit manager in response to a request to extend a fully

collateralized revolving line of credit to SAB. His memo raised

questions about the ownership, structure and purpose of the bank

and who controls and monitors its activities. This reflected a level

of scrutiny and evaluation that was often missing in the non-credit

relationships that existed between SAB and SANB and their U.S.

correspondent banks.

579

Case Histories Nos. 9 and 10

M.A. BANK

FEDERAL BANK

M.A. Bank of the Cayman Islands and Federal Bank of the Bahamas are two offshore banks affiliated with larger commercial operations in Argentina. Federal Bank’s license was suspended on

February 13, 2001, by the Bahamian Government after 9 years of

operation; M.A. Bank remains open for business after nearly 10

years of operation. Both banks were shell banks: they had no physical office for conducting banking business with customers, and

they existed through their correspondent relationships. Neither

bank had an Argentinian banking license despite cultivating an Argentinian clientele and Argentinian banking activities and neither

ever underwent an examination by any banking regulator. Yet both

offshore shell banks were able to open U.S. dollar accounts at

Citibank New York, obtain Citibank automated systems for sending international U.S. dollar wire transfers, and move more than

a billion dollars through their U.S. accounts. $7.7 million of that

was illegal drug money in the case of M.A. Bank and $1 million

was bribe money in the case of Federal Bank.

This case history examines the due diligence and monitoring failures of their U.S. correspondent bank, Citibank, which enabled

these two high risk foreign banks to gain entry to the U.S. banking

system. They include Citibank’s failure to realize that both banks

were essentially operating in Argentina without a license, its failure to realize that a $7.7 million seizure order for M.A. Bank targeted illegal drug proceeds from a Mexican drug cartel, its failure

to realize that M.A. Bank operated without basic fiscal controls and

far outside the parameters of normal banking practice, its failure

to learn that Federal Bank had no anti-money laundering program,

and its failure to provide accurate and complete answers to Argentinian bank regulators’ questions about the ownership and activities of Federal Bank.

Information pertaining to M.A. Bank was obtained from documents provided by the Government of the United States and

Citibank, court pleadings, interviews of government officials and

other persons in Argentina, Mexico, the United States and the Cayman Islands, and other materials. Key sources of information were

interviews with an official from the U.S. Federal Reserve Board of

Governors (March and November 2000), relationship managers and

other officials from Citibank (May and October 2000), and copies of

interviews of the principals of M.A. Bank conducted by agents of

the U.S. Customs Service in June 1999. The U.S. Customs Service

conducted an investigation of MAB and M.A. Casa de Cambio as

a follow up to an undercover drug operation. The investigation included interviews, in June 1999, with the principals of MAB and

regulators in Argentina. Much of the Minority Staff’s understanding of the operations of MAB was gained from the records of

those interviews. The investigation also sent written questions to

MAB officials, but they declined to provide any information.

Information pertaining to Federal Bank was obtained from the

bank records of Banco Republica, Federal Bank, and American Exchange Company, provided by Citibank pursuant to subpoena;

580

34 Entities that are part of the M.A. Group include: Mercado Abierto S.A., an over-the-counter

securities broker-dealer that functions primarily as an asset management company, which is the

major owner of all of the other entities in the M.A. Group; M.A. Casa de Cambio, a currency

exchange house; M.A. Valores Sociedad de Bolsa, an entity that operates within the Buenos

Aires stock market; M.A. Capital Markets, a merchant bank that deals with mergers and acquisitions. Mercado Abierto, S.A. owns the entities in the following proportions: MAB (60%); M.A.

Casa de Cambio (97%); M.A. Valores Sociedad de Bolsa (97%); M.A. Capital Markets. [In the

original publication of this report in February 2001, footnote read ‘‘M.A. Capital Markets (97%).

This percentage reported was an error. No percentage of ownership was reported in the documents cited.] Source: ‘‘Basic Information Report,’’ supplied by Citibank, translated from Spanish

by CRS; M.A. Bank Limited Financial Statements and Independent Auditors’ Report for 1998;

and Mercado Abierto, S.A., Annual Report and Financial Statements as of June 30, 1998.

interviews with Citibank officials; interviews with two Members of

the National Congress of the Argentine Republic, Elisa Carrio and

Gustavo Gutierrez, and their staffs; and copies of audits of Banco

Republica conducted by the Central Bank of Argentina, one commenced in 1996, concluded in 1997, and reported on in July 1998

and the other commenced in July 1998 and dated August 1998. The

Minority Staff invited the owners of Federal Bank, both directly (by

letter on September 15, 2000, to Jorge Maschwitz, attorney for the

bank in Uruguay) and through their agents (by letter on January

8, 2001, to the bank’s registered agent, Winterbotham Trust Company Ltd., of Nassau, Bahamas) to provide any information with

respect to the bank and to answer Subcommittee questions. There

has been no response. The Bahamas Central Bank revoked the license of Federal Bank Ltd. on February 13, 2001.

A. THE FACTS

M.A. BANK

M.A. Bank is a shell bank licensed by the Cayman Islands with

no physical office anywhere. M.A. Bank has never been examined

by a regulatory body of any jurisdiction. The owners and officers

of M.A. Bank (‘‘MAB’’) exploited the gaps in the regulation of offshore banks to structure a banking operation with poor controls

and operating procedures that are an invitation for money laundering and tax evasion. This case study shows how inadequate due

diligence and ongoing monitoring by M.A. Bank’s correspondent

bank enabled M.A. Bank to utilize its correspondent relationship to

access the U.S. financial network and engage in highly suspicious

financial transactions for more than 11⁄2 years after assets in its account were seized for illegal activity.

(1) M.A. Bank Ownership and Management

M.A. Bank is part of a group of Argentine finance, investment

and currency exchange entities, collectively known as Mercado

Abierto Group (‘‘the M.A. Group’’ ).34 The M.A. Group is owned and

managed by three individuals: Miguel Iribarne, Aldo Luis Ducler

and Hector Scasserra. These individuals also hold positions as officers in other entities of the M.A. Group, including M.A. Bank. All

three are former government officials. Iribarne worked in the Ministry of Economy for 14 years, attaining the position of Undersecretary for the Economy. Scasserra was the Director of the National

Development Bank, Minister of the Interior and also worked in the

Ministry of Economy. Ducler is a former Secretary of Finance.

581

According to its financial statements, MAB was registered in the

Cayman Islands on September 23, 1991 as Petra Investments

Bank, but one day later it changed its name to M.A. Bank. It was

issued a Category ‘‘B’’ banking license (an offshore banking license)

on October 22, 1991. M.A. Bank’s main activities are listed as those

related to securities trading and the administration of investment

portfolios for its own accounts and its customers’ accounts.

In its financial statements, M.A. Bank reports that it is owned

by Mercado Abierto, S.A., one of the entities that is part of the

Mercado Abierto group, and Sigma Financial Corporation. During

interviews of Ducler, Scassera and Iribarne conducted by agents of

the U.S. Customs Service in June 1999, a review of MAB’s articles

of incorporation showed that 60% of MAB is owned by Mercado

Abierto, S.A. and the remaining 40% is owned by Sigma Financial

Corporation. Upon questioning by a Customs agent, Iribarne revealed that Sigma Financial Corporation, a Cayman Islands company, was owned by Iribarne, Scasserra and Ducler. According to

the Customs interview, Iribarne said that this structure was created for ‘‘tax purposes.’’ Customs agent notes from the interview

state:

Miguel Iribarne explained that the Cayman Islands have rules

about the amount of capital M.A. Bank must have in relation

to deposits. Over the years M.A. Bank has increased their

amount of capital. This makes the profits subject to taxation

in Argentina. So, they received authorization from the Cayman

authorities to establish another corporation that owns 40% of

M.A. Bank. This reduces their taxes in Argentina by 40%.

Miguel Iribarne stated that Sigma Financial is only in the Caymans, so they do not have to pay the taxes in Argentina.

Minutes of a Sigma Board of Director’s meeting lists a former

Mercado Abierto employee as the sole director of Sigma. According

to the Customs interviews, Iribarne told the Customs agent, ‘‘They

did this for ‘tax purposes’ so none of their names would appear on

the documents for Sigma Financial.’’

MAB’s administrative agent in the Caymans is Coutts and Company; MAB has no physical presence and conducts no business

from the Cayman Islands. MAB also has a representative in Uruguay, Elenberg-Guttfraind & Associates.

(2) Financial Information and Primary Activities

The stated primary purpose of MAB is to provide offshore banking and investment services to clients of Mercado Abierto. As described above, the main activities of MAB are trading securities

and the management of investment portfolios. MAB offers clients

access to international markets for the acquisition of bonds or other

investments that they could not acquire through Argentine-regulated investment firms and provides a vehicle for depositing funds

outside of Argentina. According to Citibank officials, because of Argentine financial regulations, financial institutions that are licensed in Argentina are limited in the securities and bonds they

can offer to clients. Therefore, most financial institutions, in order

to provide their clients with a full range of international investment opportunities, establish foreign banking entities that are liVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00591 Fmt 6602 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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35 In March 2000, Senator Levin wrote to the counsel for MAB and requested that the bank

provide a general description of its activities and information on, among other things, its assets

and the number of its clients and accounts. He asked that the bank provide answers to his inquiries by April 26. MAB never provided any information or answers to Senator Levin. In April,

Senator Levin received a copy of a letter sent to Chairman Collins by MAB’s new attorney in

the United States. The attorney referred to Senator Levin’s letter to MAB and stated:

I am not in a position to address your inquiries at this time. I have just been retained on

this case, which has been going on for several years. Obviously I am just now learning about

the facts, and as I am sure you are aware this is a complex case which cannot be mastered

in a moment’s time. I will be meeting with my clients face to face in the very near future

and I will continue in my efforts to review the extensive materials. I will write you again

when I learn the facts of this case. Obviously I cannot comply with your April 26, 2000 deadline.

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

censed in a jurisdiction other than Argentina and are therefore

able to offer clients a broader range of investment opportunities.

The MAB’s 1998 financial statement reported that it had $37 mil- lion in assets and $26 million in deposits at the end of 1998. The

bank did not respond to a request for information about its primary

activities and the number of clients and accounts it serviced.35

(3) M.A. Bank’s Correspondents

MAB had U.S. correspondent accounts with Swiss Bank Corporation (now Union Bank of Switzerland) from January 1992 to May

1995, and with Citibank from September 1994 to March 2000.

MAB also had additional correspondent accounts in Europe and

South America for payments, transfers and settlements involving

foreign currencies and securities.

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

Controls

An MAB official told a U.S. Customs agent that MAB does not

accept unknown clients. To open an account at MAB, MAB said an

individual must be referred by an existing client, already have an

investment with Mercado Abierto or be someone who is known to

the officers of MAB. According to an MAB official, the bank has

know-your-customer (‘‘KYC’’) rules similar to those employed in

banks in the U.S. The Minority Staff obtained a copy of a threepage MAB document titled ‘‘Policies and procedures to prevent

money laundering activities.’’ The document identifies the policies

and procedures for establishing new relationships and servicing accounts. They are organized under four topics: ‘‘Know the Customer,’’ ‘‘Forbidden Transactions,’’ ‘‘Transactions to be closely monitored and reported to the management,’’ and ‘‘Considerations to be

taken when analyzing suspicious transactions.’’ The policies and

procedures included the following: the customer’s true identity

must be known; all suspicious transactions must be immediately

reported to the management; cash deposits and withdrawals are

forbidden. However, as revealed through the interviews of MAB officials by the U.S. Customs Service, top officials at MAB were

aware that these policies and procedures were not followed at

MAB.

(5) Regulatory Oversight

MAB is licensed as a Class B (offshore) bank in the Cayman Islands. Other than its registered agent, it has no physical presence

583

36M.A. Bank’s representative in Uruguay, Elenberg-Gotfraind & Assoc., informed the Minority

Staff that MAB has a ‘‘physical and legal presence and address in Georgetown, Grand Cayman

(Coutts & Co. Cayman Ltd).’’ However, this is nothing more than an agent’s office. M.A. Bank

has no office or staff in the Cayman Islands, and in interviews with the Customs Service, one

of the owners of M.A. Bank stated that MAB had no offices in the Caymans. 37For a general description of the status of anti-money laundering efforts in Argentina, see

the Regulatory Oversight section in the Federal Bank discussion.

in the Cayman Islands, and it is prohibited from doing business

with residents of the Cayman Islands.36 Offshore banks are required to submit annual audited financial statements to the Cayman Islands Monetary Authority (‘‘CIMA’’), the governmental entity that regulates banks in the country, but offshore banks are not

required to keep their records in the Cayman Islands.

In 1991, when M.A. Bank first received its offshore banking license, the Cayman Islands still permitted the licensing of a bank

which was not a branch or subsidiary of another bank, which

planned to keep its employees and banking records outside of the

Cayman Islands, and which planned to have no physical presence

on the island other than a mailing address at a local registered

agent. The Cayman Islands has since discontinued issuing such

bank licenses, but has allowed its existing offshore shell banks to

retain their Cayman licenses. In 2000, for the first time, Cayman

banking authorities began a bank examination process which requires bank examiners, acting on behalf of the government, to conduct an independent inspection of the bank records and operations

of Cayman licensed banks. Prior to this program, Cayman banking

authorities oversaw Cayman banks primarily by analyzing information submitted by those licensed banks or their auditors. The

new Cayman examination program requires an independent review

of records and includes sending Cayman examiners to conduct onsite visits of Cayman banks that keep employees and records outside of the Cayman Islands.37 However, M.A. Bank, despite nearly

10 years of operation, has yet to undergo any bank examination or

site visit by any bank regulator, whether from the Cayman Islands,

Argentina or any other country.

MAB is required to have an agent that represents it in the Cayman Islands, and is responsible for accepting notices from CIMA

and providing information required or requested by the regulatory

authorities. MAB is represented by Coutts and Company. The

Coutts official who handles the MAB account told the Minority

Staff that Coutts’ only function is to serve as a point of contact for

government officials. Coutts does not maintain any records, nor

does it perform any activities with respect to MAB’s banking activities.

Although the M.A. Group operates out of Argentina, MAB is not

licensed to operate in Argentina and is not regulated by the Central Bank of Argentina. According to the Customs interviews, one

of the principals told the U.S. Customs agent that:

. . . they [MAB] do not need a license [in Argentina] because

[MAB] is an offshore bank. Miguel Iribarne told [the Customs

agent] that the administrative offices for M.A. Bank are located in Montevideo, Uruguay . . . When [the Customs agent]

asked, why do they do this? Miguel Iribarne responded that

M.A. Bank is an offshore bank, if they had offices in Argentina

they would be subject to regulation by the Central Bank.

584

38 Records obtained from the Customs Department indicate that Jose Alvarez Tostado, a lieutenant in the Juarez cartel, had telefaxed the undercover agents a list of banks and accounts

that had been established to receive the transfer of the funds. The fax identified 10 different

accounts, including two accounts at Citibank.

MAB has an administrative office in Uruguay at an auditing/consulting firm called Elenberg-Gutfraind & Associates. According to

the principals of Elenberg-Gutfraind, the firm is registered with

the Central Bank of Uruguay as a representative of MAB. However, it does not appear that any type of administrative activities

related to banking or customer services takes place at that office.

In a letter to the Minority Staff, the principals of ElenbergGutfraind explained that their relationship with the M.A. Group

(including MAB), included consulting advice and technical assistance related to audits of the bank. Essentially, the firm ‘‘received

and sent documents and correspondence which are essential for the

fulfillment of the audit.’’ From the information provided, it appears

as if MAB’s administrative office in Uruguay is a representative or

agent office that may maintain documents or records. Neither the

principals of MAB nor the principals of Elenberg-Gutfraind made

any suggestion or offered any information that MAB was licensed

in, or regulated by, Uruguay.

A Special Examiner from the U.S. Federal Reserve Board of Governors who accompanied a U.S. Customs agent during their interviews of MAB owners and officials in June 1999 told the Minority

Staff that the investigation established that MAB did not have a

physical presence anywhere other than Argentina. According to the

Special Examiner, ‘‘M.A. Bank is nothing more than an account

holder at Citibank.’’ The examiner noted that through that account,

MAB can receive and make wire transfers, deposits and withdrawals. According to the examiner, its account is no different from

any checking or savings account an individual would set up, and

through that account MAB could process transactions for all of its

customers.

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

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

In May 1998, the Department of Justice announced the conclusion of a 3-year undercover drug operation called ‘‘Casablanca.’’ In

the undercover operation, U.S. Customs agents infiltrated the

Amado Carillo Fuentes drug organization (‘‘the Juarez cartel’’), posing as money launderers. As part of the operation, the agents

laundered money for the cartel through a number of Mexican and

Venezuelan banks. As an outgrowth of the original operation, the

agents also collected cash from cartel drug operations in the region

of Chicago and laundered the money back to foreign banks and

money houses through correspondent accounts maintained at

banks operating in the United States. Over a period of one year

(May 1997-May 1998), $43 million was wire transferred to specific

accounts identified to the undercover agents by members of the

Juarez cartel.38

The U.S. Government filed seizure warrants for the drug-related

funds in those accounts in May 1998. Among the affected accounts

were two accounts in the New York branch office of Citibank, One

585

39 According to the Complaint for Forfeiture filed by the U.S. Government, the account was

opened up after DiTullio was approached by two individuals, named Jorge Iniguez and Jaime

Martinez-Aryon, who wanted assistance in acquiring real estate in Argentina. Iniguez is a

former Group Supervisor of the Mexican Federal Judicial Police. While in that position, he became involved in the distribution of marijuana in Mexico. In 1991 he was arrested in California

and eventually convicted on Federal charges of conspiracy to import 800 pounds of marijuana

into the United States. In order to facilitate the transfer of funds for the purchase of properties,

DiTullio offered to open an account through which Mr. Iniguez could transfer funds from the

U.S. to Argentina. DiTullio recommended that an account be opened with MAB and/or M.A.

Casa de Cambio and arranged a meeting between himself, Ducler and Iniguez. The account was

opened in Mr. DiTullio’s name because Ducler would not open an account in Mr. Iniguez’ name

because of the source of the funds to be laundered through the account. Instead, Ducler suggested that one or more accounts be opened in DiTullio’s name, and that those accounts be used

to transfer the funds to Argentina. Complaint for Forfeiture (U.S. District Court for the Central

District of California, Western Division, No. cv 00-01493), 2/10/00. 40 Under current law, the funds deposited into a correspondent bank account do not belong

to the depositor but to the bank. Therefore, the government cannot seize the funds based on

the wrongdoing of the depositor. In order to seize the money from the bank’s correspondent account, the government must show that the bank was facilitating the laundering of illicit gains.

Otherwise the bank has an ‘‘innocent bank’’ defense. The only way for the government to seize

the illicit funds, without proving culpability by the bank, is to file a complaint in the jurisdiction

where the depositor has his account, and this is often a foreign jurisdiction.

belonged to M.A. Bank; the other belonged to M.A. Casa de

Cambio. According to a government undercover agent, $7.7 million

in drug proceeds had been deposited in the account of M.A. Bank

and $3.9 million had been transferred into the account of M.A.

Casa de Cambio.

Between August 12, 1997, and January 7, 1998, a total of $3.983

million was transferred into the M.A. Casa de Cambio account at

Citibank New York in eight separate transactions by U.S. Customs

undercover agents acting under instructions from representatives

of the Juarez cartel. Between August 12, 1997, and April 1, 1998

a total of $7.768 million was transferred into the M.A. Bank account at Citibank New York in 18 separate transactions by U.S.

Customs undercover agents acting under instructions from representatives of the Juarez cartel. In seven of the eight transfers to

the Citibank M.A. Casa de Cambio account and in nine of the 18

transfers to the Citibank M.A. Bank account, the wire instructed

that the funds were for the benefit of Nicholas DiTullio. DiTullio

is a real estate agent in Argentina and an account holder at M.A.

Bank. His account was opened on July 10, 1997, approximately one

month before the drug-related transfers started.39

When the U.S. Government presented seizure warrants for the accounts in question, only $1.569 million remained in the MAB account and $234,000 remained in the M.A. Casa De Cambio account.

The remainder of the drug deposits had been wired transferred out

of the accounts to Argentina. After the seizure of the $1.8 million

remaining in the accounts on May 18, 1998, MAB sought return of

this money, based on the defense that it was an innocent bank.40

The U.S. Customs Service carried out an investigation of MAB

and M.A. Casa de Cambio which included interviews, in June 1999,

with the principals of MAB and regulators in Argentina. As a result of the investigation, on February 10, 2000, the U.S. Government filed a complaint to seize the funds in the accounts of MAB

and M.A. Casa de Cambio on the grounds that the officials of the

bank and the Casa de Cambio were aiding the laundering of funds.

The complaint alleged in part:

. . . Dueler caused to be opened one or more accounts at M.A.

Bank, M.A. Casa de Cambio and/or Mercado Abierto in the

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name of DiTullio. It was understood by Dueler, DiTullio and

Iniguez that said accounts would be used to transfer drug proceeds from the United States to Argentina, and that said proceeds would then be paid out of the account(s) to DiTullio for

delivery to Iniguez. The government is informed and believes

and thereon alleges that the opening of the account(s) in

DiTullio’s name was designed to disguise the nature, source

and ownership of the drug proceeds that were to be filtered

through the account(s), and that Dueler was aware of the true

nature and source of the funds, i.e., drugs. In opening the account(s), Dueler intentionally dispensed with virtually all of

the standard internal controls and processes generally required

to open accounts with M.A. Bank and/or M.A. Casa de Cambio.

. . . Drug proceeds belonging to the Juarez Cartel would be

picked up in Chicago, as set forth in paragraph 16 above, and

then wire transferred to the Citibank accounts of M.A. Casa de

Cambio and M.A. Bank, as set forth in paragraphs 17 (a) and

(b) above. The monies would then be credited and paid by M.A.

Casa de Cambio and M.A. Bank to DiTullio.

. . . Despite the various names given as the beneficiaries of

the money transfers listed above, all of the transferred funds

were in fact paid by M.A. Bank and M.A. Casa de Cambio to

Nicolas DiTullio (‘‘DiTullio’’), either in U.S. currency or by

cashier’s check. The government alleges that DiTullio, Dueler,

Iniguez and Martinez-Ayon, among others, were participants in

a money laundering conspiracy, the object of which was to convert drug proceeds from the Chicago pickups into currency and

checks issued by M.A. Bank and M.A. Casa de Cambio in Argentina.

. . . Based upon the above facts, there is probable cause to believe that M.A. Bank and M.A. Casa de Cambio knowingly

used the Citibank accounts referred to in paragraphs 17 (a)

and (b) to launder money in violation of 18 U.S.C. §§ 1956

(a)(1), 1956 (b) and 1957. Accordingly, there is further probable

cause to believe that funds contained in the above-referenced

accounts are subject to seizure and forfeiture to the United

States pursuant to 18 U.S.C. § 981(a) (1). Additionally, to the

extent that the specific funds contained in the accounts are not

the same monies that were involved in the money laundering

transactions, there is probable cause to believe that those

funds have merely replaced identical property previously on

deposit in the accounts (which identical property was in fact

involved in money laundering) and are therefore subject to seizure and forfeiture to the United States pursuant to 18 U.S.C.

§ 984.

On June 9, 2000, the U.S. Government and the owners of the

M.A. Group reached a settlement on the disposition of $1.8 million

in seized funds. The U.S. Government retained $1.2 million and the

owners of the M.A. Group received $600,000. Subsequent to the

settlement, Aldo Ducler, one of the owners of the M.A. Group and

MAB, placed a full page advertisement in the Argentine newspaper, La Nacion. The advertisement, entitled, ‘‘The Truth of the

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41 It, in part, stated:

The conclusions of this exhaustive investigation (by the U.S. Government) resulted in the

signing of a bilateral agreement between the United States, the Department of Justice, and

the Department of Treasury of the United States, and our entities and directors, signed June

9, 2000 and stamped (registered) in the judicial district of California June 18 by Judge Spencer. Under this agreement the Government of the United States desists of any judicial action,

and expressly clarified that there was no culpability or fault by any side. More specifically

it eliminates the possibility of any new legal claim in this case. In addition it implies the recognition and acceptance by the United States that:

—The director of M.A. at all times acted within compliance of all legal applicable laws and

with absolute good faith. —The lack of existence at all times of any knowledge or suspicion on our side about the alleged illicit origin of the funds, which came in all cases from first rate U.S. banking institutions operating within the territories of the United States. —The collaboration we gave with our lawyers since the beginning of the investigations, collaboration that has been underscored and duly appreciated by the United States. This was

shown in a letter that [Assistant U.S. Attorney] Steven Welk sent our lawyer, in which

(naming us explicitly) he transmitted to us his appreciation for the attention received in

Buenos Aires and our cooperation in the investigation. This language in a letter that has

a letterhead of the U.S. Justice Department and with a signature of who is acting in the

name of the [U.S. Attorney for the Central District of California] (Alejandro Mayorkas)

would be unthinkable if the government of the United States did not have the conviction

that it had been dealing with honorable people that don’t have anything to do with money

laundering.

Facts’’ portrayed the settlement agreement with the United States

as a vindication of the actions of MAB and its owners.41

On December 26, 2000, the Acting Director of the Office of International Affairs of the U.S. Department of Justice sent a letter to

Dr. Jose Nicasio Dibur of the Ministry of Justice in Argentina concerning the resolution of the action taken by the United States

against MAB and its owners and refuting the claim of vindication

by Ducler. In the letter, the Acting Director wrote:

It was agreed that the consent judgment did not constitute an

admission of liability or wrongdoing on the part of the claimants. Id. At lines 3–6. At the same time, however, the consent

judgment did not constitute an agreement by the United States

that the claimants committed no illegal acts, or that the claimants lacked guilty knowledge of the illegal acts described in the

complaint.

. . . The essential purpose of the consent judgment was to divide the seized funds while leaving open the question of whether the claimants committed or, were knowledgeable of, the illegal acts described in the complaint. This is not particularly unusual.

. . . In essence, the parties ‘‘agreed to disagree’’ concerning

that question. That being said, it should be noted that this office would not have entered into the consent judgment unless

it believed that there was a valid factual basis for the forfeiture of the funds.

. . . The consent judgment applied only to the civil forfeiture

case in which it was entered. It did not provide for immunity

for any party (corporate or individual) with respect to potential

criminal conduct. The United States made no representations

whatsoever about the further investigation or prosecution concerning the criminal conduct described in the complaint.

. . . However, the consent judgment is not evidence that the

United States exonerated the M.A. entities or their principals

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or that the government believed that the allegations or the

complaint were not true.

(b) Unsound and Illegal Banking Practices

In June 1999, representatives of the U.S. Customs Service and

the U.S. Federal Reserve Board of Governors traveled to Argentina

and interviewed officials of the Argentine Central Bank (‘‘BCRA’’),

MAB, and Nicolas DiTullio. MAB officials described to the Customs

agent how MAB serviced its clients’ accounts and, in particular,

how it handled transactions of DiTullio. The explanations offered

by the MAB owners reveal banking practices that were highly vulnerable to money laundering and far outside the parameters of normal banking practice.

M.A. Group officials said that M.A. Bank had KYC procedures

similar to those at U.S. banks and that individuals can only open

accounts at MAB if they are referred from an existing client, are

already an investment client of M.A. Group, or are known to the

officers of MAB. DiTullio was not required to provide references or

undergo a credit check because his name was well known in the

real estate field, and he was a long-time acquaintance of Ducler,

Iribarne and Scasserra.

Operation in violation of Argentine banking law. According

to the Customs agent’s interviews, officials of the BCRA stated

MAB is not licensed to operate as a bank in Argentina. They said

it can operate as a client of another bank (an account holder like

anyone else), but it is not allowed to conduct banking business in

Argentina: It cannot take in deposits or dispense withdrawals. Yet,

it appears that MAB did accept deposits and dispense withdrawals

to its customers in Buenos Aires at the offices of the M.A. Group.

During a tour of the Mercado Abierto offices, a Customs agent

asked Iribarne, one of the owners and the President of MAB, if the

teller window and the vault in the M.A. Casa de Cambio section

of the offices was the place he, as a customer of MAB, would bring

funds and have MAB wire the money somewhere else. According to

the Customs interviews:

Iribarne said yes that is correct. They, M.A. Bank, would keep

the money in the vault until they could transport it to the

bank, after which they would transport the money.

. . . [The Customs agent] also asked if he received money from

the United States as a customer of M.A. Bank, would someone

from Mercado Abierto pick up the cash at the bank in Argentina, bring it to Mercado Abierto and place the money in the

vault, and would he receive the money at the windows right

here. Iribarne said that is correct.

During the interviews, the Special Examiner from the Federal

Reserve Board of Governors asked MAB officials how a customer

could receive money in Argentina if MAB did not have a branch or

an account in Argentina. According to the Customs record of the

interview, Iribarne explained how the process worked:

1) For example, Nicolas DiTullio sends the M.A. Bank account

at Citibank in the United States $100,000.

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2) If Mercado Abierto has the cash in their vault in Argentina,

Nicolas DiTullio comes into the Mercado Abierto offices and

they would give him the $100,000 in cash at the teller window.

Nicolas DiTullio signs the receipt and leaves.

3) If Mercado Abierto does not have the cash, they contact a

licensed bank or Cambio in Argentina that has a branch in the

U.S. (For example purposes, Bank Boston). They tell Bank Boston that they (M.A. Bank) are going to wire $100,000 to the

Bank Boston Branch in the U.S. Bank Boston receives the wire

in the U.S. and holds the funds in a temporary account for

M.A. Group Bank. Then someone from M.A. Bank officer [sic]

goes into Bank Boston in Argentina. Bank Boston, Argentina,

checks to make sure they have received the wire in the U.S.

and then releases the $100,000 in cash to the M.A. Bank officer. The officer takes the cash back to Mercado Abierto and

places the money in the vault until Nicolas DuTullio arrives to

receive the $100,000.

An MAB officer and accountant told the Customs agent that

there is no account for MAB in Argentina, so they always use other

institutions. When a Customs agent asked if records are kept for

all MAB transactions of $10,000 or more, as required by the BCRA,

Iribarne, according to the interview records, responded that:

They do not have to report any of the M.A. Bank transactions

to the Central Bank or keep a record . . . because the money

does not come into Argentina . . . if a bank is licensed in Argentina they would have to report the transaction and keep the

log, but an offshore bank like M.A. Bank does not. This is because the wire transfer activity takes place offshore using

‘‘undeclared’’ funds. The report would be the responsibility of

Bank Boston, if and when they transferred the $100,000 to Argentina to cover the withdrawal.

The account officer told the U.S. Customs agent that the financial transactions of all of M.A. Group’s subsidiaries were run

through a central treasurer’s office. All transactions for all of the

entities in the M.A. Group are conducted in bulk during the day

and one company can lend money to another company as needed

to help it meet commitments. At the end of the day the treasurer

records the transactions in the proper set of books.

The U.S. Government also obtained documentary evidence that

M.A. Bank was conducting banking operations in Argentina. According to the Special Examiner from the Federal Reserve Board

of Governors, the U.S. Government received material from MAB

that included deposit and withdrawal tickets all signed by DiTullio.

According to the examiner, when the examiner asked the MAB

principals if they had a license to operate MAB in Argentina, they

told the examiner that performing the transactions was a service

they provided to their clients.

Pseudonym accounts. Many of the wire transfers made to

DiTullio’s account at MAB were sent to MAB’s correspondent account at Citibank. The affidavit of a Custom’s agent, submitted in

support of the seizure warrant for funds in MAB’s account at

Citibank New York, disclosed that many of the wire transfers that

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were credited to DiTullio’s account at MAB identified entities other

than MAB as the beneficiary of the transfer, and the entity identified in the ‘‘for the benefit of’’ column often was someone other

than DiTullio. Oftentimes, the only correct information on the wire

transfer documentation was MAB’s correspondent account number.

Despite these inaccuracies, Citibank did not reject the transfers or

return the money to the originator but credited the funds to MAB’s

account. MAB then credited them to DiTullio’s account.

When the Customs agent asked the owners of MAB how they

knew to credit the transfers to DiTullio’s account and not to someone else’s, Iribarne said that DiTullio had advised them in advance

of the amounts that would be sent. When asked again by the Customs agent how the bank knew to credit DiTullio’s account when

the name of the party to be credited on the wire was a different

name from DiTullio’s, Iribarne said they were able to match the

date and time of the transfers with letters DiTullio sent to M.A.

Bank notifying the bank of incoming funds. Yet, the report of the

Customs agent noted that the letters notifying MAB of forthcoming

wire transfers to be sent by DiTullio were provided several days before the undercover operation wired the funds, and the letters did

not list a date when the transfers would occur. These omissions

raise a question of how the M.A. Bank officials knew to credit the

DiTullio account.

Moreover, MAB owners indicated that such transactions were

regular occurrences at the bank. According to the Customs interviews, the owners of MAB stated that they regularly received ‘‘fantasy names’’ on wire transfers and used the amount and date to

match them to client deposit notices:

Iribarne went on to explain that they (M.A. Bank) normally receive many ‘‘fantasy names’’ on the wire transfers they receive,

so they just use the amount and date to match them to the

proper client. When [the Customs agent] asked about these

‘‘fantasy names,’’ Miguel Iribarne said clients do this so the

funds are not ‘‘regulated.’’ Miguel Iribarne also explained that

it is also normal for clients to wire transfer money to M.A.

Bank and leave the beneficiary information completely off the

wire transfer instruction, and M.A. Bank still matches the

money to the client.

According to the Special Examiner from the Federal Reserve

Board of Governors, the practice described by the MAB owner violates normal banking practice. The examiner noted that if a bank

received a wire transfer on which the name of the party to be credited was a different name from the name of the account holder who

told the bank a wire transfer would be made to their account, the

bank would generally call the account holder to confirm where the

funds are to be credited. The bank would also ask the account holder why a third party would have money transferred into their account.

Servicing illicit funds. In discussing how they handled accounts of DiTullio and others when the wire transfer contained incorrect or no beneficiary information, the bank owners were very

clear that they believed that the clients were doing this to avoid

taxes. According to the Customs interviews:

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[The Customs agent] asked, what if two clients claim the same

amount of money, or some client claims that money had been

sent and M.A. Bank could not find the transfer amid all the

similar transfers? Miguel Iribarne said they have never had

this problem. Miguel Iribarne stressed that their clients trust

the bank, ‘‘especially the non-declared funds.’’ [The Customs

agent] inquired if the funds were non-declared for tax purposes, and Miguel Iribarne said yes.

At one point, Iribarne told the Customs agent that he believed

that all offshore accounts belonged to people avoiding taxes and

that the money may sometimes come from other illegal sources as

well:

[The Customs agent] mentioned the offshore, unregulated

funds. Miguel Iribarne told [the Customs agent] that he believes that all offshore accounts belonged to people avoiding

taxes. Miguel Iribarne said maybe the money sometimes comes

from other illegal activities as well. [The Customs agent] asked

him if he thought M.A. Bank’s clients were hiding money to

avoid taxes? Miguel Iribarne said sure, most of the customers

have overseas account [sic] so they do not have to report income. Miguel Iribarne said he does not care. The customers are

the ones not reporting, not him.

Falsification of withdrawal records. One of the ways

DiTullio withdrew money from M.A. Bank was in cash. According

to Iribarne, DiTullio would call and tell M.A. Bank he would be

coming in to withdraw money, and then he would show up and sign

a withdrawal receipt when he withdrew the money. The owners of

MAB provided the Customs agent with copies of the withdrawal

slips that had been completed and signed by DiTullio. The Minority

Staff received a copy of one of those slips. The form appeared as

follows:

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As can be seen from the form, while MAB’s name and address

is included in the typewritten statement on the form, it is not imprinted on the form itself. The withdrawal slip is not a preprinted

slip that banks generally produce and make available to all customers. Rather, it is a form that appears to have been produced on

a typewriter or printer with places to insert the amount received

and the name and account number of the client.

In reviewing the withdrawal receipts signed by DiTullio, the Customs agent asked why the receipts looked different from the M.A.

Casa de Cambio receipts, which appeared more official. According

to the Customs interviews:

Iribarne said that the M.A. Bank receipts are a private receipt.

The transactions are not reportable to the government, so they

can generate them any way they want. [The Customs agent]

asked, why is Euro-American Finance printed on the receipts

(it looks like a receipt Nicolas DiTullio generated)? Miguel

Iribarne said the form is in the computer; Nicolas DiTullio can

ask to have anything put on the receipt and they would do it,

they did not care. [The Customs agent] asked about EuroAmerican Finance. Hector Scassera [one of the other owners of

MAB] said Nicolas DiTullio did not want the local tax authorities to know about, and tax him on, the money coming from

the United States. Euro-American is a company name Nicolas

DiTullio uses to avoid the tax authorities.

According to the Special Examiner from the Federal Reserve

Board of Governors, several aspects of the withdrawal process described by the owner of MAB were not in accordance with standard

banking practices. According to the examiner, typically the institution’s name, address and other information about the bank would

be preprinted on a withdrawal form. No such information was on

the withdrawal forms signed by DiTullio. The form was simply a

typewritten note. Apparently, MAB had no withdrawal slips. The

Minority Staff learned that the examiner asked someone at the

teller window at M.A. Group’s offices for some deposit/withdrawal

tickets and was told that they did not have any. The examiner also

noted that in the case of DiTullio, the form was printed in English,

even though DiTullio spoke only Spanish.

The Special Examiner also noted that the forms were signed by

DiTullio as if he were an individual authorized by the company,

Euro-American Finance, to make withdrawals. This leaves the impression it is Euro-American Finance that has the account at MAB

and is the entity making the withdrawal. However, the examiner

pointed out and the owners of MAB acknowledged, that the funds

were being withdrawn by DiTullio from his own account. The examiner stated that this was not typical banking practice, noting

that in the United States, individuals do not sign withdrawal slips

on behalf of an organization that does not have an account at the

bank. The examiner said: ‘‘it just isn’t done.’’ The examiner said

that DiTullio told the Customs agent that he had signed a number

of the withdrawal forms in advance of any withdrawal.

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(7) Correspondent Account at Citibank

MAB maintained an account with Citibank from September 1994 through March 2000. During that time period, $1.8 billion moved

through its account. Citibank had maintained a relationship with

the M.A. Group since 1989. Over the years, various subsidiaries of

the M.A. Group had established accounts at Citibank. In addition

to MAB, other M.A. subsidiaries, including Mercado Abierto, M.A.

Casa de Cambio and M.A. Valores, had accounts at Citibank New

York. All of the accounts with the M.A. Group and its subsidiaries

were terminated in March 2000. The MAB account with Citibank

in New York was limited to non-credit, electronic banking services.

Citibank Organization for Correspondent Accounts in Argentina. Correspondent banking activities at Citibank are located

in the Financial Institutions Group. Correspondent accounts in Argentina are located in the division covering Central and Eastern

Europe, the Middle East, Africa, the Indian subcontinent and Latin

America (‘‘CEEMEA’’) which is responsible for overseeing and administering correspondent banking relationships including support

services in connection with wire transfer operations. According to

the marketing head for the Latin American Unit in the Financial

Institutions Group in New York, in the 1980s Citibank instituted

the Troika system for account management to improve coordination

and communication. Under that approach, responsibility for an account opened in the United States by a financial institution in a

foreign country was shared between (1) an account officer in the

country where the client institution is located, (2) an account officer

in the New York office and (3) a service account officer in New

York.

The lead for the account is the country account officer in the

country where the client is located. That officer is responsible for

account opening, including due diligence and KYC information, and

maintaining contact with the customer to ensure that the relationship is operating smoothly and to market new products and services. According to the marketing head, the New York officers focused on customer service, product information, and administration

of account activities. In addition, it was the responsibility of the

New York office to look at overdrafts and credit issues associated

with the account. Such issues were supposed to be reported to the

country account officer, who had the authority to approve overdrafts and credit. According to the marketing head, it was not the

responsibility of the New York office to check monthly statements

or verify transactions.

Monitoring for money laundering and suspicious activity was the

responsibility of the anti-money laundering unit in Tampa. As with

overdraft and credit issues, any money laundering or suspicious activity issues are communicated to the country account officer, and

the Financial Institutions compliance officer in New York might be

notified and brought into the matter; the New York service officers

may not hear of such matters. The anti-money laundering unit in

Tampa had systems to identify high risk countries and generic high

risk institutions, but not specific clients. According to the marketing head, until about one year ago, Citibank did not have a system in place to determine if correspondent clients should be classified as high risk. Citibank is now developing account profiles to

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identify high risk customers, who will be subjected to tighter monitoring and controls.

According to an investigator assigned to Citibank’s anti-money

laundering unit in Tampa, the unit reviews U.S. dollar based fund

transfers that fall within parameters that Citibank establishes regarding dollar amounts, high risk countries and institutions that

may be indicative of money laundering. All wire transfer activities

falling within the parameters are sent to Tampa for review. The

transactions are then sorted by different categories and reviewed

for anomalous behavior. Tampa receives records of approximately

400,000 wire transfers per month that fall within the general parameters. They are then reviewed by two people for certain characteristics that would indicate anomalous behavior. When such behavior is identified and it is determined that further investigation

is warranted, the unit will develop an investigative file. Investigative files may also be created if other events or activities cause the

unit to decide to conduct a review of a client account.

The unit head for Financial Institutions in Argentina told the

Minority Staff that the bank in Argentina is divided into products

and relationships. The relationship manager team is responsible

for the coordination of the sale of products and has the primary responsibility for marketing products. The relationship managers

also have responsibility for credit and KYC issues. The relationship

managers report to the unit head for Financial Institutions. The

unit manages approximately 70 relationships with financial institutions whose main offices are located in Argentina. It also covers relationships with another 30 institutions located in Argentina whose

main offices are in other foreign countries. (In those cases, the

Citibank office in the country where the client’s main office is located has the lead on the relationship). The largest number of relationships is with insurance companies and the second category of

relationships is with banks.

Daily operations of the client correspondent accounts are handled

by the cash management and customer service units in Argentina,

with assistance from Citibank in New York. Marketing and decisions on accepting and expanding relationships are the responsibility of the Argentine relationship managers, with approval from

the unit head and the compliance department.

According to the Financial Institutions unit head, the primary

document reflecting the due diligence information for a client is the

Basic Information Report (‘‘BIR’’), which contains information on

the history and nature of the institution, its ownership and its financial condition. In addition, a client folder will contain a checklist of items or information that must be obtained. The Financial

Institutions unit head said that Citibank also takes into consideration other, more qualitative factors that do not appear on any

checklist and are not firm requirements, such as the institution’s

reputation, and expectation of a minimum of 5 years of operating

history in the market, audited balance sheets, certain minimum

amounts of equity and whether the institution is known to some

senior Citibank officials.

Ongoing monitoring consists of annual updates of the BIR and

visits with the client both over the telephone and in person. However, the Financial Institutions unit head told Minority Staff that

595

Citibank Argentina does not review monthly account statements of

the clients, that Citibank New York monitored the accounts. The

market head in Citibank New York disagreed with that observation. He told Minority Staff that Citibank New York only monitored the account for overdrafts and credit issues, and Citibank

New York did not monitor the monthly accounts. He said the

Citibank office in Tampa was responsible for money laundering

oversight. The head of the Financial Institutions unit in Citibank

Argentina told the Minority Staff that he estimated that the relationship manager for MAB may have met personally with MAB officials four times per year and spoken with them over the telephone many other times. He noted that the amount of attention

given to a client was related to the size of the relationship. He indicated MAB was a rather small client because it had only one product, electronic banking services.

Citibank Policy on Shell and Offshore Correspondent Accounts. When Citibank was asked in the Minority Staff survey of

correspondent banking whether Citibank would ‘‘as a policy matter,

establish a correspondent relationship with a bank (a) that does

not have a fixed physical presence in any location, such as a shell

bank,’’ Citibank’s response was:

The GCIB [Global Corporate and Investment Bank] does not

establish relationships with customer banks that have no fixed

physical presence in a particular location or with banks whose

licenses require them to operate exclusively outside the jurisdiction in which they are licensed.

When Citibank was asked in the survey whether Citibank would

‘‘establish a correspondent relationship with a bank (b) whose only

license requires the bank to operate outside the licensing jurisdiction,’’ Citibank’s response was:

The GCIB does not open bank accounts for banks that have no

fixed physical presence in a particular location or with banks

whose licenses require them to operate exclusively outside the

jurisdiction in which they are licensed. However the GCIB may

open a bank account for an existing customer bank’s off-shore

subsidiaries or affiliates.

When asked how Citibank Argentina could have accepted the

correspondent account of MAB (which is not an affiliate or subsidiary of a bank but of a securities firm) in light of Citibank’s policies as expressed in its survey response prepared by its Vice President and Director of Compliance for the Global Corporate and Investment Bank, the Financial Institutions unit head said he did

not know if what the Vice President reported as Citibank policy

was correct. He noted that the opening of the MAB account was approved by the Citibank Compliance Department. Citibank representatives at the meeting also noted that as a subsidiary of M.A,

MAB activities were included as part of M.A. Group’s report to its

Argentine regulators. However, the Minority Staff pointed out that

the regulatory agency for a securities firm is different from a regulatory agency for a bank, and such reporting cannot guarantee an

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42 Approximately one month after this interview with the head of the Financial Institutions

unit, an employee at Citibank in Argentina wrote the Vice President of Financial Institutions

in New York that the Argentina office was implementing a strategy for all of its Financial Institution customers. The letter stated that Citibank Argentina was beginning to close all accounts

for offshore vehicles that were not consolidated under a local bank, and consequently not regulated by the Central Bank of Argentina. 42The concern expressed by the Minority Staff was with respect to banks that have no physical presence anywhere and are not branches or subsidiaries of another bank with a physical

presence in another jurisdiction.

examination of the critical and potentially vulnerable areas of a

banking operations.42

Four months after this issue was discussed and Minority Staff

had asked for a clarification of the policy, legal counsel for Citibank

wrote to the Minority Staff on September 29, 2000, to re-state

Citibank’s policy. Legal counsel informed Minority Staff that the

policy presented in Citibank’s survey response was ‘‘incomplete and

had created a misunderstanding about the circumstances under

which Citibank has account relationships with offshore banks.’’ Citibank’s counsel went on to describe a modified policy with respect to offshore banks that have no physical presence in the offshore jurisdiction:43

I indicated that our response to question 11 (as well as question 10) should have made clear that Citibank would and does

open accounts for off-shore subsidiaries or affiliates of existing

customer financial institutions, not just existing customer

banks as our response indicated, and that these off-shore relationships could be established without regard to whether the

offshore entity had a fixed physical presence in the off-shore location. M.A. Bank fits this scenario, as Mercado Abierto, S.A.,

an Argentine financial institution that has had an account

with Citibank since 1989, is the parent of M.A. Bank . . .

. . . We remain uncertain about whether attaching significance to physical presence is meaningful when one considers

the nature of offshore banks.

. . . Offshore affiliates typically service the existing customers

of the parent institution; they do not do business with residents of the offshore jurisdiction or transact business in the

local offshore currency, or seek to establish an independent

customer base. Their function is to serve as registries or booking vehicles for transactions arranged and managed from onshore jurisdictions. Accordingly, there is little need for a staff

or physical facility and there is nothing inherently suspicious

about the failure of an offshore affiliate to have a physical

presence in the offshore jurisdiction.

Of course these vehicles are to be distinguished from banks

with offshore licenses that are not affiliated with an onshore

financial institution. For such banks, physical presence may be

an indicator of a legitimate operation (and the absence of a

physical presence may suggest that further inquiry into the legitimacy of such a bank’s operations is warranted).

In Citibank’s view, the key to ensuring the viability and reputability of an offshore bank that is an affiliate of a financial

institution is fulsome Know Your Customer due diligence with

regard to the financial institution group. Regulatory oversight

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by offshore jurisdictions is uneven and cannot be relied on uniformly. Further, although financial institutions generally report the activities of their affiliates, including offshore affiliates, in consolidated financials that typically are presented to

regulators, in cases where the parent financial institution is

not a bank the oversight by the banking regulator in the onshore jurisdiction may not occur in these circumstances, although non-banking regulators may provide some limited oversight. For these reasons, careful review of the reputation and

management of the parent or affiliated institution is likely to

be the most important indicator of a legitimate offshore operation. And for these reasons it is Citibank’s policy to avoid account relationships with offshore entities that are incorporated

by an individual or entity that is unaffiliated with a larger,

reputable bank or financial institution.

Offshore entities that are primarily booking entities requiring

minimal personnel or physical operations often are managed

from a location that is closer to the jurisdiction of the parent

institution than the offshore jurisdiction. Your staff have indicated skepticism about the legitimacy of such ‘‘back offices’’ and inquired about the kinds of activity in which one might expect them to engage. Indeed, there seems to be some sense

that a test of legitimacy might be whether a back office has the

capacity to print and mail statements. The need to print and

mail statements will depend on the customer base of the offshore and the nature of the business, and may defeat the purposes of offshore banking—confidentiality and tax planning.

Mailing statements for activity in the private bank account of

a customer, for example, risks breaches in the confidentiality

as well as triggering a taxable event. Private bank customers

often do not receive regular statements but rather rely on the

personal relationship with the private banker for information

about the status of their account.

In sum, local banks and financial institutions establish offshore affiliates for a number of legitimate purposes. Where the

affiliate is a booking vehicle, the transactions may be managed

from an onshore jurisdiction and there may be no need for a

physical presence in the offshore jurisdiction. Thus, in Citibank’s view, instead of looking to the existence or non-existence of a physical presence to determine the legitimacy of the

offshore entity, it is more useful to look to the character and

conduct of the larger institution with which it is affiliated.

Opening the M.A. Bank account. When the MAB account was

opened in 1994, Citibank had an existing relationship with MAB’s

parent, M.A. Group, since 1989. The Financial Institutions unit

head told the Minority Staff that because of the existing relationship with M.A. Group, Citibank had relied on the due diligence and

existing knowledge of the parent company to substitute for some of

the due diligence it would normally perform on a new account. For

example, Citibank did not ask MAB for references for its previous

correspondent bank. It did not enforce the 5 year operating requirement because, as the head of the Financial Institutions unit explained, the requirement is designed to ensure the potential client

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has experience in the market place, and since MAB’s parent had

been in operation since 1983, that was fulfilled. The Financial Institutions unit head was not sure if Citibank received a copy of

MAB’s license. He explained that Citibank had received an audited

financial statement that contained a note stating that MAB was incorporated in, and had a license from, the Cayman Islands.

It is unclear whether Citibank fully understood the nature of

MAB’s operations. The July 1994 Basic Information Report filled

out for MAB contains the statement: ‘‘The entity appears in

Mercado Abierto balance sheet as a subsidiary so it is regulated by

Argentine Central Bank.’’ However, an official of the Argentine

Central Bank (‘‘BCRA’’) told U.S. Customs agents that MAB was

not licensed in Argentina, it was not regulated by the BCRA, and

it was not authorized to operate in Argentina. MAB’s President,

Iribarne, told Customs agents the same thing. Moreover, as the

unit head had explained to the Minority Staff, MAB was specifically created as an entity that was not regulated by the Argentine

authorities so that it could sell international securities and bonds

that it would be precluded from purchasing and selling if it were

subject to Argentine regulations.

In light of Mr. Iribarne’s statements to the Customs agents that

indicated that MAB was operating out of M.A.’s headquarters in

Buenos Aires, the Minority Staff asked the head of the Financial

Institutions unit if Citibank believed that MAB had authority to

operate in Argentina. The Financial Institutions unit head told the

Minority Staff that he was not sure, that it was a legal matter.

However he said he did not think that anyone at Citibank ever believed that MAB operated as a bank in Argentina.

When asked if he knew or believed that MAB operated as a bank

somewhere else, the Financial Institutions unit head stated that

MAB operated with Argentine clients, but not in Argentina. He

said that since he was not involved in the detailed matters of accounts he really did not know, but he believed MAB had a back office operation in Uruguay. He noted that most Argentine financial

institutions have back office operations in Uruguay for their Cayman Island facilities. He said the main reason for banks selecting

Uruguay is that it would be too expensive to license a bank in Argentina if banking was not the principle purpose of the financial

institution, and operating out of the Cayman Islands would be too

far from the customers. He said it was a matter of cost and proximity that attracted banks to Uruguay.

The Financial Institutions unit head said he was not sure if anyone at Citibank had confirmed that MAB had a real operation in

Uruguay. When asked, the Financial Institutions unit head stated

that no one visited an MAB office in Uruguay as part of the initial

due diligence on the bank. He said the decision makers of MAB

were in Buenos Aires, so he did not think it made sense to look

at a back office. Instead, Citibank had contact with the decision

makers of the parent company.

When asked if anyone from Citibank had ever gone to Uruguay

to confirm that MAB had a back office operation in that country,

the Financial Institutions unit head said ‘‘no.’’ The Minority Staff

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44The market head from New York told the Minority Staff that when Citibank installed computer equipment for MAB to enable MAB to use certain Citibank banking services, the equipment was installed in Argentina. This could be a further sign that there was no back office operation in Uruguay. 45The marketing head in New York told the Minority Staff that although records indicate that

he, along with personnel in Argentina, were informed of the seizure shortly after it occurred

in 1998, he did not recall being advised of the seizure at that time.

asked that Citibank try to confirm the existence of such an office,

but Citibank never did so.44

Citibank’s Response to Seizure Warrants. As noted above, in

May 1998 the U.S. Customs Service presented Citibank New York

with seizure warrants for funds in the accounts of MAB and M.A.

Casa de Cambio. $1.8 million was seized on May 18, 1998. The

order was for the seizure of funds existing in the accounts at the

time. There was no requirement or request for Citibank to freeze

or close the accounts.

Citibank documents show that at the time of the seizure,

Citibank New York informed Citibank Argentina of the seizure,

and Citibank Argentina asked MAB about the matter. According to

the Financial Institutions unit head in Argentina, Citibank did not

connect the seizure warrant with illegal activity. When Citibank

representatives in Argentina spoke to MAB officials at the time,

the MAB officials indicated that they were surprised by the action

and did not know why the funds were seized.45

According to the marketing head in New York and the Financial

Institutions unit head in Argentina, neither Citibank New York nor

Citibank Argentina learned that illegal funds were the basis for the

seizure until November 1999, nearly 11⁄2 years after the seizure

took place.

In August 1999, the Subcommittee subpoenaed Citibank records

and statements of the MAB and M.A. Casa de Cambio accounts. As

a result of the subpoena, the market head in New York called the

Financial Institutions unit head in Argentina and reported that

Citibank lawyers in New York were asking about the possibility of

closing the MAB account because of the seizure in 1998. The market head in New York called Argentina to inquire about the account and why the Subcommittee would be subpoenaing its records.

The Financial Institutions unit head in Argentina told the Minority

Staff that as a result of the call from New York, he instructed the

relationship manager of the MAB account to find out more about

the seizure action. At that point both the market head in New York

and the unit head in Buenos Aires were still unaware that the seizure was related to an undercover drug operation.

In late October, MAB presented Citibank Argentina with a two

page letter report on activities associated with the seizure. In the

letter, MAB stated: ‘‘Customs is investigating financial transactions

within the United States which are thought to be related with illegal activities.’’ MAB identified DiTullio as the client responsible for

the transfers of the funds that were seized, but did not specifically

mention that the activity was related to drug trafficking. MAB

noted that it had met with and was cooperating with the U.S. Customs Service.

Subsequent to the receipt of the report from MAB, Citibank Argentina sent an e-mail to the market head in New York. The e-mail

recounted the details of the seizure and passed on information that

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apparently had been received from MAB—that it had cooperated

with the Customs Service, the matter was at that time an administrative not a judicial proceeding, and that a resolution was expected soon. The memo concluded with an offer to close the account:

Notwithstanding this and even knowing that the shareholders

are very well known in the market and the company has strict

anti-money laundering control, we would be prepared to close

the DDAs if you consider it necessary.

A decision was made not to close the accounts. According to the

Financial Institutions unit head in Argentina, Citibank had a long

relationship with M.A. Group and there were never any problems

with the account or the entities involved, M.A. Group had a good

reputation in Argentina, and Citibank did not believe that the organization or its officials would knowingly be involved in illegal activities.

The head of Financial Institutions in Argentina told the Subcommittee staff that he subsequently discussed the matter with

two of his superiors in Argentina who instructed him to further investigate the matter and find out what the illegal activity was and

what banks were involved. In November 1999, 18 months after the

seizure warrant was served on Citibank, Citibank Argentina asked

MAB for a copy of the wire transfers that were under investigation

and asked MAB to prepare a copy of all of their documents relating

to the entire matter. The head of the Financial Institutions unit in

Argentina informed the Minority Staff that when Citibank Argentina received the copies of the transactions, he reviewed them and

noticed that the names of the parties involved in the transactions

seemed to him to be strange names for investors in Argentina. He

told the Minority Staff that combined with the information he already had that illegal activity had been involved, he decided to inform the client that Citibank was going to close the MA accounts

in mid-November. At that time, he still did not know that the

transfers in question were related to drug trafficking.

Upon hearing that news, MAB and its attorneys asked to meet

with Citibank officials. On the day of the meeting, Citibank Argentina finally received the information on the case from MAB, which

revealed that the transactions in question were related to drug

trafficking. At the meeting MAB requested Citibank to keep the account open and to keep the information confidential because closing

the account or releasing the information to the public would harm

their reputation and business. MAB officials also said that they

were negotiating the sale of MAB to a European bank and any

news on the closing of the correspondent account or the Customs

investigation would damage the prospects for the sale. The Financial Institutions unit head asked for the name of the European

bank, but MA officials would not provide it. MAB requested a

meeting with Citibank New York. Citibank held off on closing the

account. The Financial Institutions unit head responded that the

issue was a compliance matter for the bank and he could not make

a decision. Although initial efforts were made to arrange the meeting with Citibank New York, it never took place.

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On December 2, 1999, a few days after Citibank received the materials from MAB and held the meeting with its principals, newspaper articles revealed that MAB accounts were frozen because of

drug trafficking. According to the head of the Financial Institutions

unit the action taken by Citibank Argentina at that time was to

send the material to New York and place the matter in the hands

of compliance in New York. Although the Financial Institutions

unit head told the Minority Staff that he had previously made the

decision to close the account, that action was not taken.

On December 2, 1999, the Financial Institutions unit head sent

a memorandum to the head of compliance for Argentina. The

memorandum recounted the history of the MAB case and the steps

that had been taken by Citibank Argentina; it suggested that the

closing of the account was delayed to allow public attention to dissipate. The memo included the following:

From the standpoint of process Citibank Buenos Aires cannot

exercise control over accounts at Citi New York. The follow-up

of that is the task of AML [anti-money laundering] and we

have never received any communication in that regard. The

amounts involved are not very significant because these are individual transfers of US 500,000, insignificant in the movements of the client.

The closing of the account is already decided but the present

situation obliges us to wait a few days until the issue ceases

to be public. The subject is being aired publicly because letters

rotatory have come from the Mexican authorities seeking to recover properties purchased with these funds, since the funds

apparently come from Mexican Banks.

This case can be used politically to pressure the Congress for

prompt passage of laws on money laundering.

We still believe that MA acted in good faith in this case, but

the public character it has taken on will mean hardship for

that entity to the extent of having to close its operations.

On December 3, Citibank formally blocked the MA accounts and

its legal staff conducted an investigation of all of the MA accounts.

Also, on December 3, 1999, the MAB relationship manager in Argentina e-mailed the New York marketing officer who handled the

MAB account. Her communication included the following:

As I anticipated yesterday, this issue has become public. We

are in the middle of an ARR which will ask us about the following points:

1) What AML [anti-money laundering] control procedures does

Citibank New York have? Do we know that there is an AML

unit that controls the transactions, among others those sent

under PUPID. At the appropriate time the BIR of the client in

which the average movements of each of the accounts is shown

was sent. Are there such controls? Is the AML unit in Tampa

the one in charge of doing it or each division in New York?

The next day, Citibank New York responded:

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I have placed a call to [the investigator], AML Unit, Florida for

confirmation of what aspects of AML they monitor.

Citibank NY is currently in the process of establishing an AML

procedure for your FI [Financial Institution] accounts located

in New York. I will forward correspondence separately to you

today to initiate this process.

According to the head of the Financial Institutions unit, Citibank

Argentina was told to close the accounts in February 2000, nearly

21 months after the seizure took place. Between the time the seizure warrant was served on Citibank in 1998 and September 1999,

MAB moved $304 million through its correspondent banking account at Citibank.

Between the service of the seizure warrant in May 1998 and October 1999, Citibank did not follow up on information and communications available to it that would have revealed that the activities being investigated were related to drug trafficking. The seizure

warrant served on Citibank in May 1998 indicated the seizure was

related to money laundering. Citibank informed the Minority Staff

that it did not notice that information when the warrant was

served. The press gave widespread attention to the indictments and

warrants served on numerous U.S. and foreign banks as a result

of Operation Casablanca. Citibank was identified as a recipient of

some warrants. Apparently, those reports did not result in any review or investigation inside of Citibank, otherwise the connection

with the MAB seizure warrant would have been discovered. In

June 1998, MAB wrote to Citibank and asked that Citibank:

Furnish us a report on the origin, cause [and] authority acting

on the attachment order received, as well as all actions taken

by you whose objective was to make disposition of Lloyds in

our current account No. 361111386, as far as possible, providing us an exact copy of the documentary evidence attesting

to the existence of such judicial order and of the transfers or

other actions taken by you as a consequence thereof.

Citibank can find no communications that responded to MAB’s

inquiry. The preparation of a response to MAB would likely have

informed Citibank that the seizure warrant was related to money

laundering associated with drug trafficking.

In 1998 and early 1999, MAB raised the issue of the seizure several times in communications and meetings with Citibank. In May

1998, Scassera and Iribarne told the relationship manager that

they did not know who ordered the transfers and were hiring an

attorney in the United States to represent them in the investigations. In June Citibank received notice from MAB that the U.S.

Customs Service would be requesting monthly statements and all

related documentation from the MAB account. On four subsequent

occasions (August, September and October 1998 and March 1999)

MAB informed Citibank of its communications and contacts with

the Customs Service. None of these contacts caused Citibank to

make additional inquiries or learn what the nature of the action

was and why the Customs Service was so interested in the account.

According to the Financial Institutions unit head, Citibank never

made a connection that the involvement of the Customs Service

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suggested that there might be illegal activity involved. Moreover,

he told the Minority Staff that he had asked the relationship manager to find out what was involved in the situation, but the client

never told her what was really going on. He noted that in March

MAB officials informed the relationship manager that they expected the money to be returned soon.

When asked by the Minority Staff why Citibank did not threaten

to close the account if MAB was not being responsive to its inquiries, the unit head remarked that the client was someone Citibank

totally trusted and therefore never thought the seizure was related

to anything illegal. Also, he told the Minority Staff that MAB told

Citibank that the investigation involved one of it clients. He said

under such circumstances he would have thought the warrant was

related to a commercial matter.

After MAB told Citibank in October 1999 that the Customs investigation involved financial transactions related to illegal activities, it took Citibank nearly one additional month to get the information that provided details on the matter.

Additionally, Minority Staff informed Citibank counsel in late

September or early October 1999 that the basis for the Minority

Staff’s interest in the matter was because the funds seized were

the result of drug transactions related to Operation Casablanca.

Apparently this information was not passed on to the market head

in New York and the head of the Financial Institutions unit in Argentina, because in late October Citibank personnel in New York

and Argentina still did not know the reason for the seizure.

In September 2000, legal counsel for Citibank wrote a letter to

Minority Staff to explain the bank’s response to the seizure warrant. In the letter Citibank informed the Minority Staff that:

Although there was nothing on the face of the warrants that

linked the seizures to narcotics proceeds, the warrants did contain statutory references to 18 U.S.C. Secs. 981 and 984 and

to 18 U.S.C. Secs. 1956 and 1957.

. . . The legal personnel who received the warrants apparently

did not recognize that they were related to money laundering

allegations and simply processed them without pursuing further inquiries.

. . . Neither did the business people in New York recognize

the statutory citations in the warrants as related to money

laundering. Without the benefit of the affidavit, they assumed

these seizure warrants, like the vast majority of those received

by Citibank, were related to a civil dispute, which would not

trigger an in-depth account review.

. . . Citibank did not appreciate until late September 1999

that the seizure warrants were linked to narcotics trafficking.

. . . in response to this letter, members of the Minority Staff

shared with Citibank counsel either a summary of the information contained in Agent Perino’s affidavit or the affidavit itself.

. . . Citibank lawyers made inquiries to the business people

about the status of the M.A. Bank account.

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. . . However, . . . neither Mr. Norena or Mr. Lopez was informed that the inquiry related to allegations that the M.A.

Bank account had been used to launder proceeds of narcotics

trafficking. Mr. Lopez, who thought the seizure warrant was

routine, did not understand the basis for the renewed interest

in the seizure or the implication that the seizure should have

triggered an account review.

. . . Mr. Lopez . . . initiated an inquiry with the principals of

Mercado Abierto who informed him of the allegations that M.A.

Bank had been used to launder drug money and, on November

19, 1999, provided him with Agent Perino’s affidavit. Thereafter, Mr. Lopez recommended that Citibank terminate all of

its relationships with the Mercado Abierto group, even though

the Mercado Abierto principals appeared to be cooperating

with the Customs Service investigation and believed that the

allegations that had led to the seizure of the accounts would

be quickly resolved in their favor.

. . . Citibank itself was not in a position to confirm that any

suspicious account activity or pattern was in fact related to the

laundering of drug money. The Mercado Abierto accounts were

blocked on December 3, 1999, and were formally closed as of

February 21, 2000.

. . . In deciding to open the correspondent banking accounts

that were the subject of May 18, 1998 seizure warrant,

Citibank was dealing with an established customer who enjoyed an excellent reputation as a long-established and significant member of the Argentine financial community.

. . . Mercado Abierto today manages an investment portfolio

worth $400 million and in April of this year ranked seventh

among brokers in the Buenos Aires stock exchange. Further, in

the course of performing its Know Your Customer due diligence, Citibank reviewed anti-money laundering policies that

had been adopted by Mercado Abierto.

. . . But what may have happened here, as the Customs Service’s Forfeiture Complaint speculates is that one of the principals ‘‘intentionally dispensed with virtually all of the standard internal controls and processes generally required to open

accounts with M.A. Bank and/or M.A. Casa de Cambio.’’

. . . In circumstances like these, in which a principal is alleged

to have subverted his own institutions internal controls the

most careful scrutiny by Citibank may not be enough to prevent an unscrupulous principal from attempting to abuse the

correspondent banking system once a correspondent account

has been established.

. . . Although we believe that the opening of the M.A. Bank

account was appropriate, Citibank’s failure to undertake a

complete account review in May 1998, when the seizure warrant was first received was not. As a result of the lessons

learned from this episode, Citibank has adopted new procedures to process those seizure warrants that affect its relationships with correspondent banks in emerging markets, like the

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46See organizational charts from 1997 and 1999 at the end of this chapter. 47Monfina S.A. according to Citibank records is owned equally by Raul Moneta, Fernando

Moneta, Alejandra Moneta de Moim, and Alicia Moneta de French. Jorge Rivarola held a 1%

interest in Grupo Moneta as well.

seizure warrants that Citibank received for M.A. Bank and

M.A. Casa de Cambio.

In March 2000, after the MA accounts had been closed, an investigator in Citibank’s anti-money laundering unit conducted a selfinitiated review of all of the MA Group accounts. The investigation

was undertaken after the investigator saw an article about MAB

in a local newspaper. In June he produced a report which included

the following:

According to an article taken from The Miami Herald dated

March 1, 2000, ‘‘Alejandro Ducler, [sic] a former vice minister

of finance for Argentina, allegedly transferred $1.8 million in

drug cartel proceeds. Dulcer [sic] is one of the owners of the

Argentine financial holding firm known as Mercado Abierto,

which owns M.A. Casa de Cambio, M.A. Valores S.A. and M.A.

Bank Limited. All four held accounts with Citibank. . . . After

reviewing the funds transfer activity of the aforementioned

from April 1997 through March 2000, a total of $84,357,473.21

was transferred to the entities mentioned below. The consecutive whole dollar amounts transferred and the nature of the

business contributed to the rise in suspicious activity and ongoing monitoring.’’

The entities identified in that report include some that were engaged in a significant amount of transactions with MAB. Citibank

representatives informed Minority Staff that it was not accurate to

conclude that the $84 million in transactions identified in the AML

review were suspicious. According to Citibank representatives, the

review identified those transactions that involved dollar amounts

and institutions that fell within parameters established by the

anti-money laundering unit. Those parameters are based on information obtained through U.S. Government advisories and other expert opinion on where the bulk of money laundering occurs. According to Citibank representatives, the determination of whether the

$84 million worth of transactions falling within those parameters

were anomalous or suspicious would require more investigation

and analysis. That was not performed. The Minority Staff has since

learned that Citibank did file a Suspicious Activity Report on the

$84 million in transactions.

FEDERAL BANK

(1) Grupo Moneta and Banco Republica

Grupo Moneta, an economic group in Argentina, was, according

to Citibank records, established in December 20, 1977. According

to Citibank documents,46 Grupo Moneta was owned equally (33%

each) by Argentinians Raul Moneta, Benito Lucini, and Monfina,

S.A., an entity owned by the members 47 of the Moneta family. In

October 1983, the Central Bank of Argentina approved the establishment of a wholesale bank in the group, Banco Republica. In

March 1992, the Bahamas approved the establishment of an offVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00615 Fmt 6602 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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48The name of Republica Holdings prior to January 28, 1998, was United Finance Company,

or UFCO. 49Letter dated September 7, 2000, from the Manager of the Bank Supervision Department

of the Central Bank of the Bahamas to the Subcommittee.

shore bank in the group, Federal Bank Ltd. Federal Bank was understood by Citibank officials to be an offshore vehicle for customers of Banco Republica, and its correspondent relationship was

handled by Citibank in that context.

Grupo Moneta was described in a Citibank memorandum in November 1996 as ‘‘one of the most important groups in the country [of Argentina] with consolidated assets of approximately $500 million.’’ According to Citibank documents, it owned at various times

a number of financial entities in addition to Banco Republica and

Federal Bank. These entities which were owned either directly or

through other companies included Adamson Inc.; Republica Holdings,48 which, along with Citibank, owned stock in CEI Citicorp

Holdings, a company which owns stock in various telecommunications and media companies in Argentina; Citiconstrucciones, a

construction company unrelated to Citibank; and International Investments Union, Ltd. Banco Republica also owned a percentage of

CEI Citicorp Holdings and several other entities, including a controlling percentage in two consumer banks, Banco Mendoza and

Banco de Prevision Social.

Citibank had a long-term relationship with Grupo Moneta and

the families of its owners, Raul Moneta and Benito Lucini. This relationship had two primary components: Citibank’s correspondent

relationship with Banco Republica, which included both cash management and credit services; and Citibank’s ownership interest, together with Grupo Moneta, in CEI Citicorp Holdings. Citibank also

maintained accounts for other Grupo Moneta entities, including its

correspondent account with Federal Bank. The financial institutions division of Citibank Argentina, which had responsibility for

correspondent relationships in Argentina, treated its relationship

with Banco Republica and its relationship with Grupo Moneta in

tandem and almost interchangeably, often including an assessment

of the Grupo Moneta relationship as a whole when addressing the

status of Banco Republica. Federal Bank was analyzed by Citibank

as a subset of the Grupo Moneta and Banco Republica relationship.

(2) Federal Bank Ownership

According to the Central Bank of the Bahamas, Federal Bank

was licensed in July 1992 ‘‘to conduct unrestricted banking business from within The Commonwealth of the Bahamas.’’ 49 However

the 1999 annual statement of Federal Bank says its license is restricted to ‘‘conduct banking and trust business with non-residents,’’ making it an offshore bank. This discrepancy was not explained, but the evidence is clear that Federal Bank did not act as

a domestic bank in the Bahamas but confined itself to offshore

banking activities. The Bahamas Central Bank said the registered

office of the bank and the managing agents of the bank are the

Winterbotham Trust Company, Limited, of Nassau.

The Central Bank of the Bahamas provided the Subcommittee

with a document claiming to show the ownership of Federal Bank.

The owners on the document were identified as Abraham Butler,

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50When asked why Federal Bank’s nominee owners had such a wide disparity in the number

of shares each is recorded as owning, the Central Bank said it did not understand the reason

for the records reflecting the differences in shares. 51 Banco Republica did not itself have any direct ownership interest in Federal Bank. Both

banks were entities owned by Grupo Moneta. 52 ‘‘Miami Banks Used for International Money Laundering, Investigation Reveals,’’ by Andres

Oppenheimer, February 5, 2001.

George Knowles, and Philip Beneby, each listed as a banker in

Nassau, Bahamas. Butler is shown as holding 50,000 shares;

Knowles as holding 1,650,000 shares; and Beneby as holding

3,300,000 shares. When the Minority Staff inquired as to the identity of these three persons, the Central Bank said that each of the

individuals is an employee of Lloyds TSP Bank in the Bahamas,

which acted as Federal Bank’s managing agent prior to the

Winterbotham Trust Company. The Central Bank explained that

Bahamas law used to allow individual officers of the registered

agent to serve as nominee owners of the bank being managed. The

Central Bank said that there was no good reason for this practice,

it effectively disguised bank ownership, and the Bahamas no longer

allows it. The Central Bank told the Minority Staff they expect

that by the end of the year, the law will require bank records to

reflect the names of the actual beneficial owners of all banks licensed in the Bahamas that conduct business with the public.50

In a telephone conversation with the head of the Central Bank

of the Bahamas, the Central Bank confirmed to the Minority Staff

that the actual ownership of Federal Bank is similar to that reported by Citibank for Grupo Moneta, with 33% of the shares

owned by Raul Moneta; 33% owned by the members of the Moneta

family; 30% owned by Benito Jaime Lucini; 3% owned by Paulo

Juan Lucini; and 1% owned by Jorge Rivarola. But for the 3% ownership by Paulo Lucini, this information comports with the ownership information contained in the Citibank documents for Grupo

Moneta.51

In a claim directly contradicted by the information provided by

Citibank and the Central Bank of the Bahamas to the Minority

Staff, Raul Moneta is reported as having recently denied any ownership in Federal Bank in an interview with The Miami Herald.52

(3) Financial Information and Primary Activities

In a December 1998 analysis of Banco Republica by Citibank, in

a document entitled a ‘‘Commercial Bank Individual Analysis,’’ the

Resident Vice President of Citibank Argentina described the

sources of Banco Republica’s funding as follows:

The principal source of funding for BR is its base of deposits,

which represents 55% of its funding. Within the composition of

its deposits, we find that the principal type of BR deposit is

CD’s of individuals with substantial assets who trust Raul

Moneta [one of the owners of Banco Republica]. This represents a change with respect to the past, since the number of

deposits of institutional investors has decreased.

Second, 45%, is the lines of credit with foreign banks, which

BR uses frequently for foreign trade transactions. In addition,

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53Translated from Spanish by the Congressional Research Service. 54 By private banking customers, Lopez meant wealthy individual seeking wealth management

services from the bank. 55 Republica Holdings, according to Lopez, has three holdings itself. Grupo Moneta’s CEI

shares, Telephonica Argentina shares, and Telecom shares. He added that sometimes when

Republica Holdings has to pay interest on its money, it gives its shares in these entities to Federal Bank as collateral and Federal Bank loans Republica Holdings the money it requires. 56 UFCO changed its name to Republica Holdings in January 1998. 57Translation from Spanish provided by the Congressional Research Service.

BR has lines of credit with local banks such as Galicia, Deutsche, and Sudameris.53

Martin Lopez, Citibank’s relationship manager for Grupo Moneta

entities from 1995 to 2000, told the Subcommittee that his understanding of Banco Republica was that it was a wholesale bank in

Argentina that dealt with corporate customers and private bank

customers in Argentina. He described Federal Bank as an offshore

vehicle ‘‘to help private banking customers’’ of Banco Republica.54

He added that Federal Bank was created to replace American Exchange Company, another offshore vehicle of Grupo Moneta incorporated in Panama with an office in Uruguay. American Exchange

Company is discussed later in this chapter.

Lopez explained that the purpose of Federal Bank was to help

private banking customers of Banco Republica who wanted to keep

their deposits out of Argentina for fear of the country’s economic

instability. He said domestic banks like Banco Republica, in order

to compete with international banks, set up these kind of offshore

banks. Lopez described Federal Bank as a small offshore bank with

not more than 200 or 250 customers. He said the deposits in Federal Bank belong to customers of Banco Republica and that Grupo

Moneta used these deposits to provide loans through Federal Bank

to another Grupo Moneta entity, Republica Holdings.55

In a memo dated February 6, 1997, Lopez described the elements

of the Federal Bank role in Grupo Moneta:

The existence of this vehicle is justified in the group’s strategy

because of the purpose it serves:

(a) To channel the private banking customers of Banco

Republica to which they provide back-to-backs and a vehicle

outside Argentina where they can channel their savings, which

are then replaced in Banco Republica by Federal Bank, constituting one of the bank’s most stable sources of funding (approximately US $34 MM). (b) To channel the cash flow of the

partners of Banco Republica and serve, with these deposits and

the assets of Federal Bank, as a bridge, financing loans aimed

at companies associated with CEI. (c) To finance UFCO 56

through swaps of their share positions giving it financing

against the most liquid shares (Telefonica, Telecom) for US $20

MM which, in turn, Federal matches with banks abroad.57

The financial statement for Federal Bank for the year ending

1999 shows total assets in 1998 of almost $252 million and in 1999

of almost $133 million. The main liabilities included about $50 million in deposits and $40 million due to banks each year; $64 million

in 1998 and $8 million in 1999 owed to creditors for purchases of

securities; and $66 million in 1998 and $4 million in 1999 as ‘‘forward sales of securities.’’ The 1999 financial statement describes

609

58The Minority Staff calculated that the total amount of money deposited in the Federal Bank

correspondent account at Citibank New York from November 1992 through May 2000 was

$4,317,646,934, excluding 5 months for which the monthly statements are missing. When estimated amounts for the missing 5 months are added to the total, the result exceeds $4.5 billion. 59See ‘‘Remarks Grupo Republica,’’ dated 2/6/97, by Citibank, PS018310. ‘‘This association

(CEI) means, both for Grupo Moneta and Citibank, a long-term strategic alliance which requires, because of the amount of the investment and the relative weight of Grupo Moneta therein, a very strong interrelationship between both and a commitment by both to maintain that

relationship.’’ (Translated from Spanish by the Congressional Research Service.) The Minority

Staff’s account of the ownership and operation of CEI is based on a briefing provided by

Citibank attorneys. 60 Interpretive Letter No. 643, July 1, 1992, Frank Maguire, Acting Senior Deputy Comptroller.

Federal Bank’s ‘‘line of business’’ as ‘‘placing short-term deposits

with members of the international banking community and making

loans to customers either in currencies or securities and trading in

securities.’’ The Minority Staff reviewed the monthly statements of Federal

Bank for its correspondent account at Citibank and determined

that during the course of Federal Bank’s correspondent account at

Citibank New York, from November 1992 through May 2000, over

$4.5 billion 58 moved through the account. This figure exceeds any

other offshore bank examined by the Minority Staff for that period.

(4) CEI

Citibank was not only the correspondent bank for Banco

Republica and Federal Bank, Citibank was also a partner with

Grupo Moneta and Banco Republica, and—for a brief time—with

Federal Bank, in a holding company called CEI Citicorp Holdings,

S.A. (originally named Citicorp Equity Investments, S.A.), referred

to hereafter as CEI. To understand the correspondent banking relationships, it is necessary to also be familiar with this business collaboration.59

Citibank started CEI as a company to hold and manage the stock

of companies in Argentina which Citibank came to own as a result

of defaults on loans and conversion of its Argentinian bonds, using

debt for equity swaps. Citibank owned its interest in CEI through

a Delaware corporation Citibank established called International

Equity Investments (IEI). Citibank’s purchase of equity in Argentinian companies through its ownership of IEI and, in turn, CEI,

was approved by the Office of the Comptroller of the Currency

(OCC) in 1992,60 with the condition that Citibank reduce its ownership of CEI over time. For example, the OCC said Citibank could

hold no more than 40% of CEI’s shares by the end of 1997, at

which time CEI was to be managed by a third party, and Citibank

would, by a certain time, have to completely divest itself of any

ownership interest in the company. The OCC also imposed a number of other relevant conditions on Citicorp’s activities relative to

CEI.

In 1992, when Citibank was in need of capital and pursuant to

its agreement with the OCC, it looked for a purchaser of some of

its CEI stock. It found that purchaser in Raul Moneta and his financial organization Grupo Moneta. While it is difficult to piece together exactly how the Grupo Moneta’s shares in CEI were purchased and distributed, it appears that in July 1992 Citibank sold

approximately 10% of its CEI stock to Grupo Moneta through

United Finance Company Limited (UFCO); UFCO purchased an

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61 Citibank’s attorney wrote to the Subcommittee on February 25, 2001, after reviewing a

draft of this report and said that the sale to UFCO in December 1992 was an additional 10%

of CEI. Documents in Citibank files, however, suggest that the 1992 sale was larger than 10%. 62This increase in CEI shares for Grupo Moneta was accomplished through the purchase of

the shares by Republica Holdings, formerly UFCO. It is uncertain when the Central Bank of

Argentina became aware of the fact that UFCO or Republica Holdings was owned by Grupo

Moneta. 63 It also opened an account for American Exchange Company at the same time. It appears

Citibank used a common account opening document for both institutions.

additional percentage of CEI in December 1992.61 Out of its shares

of CEI stock, UFCO sold a 4.27% interest in CEI to Banco

Republica. Citibank loaned UFCO a substantial percentage of the

funds it needed to purchase the CEI stock.

In 1998 Citibank sold additional shares of CEI stock to Grupo

Moneta, and Grupo Moneta increased its overall ownership to

39.9%.62 Over time the ownership of CEI changed, and as of May

31, 2000, according to the June 30, 2000, annual report filed with

U.S. Securities and Exchange Commission, the principal shareholders of CEI were Ami Tesa Holdings Ltd. (ATH) (67.7%) and

Citibank New York (23%). Hicks, Muse, Tate and Furst, Inc. held

approximately 40% of the ATH stock, and approximately 27% of

the ATH stock was held in escrow by Citibank for Republica Holdings and ITC, both owned by Grupo Moneta.

In its June 2000 report, CEI described itself to the Securities and

Exchange Commission as ‘‘a holding company primarily engaged

through controlled companies and joint venture companies in the

telecommunications business, the cable television business, and the

media business in Argentina.’’

(5) Correspondent Account at Citibank

Citibank opened its correspondent account for Banco Republica

in 1989.63 It opened a correspondent account for Federal Bank in

1992. The Banco Republica account stayed open until 1999, and the

Federal Bank account stayed open until 2000, when both accounts

were closed due to the collapse of Banco Republica because of a

‘‘run’’ on the bank in 1999. The ‘‘run,’’ according to Lopez was due

to the publication in the Argentine press of information that Banco

Republica had received a CAMEL rating of 4 from the Central

Bank of Argentina. CAMEL ratings are used to grade the financial

stability, safety and soundness of a banking institution. The ratings range from 1 to 5, with 5 being the worst. A CAMEL rating

of 4 is considered very poor, and both Lopez and Carlos Fedrigotti,

President of Citibank Argentina, told the Subcommittee they would

not open an account for a bank with a CAMEL rating of 4.

The account opening documentation produced by Citibank for the

Banco Republica account is limited. It consists of a Legal Agreement dated August 30, 1989, regarding use of Citibank’s Global

Electronic Financial Network, the list of account numbers (there

appear to be two), an account opening checklist that appears to be

a reminder for sending information to various departments within

Citibank, several apparently minor messages, an information sheet

creating the accounts, and what appears to be a letter of request

to Citibank Argentina to open an account signed by Jorge Maldera

and Pablo Lucini, both directors of Banco Republica. The account

opening documentation produced for the Federal Bank account is

even less; it consists of a single signature card signed by Jorge

611

64Several Citibank reports on Grupo Moneta and Banco Republica note specifically the close

relationship Citibank Argentina has with the owners of Grupo Moneta. A credit report from August 1997 states: ‘‘We have excellent contacts at the Senior level. . . . This close relationship

gives us access to confidential internal Bank information.’’ And a Commercial Bank Analysis

of Banco Republica dated December 1998 states: ‘‘The bank’s Senior Management has a strong

relationship with Raul Moneta, who is No. 1 in this group. The relationship came about as a

result of the ‘shareholder’ relationship Citibank has with Grupo Republica in CEI (Citicorp Equity Investment). Raul Moneta has easy access to our Senior Management (John Reed, Bill

Rhodes, Paul Collins, etc.).’’ John Reed is the former Chairman of Citibank; Bill Rhodes is a

Vice Chairman, and Paul Collins is a retired Vice Chairman.

Maschwitz as Director of Federal Bank. There is no documentation

in the Citibank account opening records for either bank with respect to: Ownership, an audited financial statement, references

from regulators or others about the bank’s reputation, or a copy or

discussion of anti-money laundering procedures.

Although Federal Bank is a shell bank with an offshore license,

Citibank told the Subcommittee that it had a correspondent relationship with Federal Bank because Federal Bank was part of the

larger financial enterprise of Grupo Moneta and was the offshore

vehicle for Banco Republica, the owners of which Citibank said

they knew very well. For example, one Citibank document written

in March 1997 states: ‘‘There is a close relationship between our

Senior Management and R. Moneta. This, added to the association

that exists between this group and CEI, means that Citibank has

profound knowledge of the corporate structure, details of its organization, and the operation of Grupo Moneta and Banco Republica.’’ Another Citibank document states that Raul Moneta ‘‘has easy access to our Senior Management (John Reed, Bill Rhodes, Paul Collins, etc.).’’ 64

Although Federal Bank was an offshore shell bank licensed in a

country known for weak banking and money laundering controls,

Citibank documentation does not indicate any steps taken to ensure enhanced scrutiny of this bank. To the contrary, Citibank appeared to ignore even basic due diligence requirements it had in

place for correspondent accounts. For example, although Citibank

normally requires an on-site annual visit to its bank clients, Lopez

said that as the relationship manager for Federal Bank, he never

visited it and doesn’t know anyone from Citibank who has. When

asked where the bank is located, Lopez said he ‘‘has a feeling’’ it

is in Uruguay in the offices of ‘‘some representative or attorney.’’ When asked about the absence of a physical location for its customers, Lopez said it is like M.A. Bank; ‘‘they only need a booking

unit that receives deposits and could make loans.’’

Lopez said that he knew Federal Bank was not permitted to conduct banking business in Argentina and that it did not have any

other correspondent accounts other than Citibank, apart from its

correspondent relationship with Banco Republica. Since Federal

Bank is a shell bank and thus totally dependent upon its correspondent relationships, it appears that all of Federal Bank’s

transactions were conducted either through its correspondent account at Citibank or its correspondent account at Banco Republica.

(6) Regulatory Oversight

The regulatory authority for Banco Republica is the Central

Bank of Argentina, also known as BCRA. According to Carlos

Fedrigotti, the President of Citibank Argentina, the BCRA ‘‘gets

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65The Minority Staff has been advised that the effective date of the new anti-money laundering law (law 25.246) was actually February 7, 2001, because it was awaiting the approval

of the President of Argentina before it could be implemented.

good reviews’’ from both the banking industry in Argentina and

outside parties such as the World Bank and the International Monetary Fund. Fedrigotti said the BCRA has ‘‘done a good job in

cleaning up’’ the banking industry in Argentina and that the industry is far safer than it was 6 or 7 years ago. Fedrigotti said

Citibank Argentina gets audited on an annual basis; and the Minority Staff learned that Banco Republica was subject to two audits

that took place from 1996 through 1999.

The Financial Action Task Force on Money Laundering (‘‘FATF’’)

and the U.S. State Department’s most recent International Narcotics Control Strategy Report (‘‘NCSR 2000’’) report indicate that

Argentina’s anti-money laundering efforts are mixed. Argentina did

not have a comprehensive anti-money laundering law until the

year 2000.65 Based upon passage of this new law, FATF recognized

Argentina as a full member for the first time in 2000. However,

FATF’s latest annual report (2000) states:

Recent high-profile investigations have shown evidence that

drug cartels are active in Argentina, and underlined fears that

it could become a growing international money laundering center. While there was no indication of other sources of illegal

proceeds, it is believed that bribery and contraband could also

contribute to the money laundering which occurs in Argentina.

The regulatory authority for Federal Bank is the Central Bank

of the Bahamas. In June 2000, the Bahamas was one of 15 countries named by FATF for weak anti-money laundering controls and

inadequate cooperation with international anti-money laundering

efforts. The INCSR 2000 report describes the Bahamas as a country of ‘‘primary’’ money laundering concern due to ‘‘bank secrecy

laws and [a] liberal international business company (IBC) regime

[which] make[s] it vulnerable to money laundering and other financial crimes.’’ While banking and money laundering experts interviewed by the Minority Staff described the Bahamas as having

good intentions and making important improvements, during the

1990’s it provided weak oversight and inadequate resources to regulate its more than 400 offshore banks.

Because Federal Bank and Banco Republica were both owned by

Grupo Moneta, Federal Bank might also be expected to be subject

to oversight by the Central Bank of Argentina as an affiliate of

Banco Republica. As Citibank Argentina President Fedrigotti told

the Subcommittee, if Federal Bank had been linked to Banco

Republica, it would have been reviewed by BCRA. But that link

was not made, however, because Banco Republica did not directly

own Federal Bank, and, although Citibank knew that Federal

Bank was owned by the same persons who owned Banco Republica

(Grupo Moneta), the Central Bank of Argentina did not.

Ironically, in fact, Citibank officials expressed concern internally

about the weak regulatory oversight of Federal Bank, because they

knew the Central Bank of Argentina was not aware of the common

ownership of Federal Bank and Banco Republica. In an internal

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66See ‘‘Remarks on Grupo Republica’’ dated 2/6/97, PS018309. ‘‘Federal Bank Ltd.: Located

in the Bahamas with US $25 MM in capital. Its existence is not reported as linked to BCRA

[Central Bank] despite being a banking vehicle (offshore category D in our policy), which makes

it a risky vehicle per se because of having only the control of the Central Bank of the Bahamas.’’ 67See Resolution No. 395, Buenos Aires, August 28, 1996, Central Bank of Argentina. 68See FITS Argentina memo dated April 1997.

memo,66 Lopez, the relationship manager for Grupo Moneta entities, wrote, ‘‘Its [Federal Bank’s] existence is not reported as linked

to BCRA despite being a banking vehicle (offshore category D in

our policy), which makes it a risky vehicle per se because of having

only the control of the Central Bank of the Bahamas.’’ Yet, as discussed later, when the Central Bank asked Citibank about Federal

Bank’s ownership, Citibank chose to keep silent about the offshore

bank’s links to Banco Republica and Grupo Moneta. In addition,

Citibank failed to give any heightened scrutiny to what its own relationship manager characterized as ‘‘a risky vehicle per se.’’

(7) Central Bank of Argentina Concerns

Resolution No. 395/96. The Central Bank of Argentina has established limits with respect to the amount of stock a bank can

hold in a company to which it is related and the amount of loans

a bank can make to related companies. In 1996 the Central Bank

became concerned about the extent of Banco Republica’s ownership

(4.27%) in CEI. That amount represented more than 15% of Banco

Republica’s computable equity, which is the limit previously established by the Central Bank. Banco Republica asked the Central

Bank for a waiver of the 15% limit for 3 years. The Central Bank

granted that waiver on the condition that Banco Republica ‘‘refrain

from carrying out any transaction that involves, even temporarily,

directly or indirectly increasing the financing of CEI or assuming

any risk connected with said company.’’ It went on to require that

Banco Republica not ‘‘increase its stake in other companies, except

those that may eventually be associated with Banco de Mendoza

S.A.,’’ a retail bank Banco Republica was in the process of purchasing.67

During the 1996/7 audit, the Central Bank expressed concern

that Banco Republica had increased its shares of CEI. The auditors

referred to a conflict between what it was being told by Banco

Republica, that the bank owned 4.27% of CEI, and what it had

learned from the media and another inspection, that Banco

Republica owned 33–35% of CEI. The references in the news media

to a larger share of CEI are likely the ownership interest of UFCO

(discussed above), also owned by Grupo Moneta. It is uncertain

whether the Central Bank at the time of the 1996/7 audit knew

that UFCO was owned by Grupo Moneta. The Central Bank appears to suggest that another entity linked to Banco Republica may

hold the CEI shares, but it does not mention UFCO in that context.

The Central Bank apparently tried to resolve the discrepancy by

asking CEI for the ownership information directly, but it appears

that at the time of the audit, it did not have a response from CEI.

The Central Bank put as its first item for its next inspection, ‘‘Fulfillment of Resolution No. 395/96’’. In August 1998, according to Citibank documents,68 Grupo

Moneta ‘‘increased its stake in CEI to 39.9% . . . and at the same

time Raul Moneta was named president of CEI. . . .’’ The 1998 inVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00623 Fmt 6602 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
614

crease in shares in CEI was, it appears, in the name of Republica

Holdings (formerly UFCO). If the Central Bank were to treat affiliated ownership as subject to the restrictions of Resolution 395/96,

then, this increase in CEI ownership by Grupo Moneta would be

a violation of the Central Bank’s Resolution 395/96.

In addition, under the Resolution it appears Banco Republica

was prohibited from lending money to CEI related entities. Yet in

the Citibank internal documents assessing the activities of Federal

Bank, Citibank notes that one of the purposes of Federal Bank is

‘‘(t)o channel the cash flow of the partners of Banco Republica and

serve, with these deposits and the assets of Federal Bank, as a

bridge, financing loans aimed at companies associated with CEI.’’

This activity appears to be an end-run around the conditions imposed on Banco Republica by the Central Bank Resolution. Since

Banco Republica is apparently prohibited from loaning money to

companies associated with CEI, it appears Grupo Moneta was

using Federal Bank to do what Banco Republica could not do. But

because the Resolution prohibits Banco Republica loans ‘‘directly or

indirectly’’ to CEI related companies, it may reach the activity of

Federal Bank, as an affiliated entity, as well.

Audits. In 1996/7 and 1998, the Central Bank of Argentina conducted audits of Banco Republica, and copies of these audits were

made available to the Subcommittee. These audits identify numerous concerns by the Central Bank about the management and operations of Banco Republica, and both resulted in a CAMEL rating

of 4 for the bank. Although Citibank had, according to its records,

‘‘access to confidential internal bank information’’ about Banco

Republica and had ‘‘profound knowledge’’ of its structure, organization and operation, Citibank said it was unaware until 1999 that

Banco Republica had been given a CAMEL 4 rating by the Argentine Central Bank. A comparison of the information obtained by

the Central Bank during these audits with the information

Citibank Argentina had as a result of its correspondent relationship raises additional serious discrepancies and questions about

the effectiveness of Citibank’s due diligence and ongoing monitoring.

a. Operations and Anti-Money Laundering Controls.

Citibank Argentina repeatedly notes in its analyses of Banco

Republica that the bank has an anti-money laundering program. In

a FITS memo (a brief financial analysis of a bank with which

Citibank Argentina has a credit relationship) of April 1997,

Citibank notes: ‘‘BR has internal procedures to prevent money

laundering, including KYC policies. This matter is overseen by

Banco Central de la Republica Argentina. We have no evidence or

information from third parties that BR was or is carrying out illicit

money laundering transactions with the knowledge of its management or shareholders.’’ But in the BCRA audit of 1998, the BCRA

notes with concern: ‘‘The entity under examination [Banco

Republica] does not have a manual containing the programs

against laundering money from illicit activities,’’ despite early requirements that it do so and ‘‘despite the fact that the internal

Auditor, in his report on the work performed between July 1997

and June 1998, pointed out that ‘It is necessary to set up a manual

615

of rules and procedures regarding precautionary measures with respect to laundering. . .’ ’’

The Subcommittee asked Lopez whether he had obtained from

Banco Republica a copy or documentation of Banco Republica’s

anti-money laundering program. Lopez said he discussed the antimoney laundering program with Banco Republica management

during his annual reviews and was told by the management that

Banco Republica had such a program. He said he was satisfied

with that response and assumed the same program would apply to

Federal Bank. Lopez said he had not seen the BCRA report prior

to his preparation for the Subcommittee interview, that it ‘‘was disturbing’’ and ‘‘ shocking’’ to see the BCRA finding that no written

procedures existed and that Banco Republica ‘‘never disclosed’’ to

Citibank Argentina that they had a problem with the BCRA. Lopez

said that sometimes his office asks to see a bank’s anti-money

laundering manual and sometimes they ‘‘trust the customer.’’ He

noted Citibank had a 20 year relationship with Grupo Moneta, and

that ‘‘now I see a customer of 20 years can lie to you.’’

When asked about the extent to which Citibank Argentina reviewed the anti-money laundering policies of Federal Bank, Lopez

said that because Federal Bank had the same management as

Banco Republica, Citibank assumed they had the same procedures.

When asked whether Citibank had ever asked Federal Bank about

its anti-money laundering procedures, Lopez said he did and that

is reflected, he said, in the comments in the annual reviews when

discussing Grupo Moneta as a whole. The Subcommittee was not

able to find any reference in the Citibank documents to the antimoney laundering program or procedures of Federal Bank.

b. Federal Bank Transactions with CEI Related Companies. Resolution 395/96 appears to prohibit Banco Republica not

only from increasing its ownership in CEI, but also from loaning

money to CEI related entities. From Citibank documents, however,

it appears that Banco Republica used Federal Bank as a way to get

around that limitation and that Citibank was aware of this effort.

An October 23, 1995, call memorandum from Lopez describes the

utility of Federal Bank to Banco Republica. It says, ‘‘Strategically,

the group needs a vehicle to which to channel its private banking

and to create for it a nexus between its investment in CEI booked

in UFCO and Banco Republica’s financial activity.’’ In describing

the assets of Federal Bank, Lopez writes that $30 million of Federal Bank’s assets are ‘‘deposits of the Banco Republica members

themselves, which are lent to target-name customers of Banco

Republica and to businesses linked to CEI whose loans cannot be

processed through Banco Republica.’’

In a September 1996 memo on Banco Republica Lopez writes

that the significance of Federal Bank to Banco Republica is to,

‘‘[c]hannel the liquidity of the shareholders of Banco Republica and,

with these deposits and the assets of Federal Bank, support the acquisitions or grant loans to CEI companies. . .’’

The Minority Staff was not able to determine whether the BCRA

regulations prohibit a bank from using an entity with common

ownership as a vehicle to do what BCRA has prohibited the regulated bank from doing, but such an activity appears to be at odds

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69 Annex I of 1996 Audit, Folio 28. 70 1996 Audit. Folio 133. 71See the exchange of letters on this subject at the back of this chapter. 72See, for example, Citibank Basic Information Reports for November 1996, August 1997, and

May 1999, report Federal Bank as owned 100% by Grupo Moneta. 73May 1999 letter from Carlos Fedrigotti, CEO of Citibank Argentina to the Central Bank.

with the import of BCRA’s restrictions on Banco Republica in Resolution 395/96.

c. Withholding Information from the Central Bank. The

Central Bank also made several observations in the 1998 audit

that information requested of Banco Republica about certain issues

regarding Federal Bank was not provided despite repeated requests. The Central Bank said in the 1998 audit: ‘‘. . . everything

related to the Federal Bank Limited, Republica Propiedades S.A.,

CEI Citicorp holdings S.A., among others, had to be claimed several times via memos or directly to the officers in several meetings

held during the inspection and afterwards. It must be stated that

the information given in those cases was contradictory or kept back

and had to be requested over again.’’ 69

d. Misleading the Central Bank as to the Ownership of

Federal Bank. The 1998 audit suggests that the Central Bank

was not aware at the time that Federal Bank was actually owned

by Grupo Moneta, which also owned Banco Republica. The Central

Bank’s discussion of Banco Republica’s operations with Federal

Bank does not mention the common ownership, and in fact in its

closing paragraph 70 of that discussion it seems to indicate that it

was told by Banco Republica officials that ‘‘Federal Bank Limited

had discontinued its operations with Banco Republica S.A.’’ In 1997 and 1998 according to the audit documents, Federal

Bank applied to the Central Bank for the opportunity to open an

office in Argentina. The Central Bank appeared to be very concerned about the fact that Federal Bank was licensed in the Bahamas and was without any consolidated banking supervision system.

Again, the Minority Staff could find no mention of the bank’s common ownership with Banco Republica. The Central Bank, in the

end, denied the request by Federal Bank.

In the 1998 audit, the Central Bank investigators reported, ‘‘At

a meeting on November 17, 1998, with Pablo Lucini, [one of

Citibank’s principal contacts at Banco Republica] he denied any ‘economic group’ relationship between BR [Banco Republica] and

Federal B.L. [Bank Limited].’’ This apparent misinformation by Pablo Lucini to the Central

Bank of Argentina was compounded when the Central Bank specifically asked Citibank Argentina in April 1999 to provide the

Central Bank with any information Citibank Argentina had with

respect to the ownership of Federal Bank.71 Despite repeated references in their own documents and records to the fact that Federal Bank was 100% owned by Grupo Moneta,72 and that it knew

Grupo Moneta so well, Citibank Argentina responded to the Central Bank that their ‘‘records contain no information that would enable us to determine the identity of the shareholders of the referenced bank.’’ 73

The Subcommittee asked relationship manager Martin Lopez to

explain Citibank’s response to the Central Bank. Lopez said he did

not see the letter before it went out, but he knew the Central Bank

617

was looking for information about Federal Bank. He said he had

the impression that the Central Bank ‘‘was trying to play some

kind of game,’’ that it was ‘‘trying to get some legal proof of ownership.’’ When the Subcommittee asked why he thought the request

for information about Federal Bank’s owners from the Central

Bank was a ‘‘game,’’ Lopez said because one of the signers of the

letter had previously been a relationship manager or unit head of

financial institutions in Bank of Boston, and he must have known

the owners of Federal Bank. Lopez said he thought maybe the Central Bank was put in an ‘‘awkward position’’ and was ‘‘looking for

legal proof.’’ At one point he said, ‘‘We [Citibank Argentina] don’t

have information in Argentina; it’s in New York.’’ However, the

Subcommittee was later told that the annual reports on Banco

Republica containing the organizational structure and ownership

were, in fact, maintained in Citibank Argentina. Lopez also said he

had a conversation with the counsel for Citibank Argentina and

with the Chief of Staff to Fedrigotti about how to respond to the

letter. Lopez said he told them he did not think Citibank should

respond. He said following the conversation, Fedrigotti wrote the

letter and sent it. He said Fedrigotti definitely knew at the time

that Federal Bank was owned by Grupo Moneta. At the same time,

Lopez argued that the letter is ‘‘technically true,’’ because Citibank

Argentina did not have any ‘‘legal’’ documents showing the ownership of Federal Bank and that any such information would have

been kept in Citibank New York. When asked whether he called

Citibank New York to ask them or let them know of the request,

he said he did not and he did not know if anyone else did.

The Minority Staff also asked Citibank Argentina President Carlos Fedrigotti about Citibank’s response. Fedrigotti said he got the

letter from the Central Bank in April 1999 and that the letter was

‘‘within the context of what I knew was going on out in the market,’’ referring to the restructuring of Banco Republica and Grupo

Moneta at that point in time. He said he read it, understood the

gist of what was being requested, and handed it to his deputy. He

said he told his deputy to consult with Citibank Argentina General

Counsel and to prepare a response. He said a few days later a response was prepared for his signature; he said he looked at it

quickly, and he did not consult the original letter. He said he saw

the first paragraph, asked if it was accurate, and was told it was.

He said he looked at the second paragraph that referred BCRA to

Citibank in New York because that ‘‘is where the Federal Bank account was domiciled.’’ He said he was satisfied with the content,

approved it, and spent no more than 15 seconds on it.

Apparently nothing occurred with respect to the BCRA request

and Citibank Argentina’s response for more than a year, according

to Fedrigotti. Then in July 2000, when the Subcommittee requested

information with respect to Federal Bank from Citibank, ‘‘another

review of the documents and papers was made.’’ Fedrigotti said the

question was asked, ‘‘how is this letter (Citibank’s response to

BCRA) consistent with information in Citibank files.’’ He said it

was brought to his attention, and he got involved. He said he was

told the response to BCRA was in keeping with the policy at the

bank that if information is requested for an account in another jurisdiction, the person making the request should be referred to that

618

jurisdiction. In this case, Fedrigotti said, although Citibank Argentina handled all of the due diligence and day-to-day relationships

with Federal Bank, the actual account was held at Citibank New

York. Fedrigotti said that it was also true that the ownership information sought by the BCRA that Citibank Argentina had was ‘‘rebuttable’’—that is, it ‘‘wasn’t information that could legally demonstrate the ownership’’ of Federal Bank and so the ‘‘letter was legally correct.’’ Lopez said that he now knows Citibank should have answered

the letter ‘‘in a different way,’’ that Citibank ‘‘should have done

more.’’ He said in July 2000 when Citibank New York learned

about the letter as a result of the Subcommittee’s investigation, the ‘‘compliance people were very upset’’ with the answer provided in

the letter. Once Citibank New York decided the first response was

‘‘a mistake,’’ Lopez said, then a second letter was drafted and sent

telling the Central Bank that Citibank has ‘‘information prepared

internally by our [Citibank] institution regarding Federal Bank

Limited [that] includes references to the identify of its [Federal

Bank’s] shareholders.’’ The second letter is dated July 27, 2000.

Fedrigotti said that during his review of the matter in July 2000, ‘‘having myself been exposed more deeply to the type of information

that was contained and nature of informal working papers that reflected our understanding of the connection between these entities,

and keeping with our policy with being fully open with our regulators, I took the step to give information to the regulators.’’ Fedrigotti added that he wanted to make clear that in doing so, he was

not ‘‘invalidating the legality’’ of the first letter. He said, ‘‘We were

supplementing the [earlier] information.’’ But even in this second

letter, Citibank Argentina does not provide complete and accurate

information. For example, the Citibank letter does not acknowledge

to the Central Bank that Citibank New York has a correspondent

account with Federal Bank that was initiated and managed by

Citibank Argentina, and it tells the Central Bank that Citibank Argentina has no account with Federal Bank.

When asked whether he remembered any conversation with

Citibank officials with respect to the BCRA request about ‘‘playing

games,’’ Fedrigotti said he did not. He added that it was ‘‘not a fair

assumption’’ to say the BCRA was ‘‘playing games.’’

After receiving information about Federal Bank’s ownership from

Citibank Argentina, Fedrigotti said that BCRA recently (February

7, 2001) asked Citibank Argentina to ‘‘justify the apparent discrepancy’’ between Citibank Argentina’s first letter and its second letter, and Fedrigotti did so.

e. Other Central Bank Concerns. The Central Bank audits

identify other concerns about the operation and management of

Banco Republica. The Central Bank claimed that Banco Republica

was providing financing with preferential conditions for ‘‘their

linked clients’’ both with respect to interest rates and terms. The

Central Bank was concerned that there was no organization manual for Banco Republica and that the procedure manuals for the

bank had not been approved by the Board of Directors. It questioned a 10-year rental contract with Citibank for office property

that it said was possibly prohibited by Argentine law. It said the

work done by the external auditors of Delloite & Touche for Banco

619

Republica was ‘‘ ‘insufficient’ regarding both the depth of the developed procedures and the level of the conclusions which do not accord with the observations and verifications determine in the inspection.’’ It said the controls put in place from the bank’s internal

audit ‘‘are not totally appropriate’’ because ‘‘the procedures implemented lack the necessary depth.’’ In the 1998 audit, the Central

Bank said, ‘‘To sum up, the present structure of the business is impossible.’’ As a result of its audits, the Central Bank in the 1996/

7 audit and in the 1998 audit assigned a CAMEL rating to Banco

Republica of 4.

During this same time, Citibank Argentina analyzed Banco

Republica quite differently. Citibank gave Banco Republic an internal rating of ‘‘IA.’’ ‘‘I’’ is the highest rating a bank in a credit relationship can get from Citibank and ‘‘IV’’ is the worst. ‘‘IA,’’ according to Lopez, means Citibank recognizes some potential risk in the

customer which requires more frequent follow ups. But Lopez and

the Citibank Argentina team saw Banco Republica as a normal

banking operation with apparently limited matters of concern. In

a 1996 Basic Information Report, Lopez noted that Banco Republic

was a ‘‘leading wholesale bank,’’ that it had ‘‘shareholders’ financial

soundness,’’ and that it was ‘‘managed with recognized record and

experience.’’ Citibank New York closed its correspondent account with Banco

Republica on September 27, 1999, after Banco Republica’s collapse.

Citibank closed its correspondent account with Federal Bank in

June 2000. When asked why there was a lengthy delay between

the closing of the two accounts, Lopez told the Subcommittee that

Federal Bank had requested the extended opening in order to clear

out its account.

(8) American Exchange Company

American Exchange Company, according to Martin Lopez and

Citibank documents, was created by Grupo Moneta prior to Federal

Bank and was the first offshore vehicle of Grupo Moneta. Its account with Citibank was opened at the same time the correspondent accounts with Banco Republica were opened. At that

time, Lopez said, Grupo Moneta did not need an offshore bank, because the intended activity was only to trade securities and conduct

foreign exchange for customers; the offshore entity, according to

Lopez did not need to hold deposits. Most of the activities of American Exchange, Lopez told the Subcommittee, were absorbed by

Federal Bank over the years. He said it was his understanding that

American Exchange continued after Federal Bank came into existence but with little activity.

American Exchange Company, although referred to in Citibank

documents several times as an offshore bank, is not a bank, according to Lopez, but ‘‘more like an asset management and brokerage

house.’’ It is, according to Lopez, incorporated in Panama, with a

representative in Uruguay and owned by Grupo Moneta. Citibank’s

monthly statements for American Exchange show its address to be

in Punta Del Este, Uruguay. Lopez said he does not know how

many employees American Exchange has but that maybe the company needs ‘‘one person to administer the book entries.’’ He said

the same people he worked with from Grupo Moneta represented

620

74 E-mail dated 6/16/2000 from Martin Ubiema to James A. Forde, et al. CA001371. 75 ‘‘IBM Scandal That Rocked Argentina Far From Resolved,’’ The Miami Herald, May 16,

1999, by Andres Oppenheimer.

American Exchange to Citibank Argentina. Lopez did not know

whether American Exchange is licensed to do business in Argentina.

When asked who regulates American Exchange, Lopez said no

one does, because American Exchange does not hold deposits. He

said the money placed with the company does not stay in American

Exchange for more than 1 or 2 days.

With respect to the extent of an anti-money laundering program

at American Exchange, Lopez said Citibank Argentina believed

American Exchange had the same program and procedures as the

other entities in the Moneta Group. The Subcommittee has learned

from reviewing the Central Bank audits, however, that Banco

Republica, and other entities owned by Grupo Moneta, did not have

any anti-money laundering program.

The Subcommittee subpoenaed Citibank for its documents with

respect to American Exchange. The results were limited. One account opening document appears to be a signature card with the

name Jorge Videla. Lopez said he did not know the identity of

Videla and there was no due diligence information on him in the

file. A second document appears to assign an account number to

American Exchange. A third document appears to provide basic

data on American Exchange, such as country of location and provides several codes apparently internal to Citibank. The investigation was unable to locate any customer profile or substantive information on American Exchange in the Citibank records.

The American Exchange account was closed on June 30, 2000.

The closing appears to be part of a policy established by Citibank

in the Spring of 2000 to close all demand deposit accounts for offshore vehicles of Argentinian financial entities ‘‘that are not consolidating under a local bank, and consequently regulated by the

Local Central Bank.’’ 74

(9) Suspicious Activity at Federal Bank

Money Laundering and the IBM Scandal. In January 1994,

IBM Argentina made a successful bid on a contract in Argentina

to install software and provide training for Banco Nacion, a government owned bank. The amount of the bid was $300 million. It

turned out that $37 million of that amount was for a nonexistent

subcontractor, Computacion y Capacitacion Rural S.A. or CCR, for

the purpose of providing kickbacks to Argentine public officials involved in the contract. To date it appears IBM paid approximately

$21 million of the $37 million, half of which has been traced to

Swiss bank accounts of Argentine officials. The scandal has been

called ‘‘one of the biggest political-financial scandals’’ in Argentina’s

history.75 Part of that bribe money moved through Federal Bank.

On May 10, 1994, Compania General De Negocios, a bank in Uruguay, ordered $1 million to be taken from its Credit Suisse account

and deposited in Federal Bank’s correspondent account at Citibank.

The $1 million proved to be part of the $21 million payoff from the

IBM kickback scandal.

621

Movement of Money. In its 1998 audit, the Central Bank expressed concern about the volume of the transactions taking place

between Banco Republica and Federal Bank. In the 1998 audit, the

Central Bank noted that ‘‘the operation carried out by [Banco

Republica] with the Federal Bank Ltd. presents peculiar characteristics due to its close relationship to the companies linked to the

bank. . . .’’ The 1996/7 audit noted that ‘‘during November and December 1996, 8.88% and 13.53% respectively’’ of the money moving

through Banco Republica’s correspondent account in Citibank New

York ‘‘were accredited by the Federal Bank Limited.’’ The Central

Bank said that while the amounts were not significant, it was

worth noting that the majority of such money was ‘‘related to operations with companies linked with Banco Republica. . . .’’ The

1998 audit concluded with the suggestion that the next inspection

do an ‘‘analysis of the operations with Federal Bank Limited.’’ The Central Bank also noted transactions through Banco Republic and Federal Bank with respect to four offshore companies

created in the Bahamas on the same date, March 18, 1997. The

Central Bank noted that these companies have the same representative, and they have the same address in Uruguay as Federal

Bank. These four companies are: Ludgate Investments Ltd., South

Wark Asset Management Ltd., Lolland Stocks Ltd., and Scott &

Chandler Ltd. The Banco Republica monthly statements from the

Citibank New York correspondent account show the movement of

millions of dollars each month between the accounts of these entities at Federal Bank and the accounts at Banco Republica. Out of

its concern for the transactions involving these four companies, the

Central Bank auditors apparently recommended obtaining more information about them from the Central Banks of the Bahamas and

Uruguay.

The Minority Staff reviewed the monthly statements of Banco

Republica, Federal Bank and American Exchange Company. In

many instances large sums of money moved on the same day from

Banco Republica’s correspondent account at Citibank New York to

American Exchange’s correspondent account at Citibank New York,

and then to Federal Bank’s correspondent account at Citibank New

York. Other amounts moved in the reverse direction, from Federal

Bank to American Exchange to Banco Republica. All of the accounts through which the money moved were U.S. dollar accounts

in Citibank New York. The first chart, below, shows just a few of

the many instances of the movement of such sums in these accounts. It summarizes some of the activity in 1995 and in January

and February 1996. The second chart shows a similar movement of

money in 2000 after Banco Republica had collapsed. In lieu of

Banco Republica it appears the money began moving to or through

Eurobanco.

622

MOVEMENT OF MONEY THROUGH BANCO REPUBLICA, AMERICAN EXCHANGE,

AND FEDERAL BANK

1995 and 1996

DATE AMOUNT FROM TO TO

January 31, 1995 $3,000,000 Banco Republica American Exchange Federal Bank

October 12, 1995 $5,000,000 Banco Republica American Exchange Federal Bank

December 14, 1995 $500,000 Banco Republica American Exchange Federal Bank

December 18, 1995 $1,000,000 Banco Republica American Exchange Federal Bank

December 20, 1995 $700,000 Banco Republica American Exchange Federal Bank

January 23, 1996 $500,000 Banco Republica American Exchange Federal Bank

January 25, 1996 $300,000 Federal Bank American Exchange Banco Republica

January 31, 1996 $600,000 Banco Republica American Exchange Federal Bank

February 1, 1996 $200,000 Federal Bank American Exchange Banco Republica

February 6, 1996 $200,000 Federal Bank American Exchange Banco Republica

February 7, 1996 $200,000 Federal Bank American Exchange Banco Republica

February 26, 1996 $549,778 Verwaltungs American Exchange Key West Ltd.

February 28, 1996 $600,000 Federal Bank American Exchange Banco Republica

February 29, 1996 $200,000 Federal Bank American Exchange Banco Republica

Prepared by the Minority Staff of the Permanent Subcommittee on Investigations, February 2001.

MOVEMENT OF MONEY THROUGH FEDERAL BANK, AMERICAN EXCHANGE,

AND EUROBANCO

2000

DATE AMOUNT FROM TO TO

January 27, 2000 $300,000 Federal Bank American Exchange Eurobanco

February 9, 2000 $300,000 Federal Bank American Exchange Eurobanco

February 29, 2000 $300,000 Federal Bank American Exchange Eurobanco

March 3, 2000 $300,000 Federal Bank American Exchange Eurobanco

March 15, 2000 $200,000 Federal Bank American Exchange Eurobanco

March 27, 2000 $200,000 Federal Bank American Exchange Eurobanco

April 3, 2000 $200,000 Federal Bank American Exchange Eurobanco

May 23, 2000 $292,343 Federal Bank American Exchange Eurobanco

May 23, 2000 $50,250 Federal Bank American Exchange Eurobanco

Prepared by the Minority Staff of the Permanent Subcommittee on Investigations, February 2001.

623

As the 1995/1996 chart shows, for example, on January 31, 1995,

$3 million was wired from Banco Republica’s correspondent account

in Citibank New York to the account in Citibank New York of

American Exchange Company. It was then, on that same day,

wired from the Citibank New York account of American Exchange

to the Citibank New York correspondent account of Federal Bank.

On October 12, 1995, $5 million was wired following the same

route.

These same-day transactions appeared to be at their height in

1996. For example, it happened some 17 times in the first 2

months of 1996. The Minority Staff consulted several experts with

respect to wire transfers and money laundering and not one of the

five persons consulted could explain a reasonable business justification for this pattern of transfers. All five suggested that the only

reason for the transactions going through American Exchange was

to layer the transactions, since all of the accounts involved were

dollar accounts in the United States.

Contrary to Lopez’ description of Federal Bank taking the place

or business of American Exchange Company for Grupo Moneta, the

monthly statements of Federal Bank and American Exchange Company show years of activity involving tens of millions of dollars

going back and forth between the two entities.

Lopez told the Subcommittee that Citibank Argentina in general,

and he as relationship manager in particular, never saw the

monthly statements of Federal Bank or Banco Republica. He said

the monthly statements were handled by Citibank New York which

held the correspondent account. Lopez said it would be Citibank

New York’s responsibility to monitor the movement of money

through the Banco Republica and Federal Bank accounts. Yet

Citibank New York told the Subcommittee it did not have that responsibility. The market head in New York told Minority Staff that

Citibank New York only monitored the account for overdrafts and

credit issues, and New York did not monitor the monthly accounts.

He said the Citibank office in Tampa was responsible for money

laundering oversight.

While the Central Bank of Argentina was concerned about the

movement of money between Federal Bank and Banco Republica,

and the movement of money involving the four Bahamanian companies established in 1997, the Subcommittee found no written evidence in the materials subpoenaed from Citibank that Citibank

New York or any Citibank office noticed or expressed any concern

with respect to either issue. Nor was there any documentation expressing any concern about or observation of the same-day movement of money through the three accounts of Banco Republica,

American Exchange, and Federal Bank.

Citibank’s failure to question the transactions and unusual movements of money through the Federal Bank, American Exchange,

and Banco Republica accounts is even more troubling in light of the

large sums involved. Movements of $200,000, $500,000, even $3

million in even sums were routine. In one exceptional transaction

occurring on April 29, 1994, one transfer of $28 million occurred.

This was four to five times the size of even the larger transactions

among these accounts.

624

In the 9 years of monthly statements reviewed by the Minority

Staff, deposits of hundreds of thousands of dollars were common;

the largest month saw total deposits of over $173 million. The magnitude of these monthly statements far exceeds any other offshore

bank reviewed by the Minority Staff investigation. Yet Citibank

asked few questions why a shell offshore bank in the Bahamas

would have access to such sums and chose to move its funds in the

patterns it did.

B. THE ISSUES

M.A. Bank and Federal Bank are shell offshore banks, licensed

in jurisdictions that have had weak anti-money laundering controls. Citibank accepted both banks as correspondent clients because they were affiliated with large commercial operations in Argentina. In the case of M.A. Bank, Mercado Abierto was a large

financial institution that was a customer of Citibank; with Federal

Bank, the relationship was even stronger. Citibank was a business

partner with Grupo Moneta and had been doing business with

Grupo Moneta entities for a number of years. Citibank reported in

its internal analysis of these entities that the principals of both

groups were persons with excellent reputations.

What Citibank overlooked or failed to see was that no past or

current relationship with, and no level of confidence in the reputations of, these financial groups can replace the need for independent regulatory oversight. And as shell offshore banks, neither

of these banks was subject to that oversight. With respect to M.A.

Bank, Citibank failed to address the fact that the financial entity

of which M.A. Bank was a part was not subject to any bank regulatory authority. Mercado Abierto, because it was a securities firm

and not a bank, was not subject to oversight by the Central Bank

of Argentina, and hence, M.A. Bank, as an affiliate, was never

brought within the Central Bank’s purview. In the case of Federal

Bank, Citibank’s conduct is more disturbing, because it was both

aware of and concerned about the fact that the Central Bank of Argentina did not know Federal Bank was owned by Grupo Moneta,

and yet it misled the Central Bank about Federal Bank’s ownership when it was asked for information. Had the Central Bank

known that Federal Bank was also owned by Grupo Moneta, Federal Bank, as an affiliate, might have come under the purview of

the Central Bank.

These shell offshore banks appear to have achieved exactly what

they set out to do—avoid independent regulatory oversight, and the

structure they used to do so should have set off alarm bells at

Citibank. In fact, M.A. Bank’s owners acknowledged as much when

they said that M.A. Bank set up administrative operations in Uruguay to avoid regulation. At least two banking experts have indicated to Minority Staff that any institution set up in a manner

similar to M.A. Bank would raise red flags, and they would expect

that the bank would be reviewed very closely before a correspondent relationship was established.

M.A. Bank. MAB employed banking practices that were characterized by a Special Examiner for the Federal Reserve Board of

Governors as inconsistent with typical banking operations and not

indicative of safe and sound banking practice. These practices were

625

highly vulnerable to money laundering and, as revealed by the investigation by the U.S. Customs Service, facilitated the concealment and movement of illicit funds. These practices included

accepting deposits and dispensing withdrawals in Argentina, in violation of Argentine banking law; accepting deposits from unidentified sources for unknown destinations; and using withdrawal forms

that did not contain the name of the bank.

The practices implemented by MAB—with the full knowledge of

the owners of the bank—appear to have violated Argentine banking law, violated anti-money laundering principles and created an

environment that facilitated money laundering and tax evasion. In

restating its policy regarding opening accounts for shell banks,

Citibank noted that ‘‘the character of the institution’’ is ‘‘key.’’ The

description of MAB’s structure and banking practices that Iribarne

provided to the U.S. Customs agent shows the questionable character and conduct of both MAB and the larger financial institution

with which it is affiliated. Yet, there were no examinations and reviews of MAB’s practices and policies, and the due diligence and

ongoing monitoring by Citibank in the case of MAB was poor.

* There was confusion at Citibank over the appropriate roles of

the account managers that created a lack of coordination with

respect to ongoing monitoring and lack of attention to activities in the MAB account. The Financial Institutions unit head

in Argentina told the Minority Staff that New York was responsible for monitoring the account. The market head in

New York said that the New York office only monitored for

credit and overdraft issues. As of December 1999, the account

officers in both New York and Argentina were uncertain

about what, if any, review of the account was being conducted

by the anti-money laundering unit in Florida. It appears that

Citibank did not have in place account profiles to identify

high risk customers that should be subjected to tighter monitoring. One was established for the Argentina financial institution accounts only after the bank learned that the assets

seized in the MAB account were related to drug trafficking.

The anti-money laundering unit in Tampa did not initiate a

review of the M.A. entities until late 1999 or early 2000, more

than 11⁄2 years after the assets in the account were seized. At

that point, it discovered a series of possible suspicious transactions that spanned nearly 3 years of account activity.

* Citibank was slow to follow up on the seizure warrant and

did not firmly press its client for answers to obvious issues

related to the seizure of the accounts’ assets. Customs issued

a seizure warrant on the M.A. Bank correspondent account at

Citibank for the Casablanca drug money in August 1998.

Citibank, however, never took any action to review the account in light of the seizure, nor did it require its client to

explain the reason for the seizure. Consequently, it was nearly 16 months before Citibank learned the reason for the seizure and began to take action. During that time period—June

1998 through September 1999—over $300 million moved

through the M.A. Bank correspondent account at Citibank.

626

Federal Bank. With respect to Federal Bank, Citibank remained acutely aware throughout the correspondent relationship of

the fact that Grupo Moneta was a partner with Citibank in CEI.

The extent to which this colored Citibank’s judgment in opening

and monitoring the three correspondent accounts discussed in this

case history cannot be isolated, but it clearly had some effect.

Citibank Argentina, which had responsibility for the due diligence

in opening correspondent accounts in Argentina and in maintaining

the correspondent relationships, accepted Grupo Moneta’s oral assurances that it had an anti-money laundering program in place.

It did not attempt to confirm that by requesting a copy of the program or the anti-money laundering requirements. No one at

Citibank apparently identified any of the activity in the accounts

or among the accounts as suspicious or worthy of further review,

despite the many same-day transaction among Federal Bank,

Banco Republica, and American Exchange Company.

But most troubling is Citibank’s participation in keeping from

the Central Bank information on the ownership of Federal Bank.

Citibank’s files are replete with references to Grupo Moneta’s ownership of Federal Bank. In fact, Citibank’s stated rationale for

opening the account with Federal Bank, which is an offshore shell

bank, and therefore an exception to Citibank’s policy, is specifically

because Federal Bank was part of a larger financial group with

what Citibank thought was a good reputation. Citibank has told

the Subcommittee that it would avoid any correspondent account

with an offshore shell bank not connected with a larger financial

institution with which Citibank already had a relationship. So,

Federal Bank’s ownership was not only something with which

Citibank was totally familiar; it was central to Citibank’s relationship with Federal Bank.

At the time Citibank received the request from the Central Bank

for ‘‘all information’’ Citibank Argentina ‘‘may have about Federal

Bank Limited, especially the identify of its shareholders,’’ Citibank

knew the Central Bank did not know Federal Bank was connected

to Grupo Moneta and Banco Republica. If it had known, the Central Bank might have included the Federal Bank in its audits, perhaps due to its common ownership with Banco Republica. The fact

that such audits were not taking place was noted by Martin Lopez,

the relationship manager, in 1996 as making Federal Bank ‘‘a risky

vehicle per se because it is controlled only by the Central Bank of

the Bahamas.’’ Yet in 1999 when the Central Bank of Argentina

specifically asked the President of Citibank Argentina, Carlos

Fedrigotti, for ‘‘all information’’ about Federal Bank, Fedrigotti said

‘‘our records contain no information that would enable us to determine’’ who owns Federal Bank.

Because of this unusual response, the question arises as to why

Citibank would be less than forthright in answering the Central

Bank’s inquiry. One answer may be it was responding to a request

from Grupo Moneta to maintain confidentiality about its activities.

Another answer may be that since, according to Citibank internal

documents Federal Bank was being used by Grupo Moneta to loan

money to CEI related entities, it was helping Grupo Moneta avoid

sanction from the Central Bank for violating the Central Bank’s

limitations on lending to related entities. A third answer may be

627

that Citibank did not want to trigger Central Bank oversight of

Federal Bank. The reason for Citibank’s misleading response to the

Central Bank of Argentina remains a troubling mystery.

For both of these banks, perhaps the biggest failing for Citibank

was that Citibank did not believe the nature of these banks—an

offshore bank with no physical presence and no regulation—was an

important factor. Therefore it did not give the banks heightened

scrutiny or attention, where more timely and thorough reviews of

their operations and transactions may have identified the unsound

practices and suspicious transactions that occurred in the accounts,

much earlier than when they were finally discovered.

628

M.A. BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK

February 1995–December 1996

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

February 1995 ($681) $162,283 $148,296 $13,304

March 1995 $13,304 $4,187,984 $4,151,288 $50,000

April 1995 $50,000 $5,080,782 $5,001,453 $129,328

May 1995 $129,328 $4,387,155 $4,466,484 $50,000

June 1995 $50,000 $8,113,597 $8,113,597 $50,000

July 1995 $50,000 $11,998,916 $11,998,016 $50,000

August 1995 $50,000 $17,161,739 $17,132,380 $79,359

September 1995

October 1995 $50,000 $10,536,298 $10,536,298 $50,000

November 1995 $50,000 $12,374,605 $12,324,187 $100,418

December 1995 $100,418 $31,905,451 $31,955,869 $50,000

Total 1995 $105,908,810 $105,828,768

January 1996 $50,000 $15,435,676 $15,435,676 $50,000

February 1996 $50,000 $18,288,394 $18,244,033 $94,361

March 1996 $94,361 $29,737,386 $29,781,747 $50,000

April 1996 $50,000 $27,652,732 $27,652,732 $50,000

May 1996 $50,000 $70,351,181 $70,351,181 $50,000

June 1996 $50,000 $113,705,149 $113,690,140 $65,008

July 1996 $65,008 $56,838,539 $56,861,922 $41,625

August 1996 $41,625 $77,623,351 $77,804,976 ($140,000)

September 1996 ($140,000) $67,787,876 $67,597,876 $50,000

October 1996 $50,000 $74,085,484 $74,085,484 $50,000

November 1996

December 1996 $50,000 $59,039,012 $59,059,759 $29,252

Total 1996 $610,544,780 $610,565,526

Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, February 2001.

Blanks indicate missing or illegible statements.

629

M.A. BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK

January 1997–December 1998

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

January 1997 $29,252 $53,303,323 $53,282,576 $50,000

February 1997 $50,000 $52,151,036 $52,151,036 $50,000

March 1997 $50,000 $61,535,040 $61,441,073 $143,967

April 1997 $143,967 $51,890,047 $51,969,615 $64,400

May 1997 $64,400 $65,409,697 $65,424,097 $50,000

June 1997 $50,000 $123,432,889 $123,432,889 $50,000

July 1997 $50,000 $77,893,843 $77,893,843 $50,000

August 1997 $50,000 $69,659,609 $69,648,709 $60,900

September 1997 $60,900 $34,261,446 $34,272,346 $50,000

October 1997 $50,000 $63,395,384 $63,395,384 $50,000

November 1997 $50,000 $29,626,805 $29,547,543 $129,262

December 1997 $129,262 $32,116,655 $32,195,917 $50,000

Total 1997 $714,675,774 $714,655,028

January 1998 $50,000 $22,477,997 $22,477,997 $50,000

February 1998 $50,000 $21,638,729 $21,656,626 $32,102

March 1998 $32,102 $52,967,821 $52,898,526 $101,397

April 1998 $101,397 $36,678,415 $36,729,813 $50,000

May 1998 $50,000 $14,723,277 $14,772,243 $1,033

June 1998 $1,033 $88,437 $83,915 $5,555

July 1998 $5,555 $809,708 $803,435 $11,828

August 1998 $11,828 $477,493 $487,567 $1,754

September 1998 $1,754 $13,864,214 $13,851,106 $14,862

October 1998 $14,862 $17,297,364 $17,271,129 $41,098

November 1998 $41,098 $25,007,496 $25,041,389 $7,205

December 1998 $7,205 $22,307,275 $22,285,826 $28,654

Total 1998 $228,338,226 $228,359,572

Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, February 2001.

630

M.A. BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK

January 1999–September 1999

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

January 1999 $28,654 $15,456,337 $15,465,042 $19,949

February 1999 $19,949 $12,091,326 $12,022,305 $88,971

March 1999 $88,971 $24,896,503 $24,878,009 $107,465

April 1999 $107,465 $30,695,291 $30,752,757 $50,000

May 1999 $50,000 $17,330,081 $17,344,307 $35,773

June 1999 $35,773 $37,675,161 $37,672,550 $38,384

July 1999 $38,384 $13,204,280 $13,227,554 $15,109

August 1999 $15,109 $32,415,839 $32,380,949 $50,000

September 1999 $50,000 $40,784,536 $40,809,836 $24,699

Total 1999 $224,549,354 $224,553,309

Total 1995–1999 $1,884,016,944 $1,883,962,203

Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, February 2001.

631

M.A. BANK ACCOUNT ACTIVITY AT CITIBANK

AFTER SERVICE OF THE SEIZURE WARRANT

June 1998–September 1999

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

June 1998 $1,033 $88,437 $83,915 $5,555

July 1998 $5,555 $809,708 $803,435 $11,828

August 1998 $11,828 $477,493 $487,567 $1,754

September 1998 $1,754 $13,864,214 $13,851,106 $14,862

October 1998 $14,862 $17,297,364 $17,271,129 $41,098

November 1998 $41,098 $25,007,496 $25,041,389 $7,205

December 1998 $7,205 $22,307,275 $22,285,826 $28,654

January 1999 $28,654 $15,456,337 $15,465,042 $19,949

February 1999 $19,949 $12,091,326 $12,022,305 $88,971

March 1999 $88,971 $24,896,503 $24,878,009 $107,465

April 1999 $107,465 $30,695,291 $30,752,757 $50,000

May 1999 $50,000 $17,330,081 $17,344,307 $35,773

June 1999 $35,773 $37,675,161 $37,672,550 $38,384

July 1999 $38,384 $13,204,280 $13,227,554 $15,109

August 1999 $15,109 $32,415,839 $32,380,949 $50,000

September 1999 $50,000 $40,784,536 $40,809,836 $24,699

TOTAL $304,401,341 $304,377,676

Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee on Investigations, February 2001.

632

FEDERAL BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK

November 1992–December 1994

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

November 1992 $0 $5,330,633 $5,328,982 $1,650

December 1992 $1,650 $14,368,856 $14,285,770 $84,736

January 1993 $84,736 $19,293,049 $19,376,530 $1,255

February 1993 $1,255 $11,915,523 $11,917,691 ($912)

March 1993 ($912) $41,857,850 $41,851,575 $5,362

April 1993 $5,362 $12,360,188 $12,329,939 $35,611

May 1993 $35,611 $36,299,282 $36,339,371 ($4,477)

June 1993 ($4,477) $37,703,801 $37,699,349 ($25)

July 1993 ($25) $88,234,741 $88,251,972 ($17,256)

August 1993 ($17,256) $52,691,342 $52,682,873 ($8,787)

September 1993 ($8,787) $73,444,093 $73,438,767 ($3,461)

October 1993 ($3,461) $51,118,708 $51,126,460 ($11,213)

November 1993 ($11,213) $149,155,112 $149,143,898 $0

December 1993 . $0 $79,902,823 $79,917,429 ($14,605)

January 1994 ($14,605) $119,180,140 $119,170,186 ($4,652)

February 1994

March 1994 ($1,079) $128,860,126 $128,874,553 ($15,506)

April 1994 ($15,506) $173,589,317 $173,582,384 ($8,573)

May 1994

June 1994

July 1994 ($2,376) $75,126,638 $75,154,291 ($30,029)

August 1994 ($30,029) $104,071,925 $104,095,369 ($53,474)

September 1994 ($53,474) $104,015,463 $103,973,061 ($13,130)

October 1994

November 1994

December 1994 ($24,173) $131,987,104 $131,953,077 $9,853

TOTAL $1,510,506,794 $1,510,493,527

Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee of Investigations, February 2001.

Blanks indicate missing or illegible statements.

633

FEDERAL BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK

January 1995–December 1996

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

January 1995 $9,853 $77,902,327 $77,812,083 $100,097

February 1995 $100,097 $37,320,409 $37,420,510 ($2)

March 1995 ($2) $40,146,626 $40,128,623 $18,000

April 1995 $18,000 $64,907,222 $64,925,222 $0

May 1995 $0 $66,135,773 $66,135,773 $0

June 1995 $0 $53,132,809 $53,132,809 $0

July 1995 $0 $38,592,158 $38,498,750 $93,407

August 1995 $93,407 $35,547,949 $35,535,402 $105,954

September 1995 $105,954 $36,033,726 $36,056,731 $82,950

October 1995 $82,950 $24,221,051 $24,304,001 $0

November 1995 $0 $36,479,258 $36,479,258 $0

December 1995 $0 $113,992,702 $113,992,702 $0

January 1996 $0 $54,200,617 $54,129,753 $70,864

February 1996 $70,864 $62,305,676 $61,707,140 $669,400

March 1996 $669,400 $75,194,172 $75,778,277 $85,295

April 1996 $85,295 $48,112,851 $48,125,529 $72,617

May 1996 $72,617 $56,509,422 $56,555,268 $26,771

June 1996 $26,771 $55,312,054 $55,314,825 $24,000

July 1996 $24,000 $53,429,086 $53,436,486 $16,600

August 1996 $16,600 $63,314,748 $63,331,348 $0

September 1996 $0 $39,876,070 $39,876,070 $0

October 1996 $0 $46,031,435 $45,979,735 $51,700

November 1996 $51,700 $58,088,719 $58,140,419 $0

December 1996 $0 $81,790,876 $81,741,676 $49,200

TOTAL $1,318,577,736 $1,318,538,390

Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee of Investigations, February 2001.

634

FEDERAL BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK

January 1997–December 1998

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

January 1997 $49,200 $43,274,452 $43,323,652 $0

February 1997 $0 $52,501,155 $52,501,155 $0

March 1997 $0 $61,630,109 $61,630,109 $0

April 1997 $0 $72,857,583 $72,853,383 $4,200

May 1997 $4,200 $62,792,675 $62,796,875 $0

June 1997 $0 $75,546,117 $75,546,117 $0

July 1997 $0 $97,272,324 $97,272,324 $0

August 1997 $0 $85,765,292 $85,765,292 $0

September 1997 $0 $74,203,479 $74,203,479 $0

October 1997 $0 $51,146,255 $51,008,730 $137,525

November 1997 $137,525 $70,438,211 $70,575,736 $0

December 1997 $0 $80,512,574 $80,512,574 $0

January 1998 $0 $31,683,853 $31,683,853 $0

February 1998 $0 $57,012,817 $57,012,817 $0

March 1998 $0 $69,827,366 $69,827,366 $0

April 1998 $0 $22,084,470 $22,084,470 $0

May 1998 $0 $61,855,635 $61,841,635 $14,000

June 1998 $14,000 $58,670,711 $58,663,711 $21,000

July 1998 $21,000 $43,087,986 $42,220,686 $888,300

August 1998 $888,300 $71,361,949 $71,873,449 $376,800

September 1998 $376,800 $55,974,848 $56,334,848 $16,800

October 1998 $16,800 $25,500,166 $25,489,966 $27,000

November 1998 $27,000 $8,989,479 $9,014,979 $1,500

December 1998 $1,500 $22,857,608 $22,859,108 $0

Total $1,356,847,114 $1,356,896,314

Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee of Investigations, February 2001.

635

FEDERAL BANK MONTHLY ACCOUNT ACTIVITY AT CITIBANK

January 1999–May 2000

MONTH OPENING

BALANCE DEPOSITS WITHDRAWALS CLOSINGBALANCE

January 1999 $0 $35,205,145 $35,205,145 $0

February 1999 $0 $19,695,910 $19,695,910 $0

March 1999 $0 $22,251,472 $22,251,472 $0

April 1999 $0 $8,226,070 $8,226,070 $0

May 1999 $0 $12,425,893 $12,424,393 $1,500

June 1999 $1,500 $3,045,581 $3,047,081 $0

July 1999 $0 $2,905,798 $2,905,798 $0

August 1999 $0 $7,559,454 $7,559,454 $0

September 1999 $0 $813,164 $813,164 $0

October 1999 $0 $1,902,299 $1,902,299 $0

November 1999 $0 $3,780,819 $3,779,819 $1,000

December 1999 $1,000 $1,313,588 $1,314,588 $0

January 2000 $0 $344,609 $344,609 $0

February 2000 $0 $797,156 $797,156 $0

March 2000 $0 $1,372,541 $1,372,541 $0

April 2000 $0 $6,386,905 $6,386,905 $0

May 2000 $0 $3,688,886 $3,660,165 $28,721

TOTAL $131,715,290 $131,686,569

Prepared by the Minority Staff, U.S. Senate Permanent Subcommittee of Investigations, February 2001.

636

637

638

639

640

641

642

643

644

311 United States v. Berlin (U.S. District Court for the Southern District of New York Criminal

Case No. S1–99–CR–914 (SWK)), information filed 2/16/00; United States v. Kudryavtsev (U.S.

District Court for the Southern District of New York Criminal Case No. S1–00–CR–75 (JSR)),

information filed 3/29/00.

APPENDIX

This appendix summarizes a number of money laundering scandals and financial frauds referenced in the report, concentrating on

how each utilized U.S. correspondent bank accounts. Included are:

(1) Bank of New York scandal;

(2) Koop fraud;

(3) Cook fraud;

(4) Gold Chance fraud;

(5) $10 million CD interpleader;

(6) other suspect transactions at the British Trade and Commerce Bank;

(7) Taves fraud and the Benford account; and

(8) IPC fraud.

(1) Bank of New York Scandal

The Bank of New York scandal became public news during the summer of 1999, with media reports of $7 billion in suspect funds

moving from two Russian banks through a U.S. bank to thousands

of bank accounts throughout the world.

Pleadings from subsequent criminal cases describe what happened.311 They indicate that, during a 4-year period from 1995– 1999, two Russian banks, Depositamo-Kliringovy Bank (‘‘DKB’’)

and Commercial Bank Flamingo, deposited over $7 billion into correspondent bank accounts at the Bank of New York (‘‘BNY’’) in the

United States. After successfully gaining entry for these funds into

the U.S. banking system, on multiple occasions, the Russian banks

transferred amounts from their BNY correspondent accounts to

commercial accounts at BNY that had been opened for three shell

corporations, Benex International Co. Inc. (‘‘Benex’’), Becs International L.L.C. (‘‘Becs’’), and Lowland, Inc. These three corporations, in turn, transferred the funds to thousands of other bank accounts around the world, using electronic wire transfer software

provided by BNY. In aggregate, from February 1996 through August 1999, the three corporations completed more than 160,000

wire transfers.

In February 2000, guilty pleas were submitted by Lucy Edwards,

former vice president of BNY’s Eastern European Division, her

husband Peter Berlin, and the three corporations to conspiracy to

commit money laundering, operating an unlawful banking and

money transmitting business in the United States, and aiding and

abetting Russian banks in conducting unlawful and unlicensed

banking activities in the United States. The defendants admitted

that their money laundering scheme had been designed in part to

help Russian individuals and businesses transfer funds in violation

of Russian currency controls, customs duties and taxes. The three

corporations agreed to forfeit more than $6 million in their BNY

bank accounts.

In August 2000, a Federal court held that the United States had

alleged sufficient facts to establish probable cause to seize an addiVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00654 Fmt 6621 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
645

312 United States v. $15,270,885.69 (2000 U.S. Dist. LEXIS 12602, 2000 WL 1234593 SDNY

2000). 313 Id. at footnote 11. 314See, e.g., 1999 hearings on Russian Money Laundering before House Banking Committee.

tional $27 million from two BNY correspondent accounts belonging

to DKB and its part owner, another Russian bank called Sobinbank.312 The judge expressed skepticism regarding Sobinbank’s

claim to be protected from seizure of its funds due to its status as

an innocent bank, observing in a footnote:

The Court cannot fathom how billions of Sobinbank’s dollars

could have been transferred out of its constantly replenished

BONY Account, to accounts in the United States, without

Sobinbank’s knowledge or willful blindness to the scheme.313

While denying criminal liability for its own actions, BNY

committed itself in a February 2000 agreement with the Federal

Reserve Bank of New York and the New York State Banking Department to revamping its correspondent banking practices and

anti-money laundering controls. In particular, BNY agreed to

strengthen its due diligence reviews and its systems for reporting

suspicious activity. BNY subsequently ended correspondent relationships with about 180 Russian banks.

The BNY scandal caused other U.S. banks to review their correspondent accounts with Russian banks as well. Information provided in response to the Subcommittee’s correspondent banking

survey indicates that, from 1998 to 2000, Deutsche Bank’s U.S. operations reduced the number of its correspondent relationships

with Russian banks from 149 to 57, while HSBC Bank USA ended

almost 230 relationships with Russian banks, going from 283 to 57.

The BNY scandal also led to a wider review of Russian money

laundering activities utilizing international payment systems to

move funds.314 The State Department’s 1999 International Narcotics Control Strategy Report, a leading analysis of international

anti-money laundering efforts, reported that according to the Central Bank of Russia, $78 billion was sent by Russians to offshore

accounts in 1998 alone, and $70 billion of that amount went

through banks chartered in Nauru, a small island in the Pacific.

In response, several U.S. banks determined in 1999 that they

would no longer open correspondent accounts or process wire transfers for banks licensed by Nauru or certain other small South Pacific islands. Nauru is reported to have licensed 400 banks in recent years, including Sinex Bank which, according to the court

order in the BNY civil forfeiture case, was the ordering party ‘‘responsible for over $3 billion in transfers to the Benex and Becs Accounts’’ at the Bank of New York.

The BNY money laundering scandal, the revelations regarding

Russian correspondent banking practices, and the $7 billion and

$78 billion figures reflecting possibly illegal Russian funds moving

through the U.S. and international correspondent banking systems,

drive home the money laundering vulnerabilities present in the

correspondent banking field.

646

315 United States v. Koop (U.S. District Court for the District of New Jersey Criminal Case

No. 00–CR–68), criminal information dated 2/4/00. 316 As set out in the case histories for each bank, Koop moved about $4.3 million through

ODBT, nearly $5 million through Hanover Bank, and about $4 million through BTCB. He

moved additional millions through other banks in the United States and elsewhere. 317Key interviews included a March 30, 2000 interview of Koop; a June 26, 2000 interview

of Hanover Bank’s sole owner, Michael Anthony (‘‘Tony’’) Fitzpatrick, an Irish citizen who voluntarily cooperated with the investigation; a October 13, 2000 interview of ODBT’s sole owner L.

Malcolm West, a British citizen who also voluntarily cooperated; and a July 23, 2000 interview

of Terrence S. Wingrove, a British citizen fighting extradition to the United States to stand trial

on criminal charges related to the Koop fraud. Wingrove also voluntarily cooperated with the

investigation and was interviewed at Wormwood Scrubs prison in London. 318Many of the documents in this matter were provided by a defrauded investor who filed

suit against Koop, Schmidt v. Koop (U.S. District Court for the District of New Jersey Civil Case

No. 978–CIV–4305), in an attempt to recover a $2.5 million investment.

(2) Koop Fraud

In February 2000, William H. Koop, a U.S. citizen from New Jersey, pleaded guilty to conspiracy to commit money laundering in

violation of 18 U.S.C. 1957.315 Koop was the key figure in a financial fraud which, over 2 years, bilked hundreds of U.S. investors

out of millions of dollars. As part of this fraud, Koop made frequent

use of U.S. correspondent accounts utilized by three offshore banks,

Overseas Development Bank and Trust (ODBT), Hanover Bank

and British Trade and Commerce Bank (BTCB). He moved about

$13 million in illicit proceeds through U.S. accounts associated

with these banks,316 and used their services to launder these funds

and otherwise advance his fraudulent activity.

Nature of Koop Fraud. Court pleadings, documents, videotapes, and interviews 317 provide the following information about

Koop’s illicit activities.318 In or around the summer of 1997, Koop,

a retired swimming pool contractor with no financial credentials or

education beyond high school, began to represent himself as an experienced investment advisor. Koop claimed he had a high yield investment program that could produce returns as high as 489% over

a 15-month period, allegedly with little or no risk. He also admitted

in his criminal proceedings that he had represented himself as specializing in ‘‘prime bank notes,’’ which he acknowledged are fictitious financial instruments. On a number of occasions, Koop appeared before groups of small investors urging them to pool their

funds into amounts of $1 million to $5 million, for placement into

his investment program. Over 200 U.S. investors appear to have

placed funds with Koop. With rare exceptions, none has recovered

any of their principal or promised returns.

Koop called his investment program the ‘‘I.F.S. Monthly ‘Prime’

Program.’’ Koop operated this program through several entities he

controlled, all of which he referred to as ‘‘IFS.’’ These entities included: (1) International Financial Solutions, Ltd., which was incorporated in Dominica by OBD, and changed its name on 11/28/97,

to Info-Seek Ltd.; (2) Info-Seek Asset Management Trust, which

was established by BTCB in Dominica on 4/20/98; and (3) Info-Seek

Asset Management S.A., which was established by BTCB in Dominica on the same day, 4/20/98.

Koop prepared and distributed a large packet of information

about the IFS investment program to potential investors. His promotional materials explained the IFS investment program as follows:

647

319See United States v. Johnny William Cabe and Shelton Joel Shirley (U.S. District Court

for the District of South Carolina Criminal Case No. 0:00–301) and United States v. Terrence

Stanley Victor Wingrove (U.S. District Court for the District of South Carolina Criminal Case

No. 0:00–91). 320Schmidt v. Koop, Koop deposition (12/10/98) at 121.

This program will pay you up to 489% plus principal on your

investment, and your initial investment is guaranteed. . . .

Receive a check for 5% of your initial investment each month

while your balance grows to the rate chosen in any one of the

following listed programs. Your first check starts after the first

90 days. . . . If you are worried about whether IFS will

really pay what is promised, please be advised that IFS

has never failed to payout on any program that it has

ever entered into with any and all clients. [Emphasis in

original text.]

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

Your investment in the form of money will be held in a trust

offshore. There is a very large demand offshore for large blocks

of money that are certified and cleared as clean funds. By joining group funds together and committing large blocks of funds,

we are able to command the returns that are normal for these

transactions.

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

materials stated:

All of the monies go into the trust where they are disbursed

through lines of credit and promissory notes. This is done

through a credit line that IFS has been able to establish with

many of the prime banks of the world. The money never leaves

the trust. The truth of the matter is that these funds are safer

than mutual funds, real estate and the stock market.

When asked about taxes, the materials stated, ‘‘It is up to you

to report your income to Uncle Sam as you see fit to do so. Due

to the fact that IFS is setup as a pure private trust, we do not report it to anyone.’’

Koop worked with a number of other persons who served as

intermediaries in organizing individuals into investment groups

and soliciting investment funds. Koop worked, for example, with a

minister in South Carolina, Johnny Cabe, who formed his own company called Hisway International Ministries, and solicited investments primarily from church members.319 He worked with Hank A.

Renovato Jr. who formed a Nevada corporation, Capital Fortress,

Inc., and solicited investors in Alabama and Colorado. He worked

with Glenn Cruzen who formed a company called Effortless Prosperity and solicited investments in Texas and California; Richard

Olit who solicited investors in California; Leighton L.K.L.

Suganuma who formed a Nevada corporation called Aloha ‘‘The

Breath of Life’’ Foundation, Inc.; and Mark A. Meyerdirk in Kansas. Koop also worked with two individuals living in England, Terrence Wingrove and Winston Allen. Koop has indicated that he

typically paid an intermediary 10% of the funds they were responsible for directing into the IFS investment program.320

648

321For example, the investigation obtained copies of faxes dated 8/12/97, which were written

by Koop, were addressed specifically to ODBT, and referred to the initial opening of Koop-related accounts at the bank. A key account statement covering an 18-month period from 8/97

until 3/99, was also issued by ODBT. The investigation found no similar documentation addressed to AIB. Because, from its inception in 1996 until late 1997, ODBT had a correspondent

account at AIB, Koop may have mistakenly thought that he was dealing with AIB. Much of the

documentation related to the Koop accounts at ODBT was collected in discovery proceedings related to Schmidt v. Koop, after Koop provided written authorization for ODBT to produce all

documentation related to his accounts at the bank. Some of the documents refer to Overseas

Development Bank, or Overseas Development Banking Group, rather than Overseas Development Bank and Trust. But because the vast majority refers to ODBT, this discussion refers to

ODBT throughout the text. 322ODBT also appears to have kept the Koop-related accounts after it terminated its association with AIB in the spring of 1998, possibly because Koop was one of the few AIB depositors

with substantial assets.

Koop’s Use of Offshore Banks. Koop utilized numerous bank

accounts in the commission of his illicit activities. At first, he directed fraud victims to send money to his personal bank account

at Interchange State Bank in Saddle Brook, New Jersey. Later he

directed funds to banks in other States such as Illinois, Missouri,

and Oregon. In 1997, he began using offshore banks. Koop used the

offshore banks examined in this investigation to further his fraudulent activities in four ways: (1) to establish offshore companies to

conduct business transactions; (2) to open offshore accounts where

co-conspirators and investors could send funds and he could start

to launder them; (3) to generate revenue and perpetrate his fraud

by offering investors the opportunity, for a fee, to open their own

offshore bank accounts where promised investment returns could

be deposited; and (4) to increase his wealth by earning interest on

deposits or using the offshore banks’ investment programs.

Overseas Development Bank and Trust. ODBT was the first

offshore bank Koop used in his fraud. ODBT established Koop’s initial offshore corporation, International Financial Solutions, Ltd.,

which would become one of Koop’s primary corporate vehicles for

the fraud. ODBT opened five accounts for Koop and allowed millions of dollars in illicit proceeds to move through them. It allowed

Koop to open at least 60 more accounts for third parties—who

turned out to be the defrauded investors, before ODBT liquidity

problems caused Koop to switch his offshore banking to Hanover

Bank and BTCB.

According to Koop, he first became involved in offshore banking

when, in 1997, he saw a fax advertising offshore services at American International Bank (AIB) in Antigua and Barbuda. Koop said

that he quickly and easily established his first offshore corporation

and opened his first offshore account at AIB, without ever actually

speaking to anyone at the bank. He said he simply exchanged

faxed materials with the bank, including an application form requesting minimal due diligence information, and his corporation

and account were established.

Koop said in his interview that he later learned that AIB had

been taken over by ODBT and so began dealing with ODBT. However, account documentation indicates that he dealt with directly

with ODBT from the beginning, and that ODBT appears to have

handled his accounts from their inception.321 The documentation

indicates that Koop had accounts at ODBT for almost 2 years, from

August 1997 until April 1999, which was also the key time period

for his fraudulent activity.322

649

323The incorporation papers for Koop’s key offshore company, International Financial Solutions, Ltd., indicate it was incorporated in Dominica on 10/21/94, although later documents

claim the incorporation date was 10/21/97. Since the ODBT account documentation shows transactions as early as August 1997, however, the 1994 incorporation date appears more likely to

be authentic. On November 28, 1997, Koop changed the name of his company from International

Financial Solutions, Ltd. to Info-Seek Ltd. He referred to both companies as ‘‘IFS.’’ 324This account was associated with a Visa credit card that ODBT had provided to Koop’s company and was apparently used to pay the company’s substantial Visa charges. 325 Charity-Seek International Ltd. was incorporated as a Dominican bearer-share company by

ODBT at Koop’s request in December 1997. Koop told the bank that the company would be

owned by Charity-Seek International Trust, which Koop described as a trust he had previously

established in Belize and which was controlled by him and his associates, Hank Renovato,

Leighton Suganuma and Mark Meyerdirk. Professional Fund Raisers International Ltd. was incorporated by ODBT on the same day as a bearer-share company that Koop said would be

owned by a Belizian trust, Professional Fund Raisers International Trust, controlled by the

same individuals. Koop requested the establishment of both companies and their accounts in a

12/2/97 memorandum he sent to West at ODBT. He asked ODBT to establish the companies

and accounts within 24 hours of his request. Koop also made the unusual request that ODBT

serve as the account signatory for both accounts, apparently to avoid identification of the accounts if a subpoena were to request all accounts for which Koop were a signatory. In response,

ODBT established both accounts within 24 hours, although it is unclear whether ODBT agreed

to act as the signatory for them. West indicated in his interview that he did not recall either

account and did not believe that ODBT would have agreed to act as the signatory since that

would have been ‘‘very unusual.’’ He said that his normal course of action would have been to

forward the Koop requests to AIMS for processing. He promised to research the matter and provide copies of the account opening documentation if they could be located, but no such documents were provided to the Minority Staff investigation. 326ODBT also opened accounts for some of the persons working with Koop, in particular account numbered 010–003–026 for Effortless Prosperity, a company associated with Glenn

Cruzen. 327The largest transactions were:

—$1.2 million withdrawal on 9/8/97 to Bank of America for George Bevre; —$800,000 transfer on 11/5/97 to the second IFS account numbered 010–002–285; —$800,000 withdrawal on 12/3/97 to Arab Bank in Dubai, U.A.E.; and

—$500,000 withdrawal on 3/6/98 to Measures Frank & Co.

ODBT documentation indicates that the bank established at

least the following five Dominican corporations for Koop and

opened bank accounts in their names:

(a) account numbered 010–001–988 for International Financial

Solutions, Ltd.; 323

(b) account numbered 010–002–285 for International Financial

Solutions, Ltd.; 324

(c) account numbered 010–003–844 for Info-Seek Ltd.;

(d) account numbered 010–003–753 for Charity-Seek International Ltd.; 325 and

(e) account numbered 010–003–754 for Professional Fund

Raisers International Ltd.

The investigation obtained only one, fairly complete account

statement for these five accounts. It lists all transactions for IFS

account numbered 010–001–988, from August 1997 when it opened,

until March 17, 1999, about a month before the account closed.

Most of the deposits and withdrawals were in large round numbers, such as $10,000, $50,000 or $100,000. Many of the deposits

were made by Koop, his fraud victims or co-conspirators.326 Over

a dozen transactions, mostly withdrawals, exceeded $100,000.327

Altogether over almost 18 months, the account statement shows deposits totaling more than $4.3 million and withdrawals of nearly

the same amount.

The investigation also obtained a single page from an account

statement for the IFS account numbered 010–002–285, covering

the first month this account was opened. It shows an initial deposit

of $800,000, all of which was transferred from the original IFS acVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00659 Fmt 6621 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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328This balance apparently reflects both IFS accounts open at the time, account 101–001–988

with about $783,000, and account 010–002–285 with about $800,000. 329These account entries were:

—$7,500 on 11/7/97 for 25 accounts; —$4,500 on 11/12/97 for 15 accounts; —$4,500 on 1/16/98 for 15 accounts;

—$1,800 on 2/13/98 for 6 accounts.

count; two withdrawals totaling $700,000, which were wire transferred on December 3, 1997 to Arab Bank in Dubai, and a closing

balance of about $100,000. On November 26, 1997, Overseas Development Banking Group issued a letter ‘‘To Whom It May Concern’’

stating that Koop was the sole signatory for the IFS account and

the account balance was in excess of $1.5 million.328 All of this

money was related to Koop’s self-confessed financial fraud and

money laundering.

The IFS account statement also includes four entries showing

that Koop paid $300 per account to open 60 additional accounts at

ODBT, apparently for fraud victims who wished to open their own

offshore accounts.329 Koop apparently was charging his investors a

much higher fee than $300 for each account he opened. The investigation obtained copies of faxes sent by 16 individuals in nine

States in the United States to ODBT, inquiring about the status

of their ODBT accounts and whether Koop or IFS had deposited

any funds into them. When asked, West indicated during his interview that he had been unaware of the 60 accounts opened by Koop

for third parties. He said that, in 1999, ODBT had closed numerous

accounts with small balances due to a lack of information about the

beneficial owners of the funds, and guessed that the 60 accounts

were among the closed accounts. While he promised to research the

60 accounts, he did not provide any additional information about

them.

Because the Minority Staff investigation was unable to obtain account statements for the 60 accounts, the other four accounts

opened for Koop, and the accounts opened for other persons involved in the IFS investment scheme, the total deposited into

ODBT accounts in connection with the Koop fraud is unknown. The

facts indicate, however, that it is certain to collectively involve millions of dollars.

Koop directed his co-conspirators and fraud victims to send funds

to his ODBT accounts through various U.S. correspondent accounts. For example, account statements for Jamaica Citizens

Bank Ltd. (now Union Bank of Jamaica, Miami Agency) show numerous Koop-related transactions from October 1997 into early

1998. Wire transfer documentation shows repeated transfers

through Barnett Bank in Jacksonville. In both cases, the funds

went through a U.S. account belonging to AIB, and from there were

credited to ODBT and then to Koop. In January 1998, Koop also

issued wire transfer instructions directing funds to be sent to Bank

of America in New York, for credit to Antigua Overseas Bank, for

further credit to Overseas Development Bank, and then to one of

his five accounts at ODBT.

In the spring of 1998, ODBT began experiencing liquidity problems and failing to complete Koop’s wire transfer requests. Koop

materials from this time period state:

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330See account opening documentation, 4/9/98 document signed by Brazie on how to structure

BTCB relationship. See also Schmidt v. Koop, Koop deposition (12/10/98) at 130. 331Schmidt v. Koop, Koop deposition (3/2/99) at 431.

We are currently transacting our banking business with the

Overseas Development Bank and Trust Company, which is

domiciled in the island of Dominic[a] in the West Indies. We

have witnessed a slowness in doing business with this bank as

far as deposit transfers and wire transfers are concerned. Because of these delays, we have made arrangements with the

Hanover Bank to open accounts for each of our clients that are

currently with ODB, without any charge to you. If you are interested in doing so, please send a duplicate copy of your bank

reference letter . . . passport picture . . . [and] drivers license.

. . . IFS will then open an account for you in the Hanover

Bank, in the name of your trust.

By April 1998, Koop began directing his co-conspirators, and

fraud victims to deposit funds in U.S. correspondent accounts being

used by Hanover Bank or BTCB, and generally stopped using his

ODBT accounts. In a document sent to Koop investors entitled, ‘‘A

Personal Letter from the Desk of William H. Koop,’’ dated June 22,

1998, Koop stated that, due to the problems encountered at ODBT,

IFS had made the ‘‘changeover’’ to Hanover Bank. Koop finally

closed his ODBT accounts in April 1999.

Hanover Bank. Koop’s subsequent use of Hanover Bank is detailed in that bank’s case history, earlier in this report.

Koop and BTCB. Koop stated that he began his relationship

with BTCB in mid-1998, after a chance meeting in Washington,

D.C. with Charles Brazie, a BTCB vice president, who told him

about the bank’s high yield investment program and faxed him account opening forms.330 BTCB documentation indicates that Koop

opened his first BTCB bank account on April 20, 1998.

Over the course of 1998, BTCB documentation indicates that the

bank established the following five Dominican corporations for

Koop and opened bank accounts in their names:

(a) account numbered 101–011089–0 for Info-Seek Asset Management S.A.;

(b) account numbered 101–011079–2 for Hanover B Ltd.;

(c) account numbered 101–011117–3 for Cadogan Asset Management Ltd.;

(d) account numbered 101–011107–5 for Atlantic Marine

Bancorp Ltd.; and

(e) an account for Starfire Asset Management S.A.

The Info-Seek Asset Management S.A. account was the successor

to Koop’s three IFS accounts at ODBT. Hanover B Ltd. was incorporated on May 21, 1998. The Hanover B account was opened in

an apparent attempt by Koop to mimic a correspondent account for

Hanover Bank. Koop has stated in a sworn deposition that the

name ‘‘Hanover B Ltd.’’ was chosen ‘‘to correspond to Hanover

Bank.’’ 331 Another person indicted in the Koop fraud, Terrence

Wingrove has said that he understood the Hanover B account was

opened to ‘‘mirror’’ the real Hanover Bank account and make fraud

victims think they were sending funds to either IFS or to their own

Hanover Bank offshore accounts that Koop, for a fee, had preVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00661 Fmt 6621 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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332 Both BTCB and Hanover Bank have told the investigation that they never dealt directly

with each other, and Hanover Bank never opened a correspondent account at BTCB. While the

documentation supports that representation, the documentation also makes it clear that Hanover B Ltd. was confused on more than one occasion with Hanover Bank. 333These statements were produced by BTCB in response to Schmidt v. Koop discovery requests. 334 BTCB account statements for the Cadogan and Atlantic Marine Bancorp accounts show

they were opened in July 1998, with the $6,500 minimum in deposits allowed, and experienced

no further activity through December 9, 1998. No account statement was produced for the

Starfire account. The deposits into the IFS and Hanover B accounts came from co-conspirators

in the Koop fraud and from defrauded investors. BTCB records show, for example, that Koop’s

co-conspirator, Cabe, sent payments of $450,000, $150,000 and $499,990 to the Hanover B account. Several IFS investors wired funds to the IFS account. 335Schmidt v. Koop, Koop deposition (12/10/98) at 66, 73. 336This is the Schmidt v. Koop case. 337Schmidt v. Koop ‘‘Certification of Rudolfo Requena,’’ dated 10/29/98.

tended to open for them. In a letter dated 12/10/98, BTCBs own

legal counsel referred to the Hanover B account as the ‘‘Hanover

Bank’’ account.332

BTCB account statements covering most of 1998,333 show that in

a 6-month period from April to October 1998, over $2.6 million was

transferred into and out of the IFS account, while about $1.3 million passed through the Hanover B account in the same period.334

These funds, which were deposited into BTCB’s U.S. accounts at

BIV and Security Bank, total almost $4 million. All of this money

is related to Koop’s self-confessed financial frauds and money laundering.

Most IFS investors, when sending money to IFS directly, trans- ferred amounts in the range of $5,000 to $50,000. The largest

single IFS investor appears to have been Glenn Schmidt, of California, who sent $2.5 million. This money was sent by wire transfer

on 4/22/98, 2 days after Koop opened his first account at BTCB.

Schmidt transferred the funds from his bank in California to

BTCBs correspondent account at BIV in Miami, for further credit

to IFS. It was the largest single deposit into BTCB’s account at

BIV. Koop admitted in his criminal case that he had convinced

Schmidt to invest these funds, failed to invest the money as promised, and failed to repay any funds to Schmidt despite repeated assurances. Instead, he used the $2.5 million to provide funds to his

co-conspirators, establish four more accounts at BTCB, and make

Ponzi payments to a few IFS investors awaiting returns. He also

transferred $1 million to a Bank of America account in Oregon for

‘‘CPA Services,’’ a company run by the Christian Patriot Association, an organization which is associated with militia groups and

which Koop said he sometimes used to make cash payments to

third parties.335

In September 1998, Schmidt filed a civil suit in federal court in New Jersey to recover his $2.5 million.336 That suit named as defendants Koop, several of his companies, BTCB, BIV and Hanover

Bank. BTCB sought to be dismissed from the suit, claiming among

other arguments that the suit had failed to state a claim against

the bank and the U.S. court lacked jurisdiction over it. BTCB also,

at first, seemed to deny any relationship with Koop. A 10/29/98

‘‘certification’’ filed by BTCB president Requena stated in part: ‘‘[T]here is not, nor has there been an account opened in BTCB . . .

for ‘William H. Koop’ or for ‘International Financial Solutions

Ltd.’ ’’ 337 Despite this certification, plaintiffs counsel sent BTCB a

written authorization by Koop to provide documentation related to

653

338Schmidt v. Koop, Koop deposition (3/2/99) at 433. 339See also Schmidt v. Koop, Koop deposition (12/10/98) at 58–59, 143–46, 149–57; and (3/2/

99) at 406; and evidence of $1 million transfers from the BTCB account at Security Bank to

a Global Investment Fund on 7/3 and 7/6/00.

‘‘any BTCB account’’ controlled by or related to him. In response,

on 12/10/98, BTCB disclosed that Koop had, in fact, five accounts

at the bank and provided account statements and other information. In return, plaintiff’s counsel voluntarily dismissed BTCB from

the civil suit ‘‘without prejudice,’’ meaning that it could petition to

rejoin the bank again, if appropriate.

Koop has pleaded guilty to conspiracy to launder the fraud proceeds. BTCB records show that virtually all of the $4 million deposited into the IFS and Hanover B accounts in 1998 was withdrawn

within about 6 months. Much of the money was transferred to bank

accounts controlled by Koop or his accomplices, including in Mississippi, the United Kingdom, and at CPA Services. In two instances in June 1998, a total of over $30,000 was paid to third parties to help purchase and furnish a New York apartment. In another instance, on 7/21/98, BTCB issued a certified check for

$294,000 to Bergen County in New Jersey, enabling Koop to purchase a house there.338 According to Koop, what is omitted from

the records provided by BTCB in the civil suit is another $1.3 million in illicit proceeds that he placed in BTCB’s high yield investment program.

Koop Investment in BTCB High Yield Program. Koop told

the investigation that, on June 29, 1998, he transferred $1,325,000

to a BTCB subsidiary, Global Investment Fund, for investment in

BTCB’s high yield program.339 He said that BTCB had contacted

him repeatedly about investment opportunities. He provided a

copy, for example, of a BTCB document promising annual returns

on certificates of deposit as high as 79%. He also provided copies

of BTCB documents setting out specific terms for an investment in

its high yield program, including a letter of intent, corporate resolution for a private placement of funds, and cooperative venture

agreement. Koop said that he pursued only one of the offered

BTCB investments, in which BTCB’s subsidiary, Global Investment

Fund, promised to pay him a 100% return on the $1.3 million each

week for 40 weeks, for a total of more than $50 million.

U.S. bank records for BTCB’s account at Security Bank show

transfers of millions of dollars in July and August 1998 to accounts

associated with Global Investment Fund, any one of which could

have included Koop’s investment funds. These transactions included:

—7/3/98 wire transfer of $1 million from BTCB’s account at Security Bank to Bank One in Columbus, Ohio, for further

credit to Bank One in Houston, Texas, for further credit to

‘‘Global Investment Fund S.A.’’—these funds were initially

rejected and successfully re-transmitted on 7/6/98;

—8/14/98 wire transfer of $170,000 from BTCB’s account at Security Bank to Banque National de Paris in New York for

Sundland States ‘‘Ref. Global Investment Fund/Outlast’’;

654

340SEC v. Cook (U.S. District Court for the Northern District of Texas Civil Case No. 399– CV–0571), complaint and other pleadings dated 3/16/99. See also legal pleadings compiled at

www.dennelfinancial.com.

—8/14/98 wire transfer of $830,000 from BTCB’s account at Security Bank to the Royal Bank of Scotland in the Bahamas

for Highland Financial Corp. ‘‘Ref. Global Investment Fund’’;

—8/26/98 wire transfer of $1,006,918.31 from Bank One Trust

Company N.A. in Columbus, Ohio, to BTCB’s account at Security Bank for further credit to ‘‘Global Investment Fd SA’’;

and

—8/31/98 wire transfer of $1 million from BTCB’s account at

Security Bank to U.S. Bank in Aurora, Colorado, for Global

Investment Fund S.A.

These transactions alone establish transfers of $3 million to

Global Investment Fund during the summer of 1998, which was

when Koop alleged he made his investment into BTCB’s high yield

program. Koop noted in his interview that, as of March 2000,

BTCB had yet to make a single payment or to return any of his

principal. He stated that BTCB still had $1,325,000 of his proceeds,

together with any interest or profits accumulated over the last 2

years. If true, BTCB would still have possession of over $1.3 million in fraud proceeds that ought to be returned to Koop’s defrauded investors.

The Koop fraud provides a detailed illustration of how criminals

can use offshore banks and their U.S. accounts to launder funds

and perpetuate financial frauds. It also demonstrates how inadequate bank controls and money laundering oversight contribute to

the ability of criminals to carry out their activities. The impact on

the United States includes hundreds of defrauded investors, prosecutions in New Jersey and South Carolina, extradition proceedings in the United Kingdom, civil litigation, and the ongoing

depletion of law enforcement and court resources.

(3) Cook Fraud

In March 1999, Benjamin Franklin Cook III was named in civil

pleadings filed by the Securities and Exchange Commission (SEC)

in Texas as a key figure in a fraudulent high yield investment program which, in the course of less than 1 year, bilked over three

hundred investors out of more than $40 million. In August 2000,

a criminal indictment in Arizona charged Cook with 37 counts of

racketeering, fraud and theft. U.S. bank records indicate that at

least $4 million associated with this fraud passed through U.S. correspondent accounts belonging to BTCB, and BTCB was directly involved in investment activities undertaken by persons and companies associated with the Cook fraud.

Nature of Cook Fraud. On March 16, 1999, the SEC filed a

complaint and other pleadings before a Federal court in Texas requesting emergency relief against Cook, his company Dennel Finance Ltd. (‘‘Dennel’’), International Business Consultants Ltd.

(‘‘IBCL’’), and a number of other individuals and entities, for engaging in a ‘‘fraudulent scheme to offer and sell unregistered ‘prime

bank’ securities throughout the United States.’’340 The complaint

alleged that the defendants raised funds primarily by ‘‘target[ing]

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341See chart entitled, ‘‘BTCB Transactions Related to Cook Fraud,’’ in BTCB case history.

religious and charitable groups and persons investing retirement

funds.’’ It alleged ‘‘numerous misrepresentations and omissions of

material fact’’ by defendants, including that investor funds would

be ‘‘secured by a bank guarantee,’’ would serve as ‘‘collateral to

trade financial instruments with top 50 European Banks,’’ and

would earn ‘‘annual returns of 24 to 60 percent.’’ The complaint alleged that, ‘‘[i]n reality, the prime bank program . . . [did] not

exist,’’ and defendants had ‘‘misappropriated investment funds for

personal and unauthorized uses, including making Ponzi payments

to existing investors with funds provided by new investors.’’ The U.S. district court in Texas issued orders in March and April

1999, prohibiting Cook from making false statements to investors,

freezing his assets, appointing a receiver, requiring expedited discovery, and affording other emergency relief requested by the SEC.

To recover investor funds, the SEC appointed Lawrence J. Warfield

as its official receiver charged with locating and taking control of

assets belonging to Cook and others involved in the fraud. The receiver quickly froze about $11 million in assets, began reconstructing business and financial records, and began subpoenaing

records from 142 U.S. bank accounts used in the Cook fraud.

Cook and his associates refused to cooperate with the investigation. In September, the court issued an order requiring Cook to

show cause why he should not be held in contempt, and on October

8, 1999, ordered him imprisoned for contempt of court. On October

20, Cook was arrested and confined to a Texas detention facility.

On August 20, 2000, the Arizona Attorney General indicted Cook

on 37 counts of racketeering, fraud and theft. The indictment,

which was sealed pending Cook’s extradition from Texas, was described by the Arizona Attorney General as alleging that Cook defrauded 300 investors out of more than $41 million through a

fraudulent investment program. The indictment allegedly asserted

that only $635,000 of the $41 million had ever been invested, and

most of these funds were lost. The complaint also allegedly stated

that Cook used much of the $41 million on personal expenses, including a luxury home, automobiles, airplanes and jewelry, and to

purchase real estate.

Cook and BTCB. After reviewing U.S. bank records and other

information, the investigation determined that at least $4 million

in illicit proceeds from the Cook fraud moved through accounts at

BTCB, and that BTCB itself was directly involved in investment

activities undertaken by persons and entities associated with the

Cook fraud.

An analysis of BTCB’s U.S. correspondent bank records by Minority Staff investigators uncovered documentary evidence linking

100 wire transfers to defrauded investors or entities associated

with the Cook fraud, including Dennel and IBCL.341 These transactions moved funds totaling $4,086,152 over a 2-year period from

1998 until 2000, suggesting BTCB accounts were an active conduit

for funds associated with the Cook fraud. The 100 wire transfers

included the following:

—BIV records disclosed 34 deposits totaling over $1.4 million

from April 6 until May 28, 1998, when BIV closed the BTCB

656

account. All were wire transfers directed to BTCB for further

credit to IBCL. The first deposit, on 4/6/98, was for $634,982,

which increased the bank’s total deposits at the time by 23%.

—Security Bank records disclosed 34 deposits totaling over

$2.3 million, and 24 withdrawals totaling over $2 million

from June 22, 1998 until February 14, 2000. These transactions involved wire transfers to or from Security Bank’s

U.S. correspondent account for BTCB, accompanied by directions to credit or debit an entity associated with the Cook

fraud. The transactions involved primarily IBCL or Dennel,

but also Global Investments Network Ltd., Trans Global Investments, Wealth & Freedom Network LLC, and Premier

Gold Fund Ltd. The transfers included 14 deposits in 1998

with directions to credit the funds to Dennel, suggesting the

existence of a Dennel account at BTCB at least during that

year.

—First Union records disclosed eight withdrawals totaling over

$2 million from April 26 to October 6, 1999. All were wire

transfers from BTCB to accounts associated with IBCL and,

in one instance, with Desert Enterprises Ltd., also associated

with the Cook fraud.

More than 20 of the 100 wire transfers equaled or exceeded

$100,000. Two of the largest transactions, on 4/6/98 and 9/16/98, together deposited more than $1 million into the IBCL account at

BTCB. The largest withdrawal, on 5/7/99, sent $900,000 to an

IBCL account in California.

The transactions included in this data analysis were selected because of bank account or wire transfer documentation which, on its

face, directly linked the funds to a defrauded investor or to an entity associated with the Cook fraud, as indicated in court filings and

other materials provided by the SEC receivers’ office. It is likely

that additional Cook-related transactions escaped detection due to

the limited documentation available to the Minority Staff investigation and limited public information regarding how the Cook fraud

operated. In light of the $40 million scope of the Cook fraud, the

$4 million that passed through BTCB accounts shows BTCB was

an active conduit for the fraud.

IBCL Investment in BTCB High Yield Program. In addition

to opening accounts and moving funds, the investigation obtained

evidence indicating that BTCB actively participated in some of the

investment activities undertaken by persons and companies associated with the Cook fraud. BTCB’s investment role appears to have

begun in 1998 and continued throughout 1999, despite the March

1999 SEC complaint naming Dennel and IBCL, among others, as

participants in a massive investment fraud.

The investigation first learned of BTCB’s investment role after

speaking with a person who had complained about BTCB to the

Dominican Government. Wayne Brown, a Canadian citizen, voluntarily answered questions and provided documents related to his

ongoing efforts to recover $30,000 he sent to BTCB in 1998 for

placement in a high yield investment program. Brown characterized his lost investment as due, in part, to the Cook fraud.

657

Brown explained that he made the $30,000 investment because

an old friend, Tony Rodriguez, allegedly an experienced investor,

had recommended that he try the BTCB high yield program.

Brown said that, on the advice of Rodriguez, he solicited additional

investments from family members and other persons, pooled the

funds, and provided a total of about $250,000 to Rodriguez for investment. He said the funds were wire transferred to BTCB’s correspondent account at Security Bank in several installments, and

Rodriguez was supposed to ensure their placement in the BTCB

program. He said that it was his understanding that, in order to

gain access to the BTCB investment program, Rodriguez had

worked with Peter Shifman, an accountant with ties to both Cook

and IBCL. He said that it was his understanding that Shifman,

who was familiar with Dominica and BTCB, was able to get

Rodriguez’ investors into the BTCB program. He said the investment program never produced any returns, and he and his associates have been unable to recover any of their funds.

Documents obtained by the investigation establish that Rodriguez was associated with at least three entities that, according to

the SEC receiver, were involved in the Cook fraud: Global Investment Network Ltd., Coopman Ltd., and Wealth & Freedom Network, LLC. The documents establish that, in 1998, BTCB not only

maintained accounts for Global Investment Network Ltd., Coopman

Ltd. and IBCL, but also dealt directly with Rodriguez and Shifman,

and eventually placed IBCL funds into BTCB’s own high yield investment program.

In a memorandum dated 7/20/98, on IBCL letterhead, for example, Shifman reported the following to ‘‘All Investors,’’ including

Brown:

I have just returned from Roseau, Dominica. . . . [A]ll pooled

funds are now invested. I have received a letter from Dr.

Charles Brazie, Vice President of Managed Accounts of British

Trade and Commerce Bank indicating that our funds have

been allocated for participation. . . . Please note that the Company mentioned on the letter head (Global Investment Funds

S.A.) is the Investment Company of British Trade and Commerce Bank. . . . Dr. Brazie has indicated that the first disbursement will now be sometime next week.

This document indicates that BTCB was directly involved in handling investments for IBCL and IBCL’s investors.

A later memorandum from Shifman to ‘‘All Investors,’’ dated 4/

1/99, suggests that the BTCB investment program was not going

well and investment returns were not being paid as promised.

All of you are aware that . . . disbursements have not been

issued since the beginning of December, 1998 . . . due to the

lack of performance by the Bank that IBCL is contracted with.

. . . I am able to offer these options to each individual investor. . . . Continue our current contract and wait until the end

of April to see if that contact performs. Request the return of

your investment. . . . Terminate the current contract and

issue a new contract with the following terms: 1. The investment contract will be for twelve (12) months. 2. A Certificate

of Deposit will be purchased through the Bank and its FloridaVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00667 Fmt 6621 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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342See document signed by Brown, dated 4/6/00, requesting return of his $30,000 investment.

based Securities Firm for the total amount of the investment.

3. A guaranteed rate of return of two percent (2%) per month,

paid monthly will be paid to investors.

This memorandum is dated less than 1 month after the SEC

complaint alleging IBCL involvement with investment fraud.

Brown indicated that, despite the Shifman promise of a 2%

monthly return, he requested the return of his $30,000.342 Brown

indicated that, in response, he received conflicting stories about

whether his $30,000 was actually with Global Investment Network

Ltd. under the control of Rodriguez, or with IBCL under the control

of Shifman. On 10/8/99, Brown received a fax on IBCL letterhead

stating that, while the records indicated his $30,000 had been

‘‘transferred directly to the IBCL account’’ at BTCB:

[h]owever, the funds were placed in that account under contract with Global Investments Network Ltd., leaving them outside of our control. In order to place them into the Certificate

of Deposit Program, and realize further profits from the BTCB,

we would have to enter a new [agreement] issued to you from

this office. I am expecting a call from Betts [at BTCB] sometime in the next hour or so, and he and I will address your situation, as well as others, and figure out the best and most efficient means of handling your investment.

A few days later, Brown received a letter from BTCB dated 10/

11/99, signed by Betts and addressed, ‘‘To all depositors in Global

Investment Network Ltd. [a]nd certain depositors in International

Business Consultants Ltd.’’ After observing that the Global Investment Network account had been largely depleted, the letter indicated a solution had been found to help individual investors. The

letter announced that BTCB had ‘‘come to an arrangement with

Tony Rodriguez with respect to handling your deposits with Global

and IBCL.’’ The letter continued:

As I have explained to many of you on the telephone the remaining balance in Global will only return 17% of your original

principal. However, of the approximately $300,000 of your deposits that went into Global, $252,615 was transferred into

IBCL and is presently invested in their managed account with

the Bank. . . . The bottom line is that if you agree to let your

funds be placed under the management of IBCL and Peter

Shifman then the Bank can assure you that your funds are

safe and in an account that is intact and will stay that way

until the investment program is over.

Despite BTCB’s strong encouragement to leave all funds with

IBCL in the BTCB investment program, Brown continued to ask

for the return of his funds, without success.

The investigation obtained a second BTCB letter dated 10/11/99,

which was also signed by Betts. This letter was addressed to Tony

Rodriguez at Global Investment Network Ltd. It discussed a ‘‘proposed settlement’’ in which BTCB would ‘‘take over the management’’ of Global Investment Network funds ‘‘in conjunction with

Peter Shifman,’’ provided that Rodriguez made up a funding shortVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00668 Fmt 6621 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
659

343Gold Chance International Ltd. v. Daigle & Hancock (Ontario Superior Court of Justice,

Case No. 00–CV–188866)(hereinafter ‘‘Gold Chance’’).

fall by transferring additional funds from his Coopman Ltd. account at BTCB to the IBCL account. This letter provides still more

evidence of BTCB’s deep involvement in the investment activities

of these entities at a time when, in 1999, each was under investigation in the ongoing SEC fraud proceedings.

Brown said that, after many attempts to recover his funds from

the BTCB high yield investment program, he requested the assistance of Dominica’s banking regulators. On August 1, 2000, he received a letter from Dominica’s banking supervisor stating that

records produced by BTCB indicated that his $30,000 had been

transferred by Rodriguez out of BTCB to one of Rodriguez’s ‘‘other

accounts in the United States.’’ The banking supervisor wrote: ‘‘It

now appears that you have to pressure Rodriguez for the return of

the funds. It was a mistake not to have invested directly with

[BTCB].’’

Brown indicated that he felt as if he were in a shell game where

his funds were being moved from account to account, always beyond his reach, from Global Investment Network to IBCL to BTCB

to another bank in the United States. He noted that, at each step,

the persons involved had simply blamed someone else for not producing promised returns and not returning his funds.

When Minority Staff investigators contacted the SEC receiver

and his staff to obtain their perspective on BTCB, the receiver’s

staff expressed surprise at the number, dollar amount and timing

of BTCB transactions tied to persons and entities associated with

the Cook fraud. The staff provided a copy of a letter sent by the

SEC receiver to BTCB on May 8, 2000, asking the bank to freeze

all funds in the IBCL account. The staff said it was their understanding that BTCB had, in fact, frozen the IBCL account, but few

funds were captured. They indicated they had been unaware that

$4 million in suspect funds had passed through BTCB; unaware of

the Dennel, Global Investment Network and Coopman accounts at

BTCB; and unaware that IBCL investor funds had been lodged

with BTCB.

The Cook fraud provides another illustration of how criminals

use offshore banks and their U.S. accounts to launder funds and

facilitate financial fraud. The impact on the United States includes,

again, hundreds of defrauded investors, SEC proceedings prosecutions in New Jersey and South Carolina, extradition proceedings in

the United Kingdom, civil litigation, and the ongoing depletion of

law enforcement and court resources.

(4) Gold Chance Fraud

In April 2000, two brothers filed a civil suit in Canada alleging,

in essence, that their company, Gold Chance International Ltd.

(‘‘Gold Chance’’), was the victim of a loan fraud involving $3 million.343 They alleged that Gold Chance had been fraudulently induced to deposit $3 million as supposed loan collateral into an attorney trust account in Canada, waited months for a loan that

never materialized, and then learned that the company’s funds had

been secretly transferred to an offshore account at BTCB.

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344See Gold Chance statement of claim (4/16/00), amended statement of claim (5/17/00), and

‘‘Reasons for Decision’’ by Judge Campbell (6/12/00).

In response to plaintiffs’ efforts to recover the funds, an Ontario

court granted immediate emergency relief, including freezing assets

under a Mareva injunction, appointing a receiver for the law firm’s

trust account, and ordering BTCB and others to cooperate with discovery. Although the civil proceedings have yet to reach a conclusion, a preliminary court decision, pleadings in the civil case, and

other information show that the $3 million was deposited into

BTCB’s U.S. correspondent account at First Union National Bank

on December 15, 1999, and within a week, the funds were divided

up and wired to multiple bank accounts around the world. In an

order dated June 12, 2000, the court expressed skepticism regarding BTCB’s claim that the $3 million was still safely on deposit

with the bank, invested at the request of a client into a 1-year

BTCB high yield program maturing in December 2000.

Nature of Gold Chance Fraud. On April 16, 2000, Canadian

citizens Brent and Greg Binions filed a civil suit in the Ontario Superior Court of Justice, on behalf of Gold Chance and two other

companies they own, seeking recovery of the $3 million from two

individuals, Sayse Chatterpaul and Paul Zhernakov, several companies controlled by these individuals, and the law firm and banks

involved in moving the funds out of Canada, including BTCB.

The plaintiffs’ statement of claim, related pleadings and an opinion issued by the court in June 2000, indicate the following

facts.344 In the fall of 1999, Gold Chance was introduced to and entered into negotiations with Chatterpaul to obtain a loan to develop

certain automobile fuel technology. In December 1999, Gold Chance

executed a borrowing agreement with Chatterpaul’s alleged company, Triglobe International Funding Inc. The agreement provided

that Triglobe would issue a loan to Gold Chance, on the condition

that Gold Chance first posted 25% of the loan amount in cash collateral to be kept in a fiduciary account under the control of legal

counsel. On December 3, 1999, having borrowed the required sum

from Toronto Dominion Bank, Gold Chance delivered a $3 million

bank draft to Daigle & Hancock, a Canadian law firm, for deposit

into the firm’s fiduciary account at the Bank of Montreal.

The promised loan was not, however, issued to Gold Chance.

After 2 months, on February 17, 2000, Chatterpaul and Gold

Chance replaced the original agreement with a second borrowing

agreement which, among other changes, replaced Triglobe with a

company called Free Trade Bureau S.A. (‘‘Free Trade’’). The agreement provided that Free Trade would issue a $12 million loan to

Gold Chance, collateralized by the $3 million in the fiduciary account. Chatterpaul signed the contract on behalf of Free Trade.

When no loan materialized, on March 13, 2000, Gold Chance demanded return of the $3 million.

The pleadings allege plaintiffs learned in March 2000 that, without their consent, the $3 million had been transferred in December

1999, to a BTCB account for Free Trade. The pleadings allege that

the $3 million was quickly depleted through multiple wire transfers

initiated by BTCB to bank accounts around the world. The pleadings also state that plaintiffs learned Free Trade was owned, not

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345 Requena affidavit at 6.

by Chatterpaul, but by Zhernakov, an individual with whom they

had had no prior dealings. The pleadings accuse the defendants of

a variety of fraudulent acts, contractual and fiduciary breaches,

wrongful conversion and other misconduct, and demand compensatory and punitive damages.

Free Trade and BTCB. BTCB admits that it has not only handled accounts and funds for persons and entities associated with

the Gold Chance fraud, but also retains possession of the disputed

$3 million, which it claimed was placed in a 1-year BTCB investment program.

In its September 2000 submission to the Subcommittee, BTCB

acknowledged its involvement in the Gold Chance dispute, without

using specific client names. BTCB provided the following description of the civil litigation:

A longstanding Canadian client had an existing account with

BTCB, and his background fully checked out. He subsequently

placed an additional $3 million into this BTCB account . . .

[and] committed these funds under a year long investment contract with BTCB to place the funds; which the bank in turn

committed for a year. The first sign of trouble BTCB had was

when a company completely unknown to us surfaced, and alleged that the $3 million was actually its money given to the

lawyer in Trust.

Unfortunately, it turned out later that the Canadian lawyer

had obtained the $3 million from a client company under the

false pretense, that the $3 million would be used as collateral

for a loan from BTCB of $12 million, a situation completely unknown to us and contradicted by all paperwork between BTCB

and this Canadian client and lawyer regarding the placement

of $3 million with us in December 1999. . . .

BTCB has the $3 million invested under the signed contract,

and will return the funds when the contracted 1-year period

expires in December 2000.’’

BTCB also stated that it had ‘‘filed an affidavit [with the Canadian court] explaining our lack of knowledge and documenting the

Canadian client and lawyer’s signed documents submitted to our

bank; thus requesting a complete dismissal from the action.’’ Although BTCB did not provide a copy of the affidavit or the attached

documents, the investigation obtained them from the publicly available pleadings in the Canadian lawsuit. The affidavit was signed

by BTCB president Requena and filed on September 7, 2000, less

than 2 weeks before BTCB made its submission to the Subcommittee.

In explaining BTCB’s role to the court, the Requena affidavit attempted to draw a stark contrast between Zhernakov and

Chatterpaul, stating that while BTCB had done business with

Zhernakov for 2 years, BTCB ‘‘does not have any knowledge or information . . . and has never had any business or other relationship or affiliation with’’ Chatterpaul or any of his companies.345

With respect to Zhernakov, the Requena affidavit stated that Free

Trade had been ‘‘incorporated on 2 January 1998 . . . for the DeVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00671 Fmt 6621 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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346 Id. 347See Gold Chance, ‘‘Factum of the Plaintiffs’’ (6/8/00). 348 Id. at 7. 341 Id. at 8–9.

fendant, Paul Zhernakov pursuant to his instructions [and] . . .

has been a customer of BTCB since January 1998.’’ 346 Exhibit L

to the affidavit provides copies of BTCB’s standard agreements for

its high yield investment program, signed by Zhernakov on behalf

of his company Free Trade, establishing that the company became

a participant in the program in January 1998.

U.S. bank records substantiate Zhernakov’s status as a BTCB client, including records showing the Zhernakov name in BTCB account transactions as early as April 1998. U.S. bank records also

show one transaction involving Chatterpaul—a wire transfer dated

June 21, 1999, originated by Sayse Chatterpaul, sending $680,000

from the Canada Trustee Mortgage Company in Ontario to the

BTCB account at Security Bank for further credit to Free Trade.

This deposit, for more than half a million dollars, should have attracted BTCB’s notice. At a minimum, it provides evidence of a connection between Chatterpaul and Free Trade and contradicts

BTCB’s claim to the court that it had never had any business dealings with Chatterpaul.

Plaintiffs’ pleadings raise questions about Zhernakov’s background, business dealings, and source of funds.347 Plaintiffs’ information appears to be based primarily on a sworn deposition provided by Zhernakov on June 5, 2000, in connection with the lawsuit. Citing pages in a Zhernakov transcript, plaintiffs allege that

Zhernakov was born in Russia in 1954, and is currently a citizen

of Grenada. They allege he was employed by the Russian Navy for

17 years, then worked for an airline and had a business consulting

firm, but currently ‘‘does not work or have a business.’’ 348 They

state that Zhernakov testified at his deposition that he arranged

loans through BTCB for commissions, spoke regularly with Betts

during 1999, and worked on occasion with Chatterpaul. Plaintiffs

state that Zhernakov testified that both he and Chatterpaul were

‘‘authorized’’ to act on behalf of Free Trade.349 This information

raises questions about what due diligence research BTCB did prior

to accepting Zhernakov as a client and what information BTCB had

about the source of his funds. It also casts doubt on BTCB’s assertion to the court that it had no prior dealings with or information

about Chatterpaul since, according to Zhernakov, Chatterpaul had

signing authority for Free Trade, a BTCB-established Dominican

corporation.

With respect to the Gold Chance funds, U.S. bank records show the deposit of the $3 million into BTCB’s account at First Union

on 12/15/99. The wire transfer documentation states that the funds

originated from Daigle & Hancock at the Bank of Montreal and the

intended beneficiary was Free Trade Bureau S.A. at BTCB. On the

day the funds were deposited, BTCB’s account balance at First

Union was only $14,308. Over the next 2 weeks, only three other

small deposits, totaling about $25,000, came into the BTCB account. That means that, for the month of December 1999, the $3

million in Gold Chance funds were the primary source of funds in

the BTCB account.

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350The wire transfers included the following:

—$93,000 on 12/16/99 to Bank of Nevis International for Universal Marketing Consultants; —$15,339.95 on 12/16/99 to First National Bank of Antlers, Oklahoma for Republic Products

Corp., a company controlled by BTCB’s major stockholder John Long; —$240,000 on 12/17/99 to Barclays Bank in the Bahamas for BSI Corporation; —$50,000 on 12/20/99 and $50,000 on 12/23/99 to National Commercial Bank in Dominica

for BTCB’s correspondent account; —$200,000 and $55,000 in two separate wire transfers on 12/21/99, both to Pacific National

Bank in Miami for BTCB’s correspondent account; —$205,000 on 12/21/99 to Mashreq Bank in Dubai for Graham Farrell; —$612,000 on 12/21/99 to Banque Cantonale de Geneve for Laurent Finance;

—$200,000 on 12/23/99 to HSBC Bank in Hong Kong for Wanvijit Chauatong;

—$140,000 on 12/23/99 to ANZ Grindlay Bank in India for Asset Management India;

—$40,000 on 12/23/99 to a Union Planters Bank account for the credit of BTCB’s president

Rodolfo Requena; and

—$14,625 on 12/23/99 to the Bank of Montreal for Zhernakov, one of the defendants in the

civil lawsuit. 351Orphan Advocates LLC is an Idaho corporation and another BTCB client. The Ontario

court reviewing the Gold Chance case has authorized the plaintiffs to inquire about whether this

Idaho corporation is somehow associated with Betts or his wife, Mavis Betts, who still resides

in Idaho. See Gold Chance, court orders dated 5/15/00 and 6/2/00. The court has also authorized

inquiries into the corporation’s relationship with entities called Orphan Advocates Trust, Orphan Advocates Foundation, China Fund for the Handicapped, and a company which has

changed its name four times in 4 years, from Children’s Aid of Idaho, Inc. in 1994, to Children’s Adoption Service International, Inc. in 1995, to Children’s Adoption Services Inc. in 1996, to

CASI Foundation for Children, Inc. in 1998.

Plaintiffs have alleged that the $1 million payment to Orphan Advocates LLC on January

3rd was actually paid into an account held by Orphans Advocates Trust which, in turn, transferred the funds on the same day to the China Fund for the Handicapped. See Gold Chance, ‘‘Factum of the Plaintiffs’’ (6/8/00) at 6. China Fund for the Handicapped appears to be another

investor in BTCB’s high yield program. Documentation at First Union shows that, on 6/21/99, the Fund transferred $3 million from its bank account at Chiyu Banking Corp. in Hong Kong

to BTCB’s account at First Union. Ted Johnson, a member of the Board of CASI Foundation

for Children, Inc., told a Minority Subcommittee investigator on November 3, 2000, that it was

his understanding that the China Fund for the Handicapped had invested a significant amount

in BTCB’s high yield investment program. Johnson said that the Fund was ‘‘not satisfied with

the timing or amount’’ of the returns on their BTCB investment, although he understood the

Fund had not filed any legal action. He also said that the China Fund for the Handicapped with

BTCB investments was associated with the China Fund for the Handicapped that is a quasigovernmental organization in China, headed by Deng Xiaoping’s son, Deng Pufang. He also stated that the China Fund for the Handicapped is associated with Orphan Advocates LLC.

Wire transfer documentation indicates additional links between BTCB, the China Fund for

the Handicapped, and Orphan Advocates LLC. The wire transfers include the following:

—7/8/99 transfer of $1 million from BTCB account at First Union to a bank in Milwaukee,

Wisconsin, called Marshall & Isley Bank, for further credit to an attorney trust account,

belonging to John P. Savage; —8/11/99 transfer of $2,500 from BTCB account at BIV to the same Milwaukee bank and

the same attorney trust account, with the following notation: ‘‘Ref: Orphans Advocates

Ltd.’’; and —11/30/99 transfer of $150,000 from BTCB account at First Union to the Bank of Communication in Beijing for the ‘‘Corporation Project of the Rehabilitation of Disable Children,’’

Continued

The wire transfers that depleted the $3 million deposit do not,

on their face, substantiate BTCB’s claim that it placed the $3 million into a year-long investment program. Instead, the bank records

show that the $3 million deposit on 12/15/99 was followed by a flurry of outgoing wire transfers in widely varying amounts to multiple

bank accounts around the world. Most of the payments using the

Gold Chance funds appear to have been made to BTCB creditors

or clients, with about $355,000 transferred to other BTCB correspondent accounts. Altogether, in the span of 1 week ending December 23, 1999, about $2.3 million left the BTCB account.350 By December 29, 1999, only about $734,000 remained in the BTCB account, of which all but $40,000 was attributable to the Gold Chance

funds. On 12/30/99, BTCB deposited another $275,000, taken from

its Security Bank correspondent account, and on 1/3/00, it transferred $1 million from the BTCB account to a Bank of America

branch in Idaho for ‘‘Orphan Advocates LLC.’’ 351 After the $1 milVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00673 Fmt 6621 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
664

which allegedly is a member of the same Federation for the Disabled, in China, as is the

China Fund for the Handicapped. 352See Gold Chance ‘‘Reasons for Decision’’ (6/12/00) at 9. 353See Gold Chance, Requena affidavit (9/7/00) at 14. 354 Id. at 2.

lion transfer, the BTCB account at First Union held only about

$11,000. No significant activity took place in the account afterward,

and in February 2000, First Union closed the BTCB account.

The Ontario court appeared to have reached the conclusion in

June 2000, that Gold Chance’s $3 million was no longer at BTCB.

After reviewing bank and wire transfer documentation showing disbursement of the Gold Chance funds and recounting BTCB’s failure

to return the $3 million to Zhernakov upon his request, the Ontario

court wrote, ‘‘The prepared statement of Betts that the funds are

in BTCB is not to be believed, against either the tracing evidence

or Betts’ failure to deliver the funds.’’ 352

Despite this statement by the court in June, BTCB nevertheless

claimed, in the Requena affidavit submitted to the court in September, that the $3 million was ‘‘invested on 15 December

1999.’’ 353 The affidavit contended that the First Union account was

a ‘‘general account used for business and investment purposes by

BTCB[,] [t]he money from Free Trade was not trust money as far

as BTCB was aware and so it was co-mingled with the general

funds in this account.’’ The affidavit maintained that the $3 million

was credited to the Free Trade account and ‘‘deposited by the Defendant Free Trade . . . into a managed investment account for a

locked-in period of 1 year.’’ 354 BTCB further claimed that any dispute over the $3 million investment must be resolved by arbitration in London, as provided in the investment agreement.

Free Trade Investment in BTCB High Yield Program. The

evidence suggests that BTCB’s high yield investment program may

be contributing to the Gold Chance fraud. First, the documents provided by BTCB to the court, attached as Exhibit L to the Requena

affidavit, establish that Free Trade enrolled in BTCB’s investment

program in January 1998—2 full years before the Gold Chance deposit. Although BTCB maintains that the $3 million was intended

for and immediately placed into its investment program pursuant

to Free Trade’s managed account agreement, the documentation

provided by the bank does not support that assertion. To the contrary, Exhibits M through U discuss opening a ‘‘new account’’ with

the money, under dual signatory authority that differed from Free

Trade’s managed account agreement. Not one of these documents

mentions the word ‘‘investment’’ in connection with the $3 million;

not one references the BTCB investment program. The first document to claim that the $3 million was placed into a BTCB investment program is a BTCB letter dated April 12, 2000, a month after

Gold Chance demanded return of its funds. The unavoidable implication is that BTCB may itself be defrauding Gold Chance—delaying return of the $3 million by falsely claiming the money’s enrollment in the BTCB investment program.

Additional concerns arise from BTCB’s admission in the

Requena, affidavit at page 19 that, although transactions involving

the $3 million required two signatures—from Zhernakov and

Daigle—the bank had already advanced $240,000 to Zhernakov on

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355 Correspondent Services Corp. v. J.V.W. Investment Ltd. (U.S. District Court for the Southern District of New York Civil Case No. 99–CIV–8934 (RWS)), complaint (8/16/99). 356 Correspondent Services Corp. v. J.V.W. Investment Ltd., 2000 U.S. Dist. LEXIS 11881 (U.S.

District Court for the Southern District of New York 2000)(hereinafter ‘‘CSC v. JVW’’). 357See SEC filing by Sterling Chemicals Holdings, Inc., Schedule 14A (12/27/97), proxy statement at 5. 358 CSC v. JVW at 4.

his signature alone. BTCB has admitted that releasing the

$240,000 violated the account instructions. Whether this violation

was deliberate or inadvertent, it demonstrates a lack of proper account controls. And it raises, again, the spectre of BTCB misconduct—paying funds upon request to Zhernakov, while refusing

to pay funds to the plaintiffs with the excuse that the entire $3

million is ‘‘locked’’ into a year-long investment.

BTCB later posted with the Ontario court a $3 million letter of

credit with a maturity date of December 15, 2000. However, when

that date arrived, BTCB failed to pay the required amount to the

court. Gold Chance is still seeking recovery of its funds.

The Gold Chance fraud provides a third illustration of a financial

fraud carried out in part through an offshore bank with a U.S. account. While the major impact in this instance is in Canada, where

the defrauded investors reside and the key civil suit has been filed,

there is also a collateral impact on the United States in which

BTCB’s U.S. correspondent bank is being asked to produce documents and explain what happened to the. $3 million sent to

BTCB’s U.S. account.

(5) $10 Million CD Interpleader

In August 1999, PaineWebber’s clearing firm, Correspondent

Services Corporation (CSC), filed an interpleader complaint in Federal court in New York to resolve a dispute over the ownership of

a $10 million certificate of deposit (‘‘CD’’) issued by BTCB.355 The

parties asserting conflicting claims to it included J. Virgil

Waggoner, a wealthy U.S. citizen from Texas; Donal Kelleher, an

Irish citizen living in England who served, for a time, as an investment advisor to Waggoner; J.V.W. Investment Ltd., a Dominican

corporation established by BTCB for Waggoner and administered

for a time by Kelleher; and First Equity Corporation of Florida, the

securities firm that, in 1998, was owned by BTCB. In August 2000,

the U.S. district court issued a decision 356 which resolved the CD

ownership issue in favor of Waggoner, but also identifies troubling

information about BTCB’s investment activities and operations.

BTCB’s Issuance of the $10 Million Bearer CD. The August

2000 court decision, documents associated with the interpleader action, discussions with bank officials, and other information produced the following facts: Waggoner is a retired chief executive officer of a large chemical company in Texas, and the current chief executive and owner of a U.S. company called J.V.W. Investments,

Ltd.357 In November 1997, Waggoner entered into an arrangement

with Kelleher under which Kelleher agreed to locate a high-yield

investment program for a $10 million investment by Waggoner, in

exchange for receiving a percentage of any profits on such investment.358 In mid-1998, Kelleher told Waggoner about the BTCB

high yield program, and Waggoner agreed to invest in it.

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359 Id. at 11. 360 Id. at 14. 361 Id. at 19. 362 Id. at 22–24.

On June 12, 1998, BTCB requested their completion of various

forms to establish an international business corporation and open

an account.359 On June 19th, BTCB incorporated J.V.W. Investment Ltd. as a bearer share Dominican corporation.360 The name

of this company mirrored the name of Waggoner’s existing U.S. corporation, J.V.W. Investments Ltd., but omitted the letter ‘‘s’’ from

‘‘Investments.’’ BTCB has advocated taking this approach to naming a new Dominican corporation ‘‘to allow an orderly and mostly

invisible transition’’ from an existing corporation somewhere else.

On June 25, 1998, J.V.W. Investment Ltd. (‘‘JVW’’) entered into

a cooperative venture agreement with BTCB to place an investment in BTCB’s high yield program. As explained in the court’s decision, this agreement provided:

(a) JVW would deposit $1.0 million into a ‘‘Custody/Transaction Account at BTCB’’; (b) BTCB would issue a certificate

of deposit (‘‘CD’’) in JVW’s name; (c) the CD would have a term

of 1 year and bear interest at 6% per annum; and (d) BTCB

would place the $10 million into investments to provide a ‘‘significant yield’’ on a best efforts basis over the course of a

year.361

On 6/28/98, $10 million belonging to Waggoner was transferred

into a Citibank correspondent account in New York. This correspondent account belonged to Suisse Security Bank and Trust

(‘‘SSBT’’), a small offshore bank licensed in the Bahamas. Although

Citibank was unaware of it, beginning in 1997 or 1998, SSBT had

begun providing correspondent services to BTCB and allowing

BTCB to use the SSBT account at Citibank.

The court notes a factual dispute over whether the $10 million

paid into the correspondent account was supposed to be deposited

into the BTCB account at SSBT, or into a freestanding account at

SSBT. The court decision states:

According to Waggoner’s pleadings, BTCB instructed Kelleher

to place the $10 million into a BTCB sub-account in the name

of JVW at SSBT. . . . BTCB would then place the $10 million

into the Investment Program and issue the CD to JVW.

Kelleher, however, transferred Waggoner’s $10 million into a

freestanding account at SSBT, not the designated BTCB subaccount. . . . SSBT [then] refused to transfer the $10 million

from the freestanding account to the BTCB sub-account. As a

result, Waggoner did not gain entry into the Investment Program. SSBT, when asked why it refused to effect the transfer,

first stated that it was concerned that the $10 million might

have an illegal origin. When a formal inquiry showed that to

be wholly without basis, SSBT stated that it had placed the

$10 million into ACM mutual funds . . . at Kelleher’s direction. . . . Kelleher claims, by contrast, that he instructed

SSBT to place the $10 million in the BTCB sub-account.362

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363 Id. at 24. 364See 9/21/98 letter from Betts to Tucker Anthony; and undated letter from Kelleher to Tucker Anthony. Tucker Anthony held the ACM mutual funds for SSBT. 365 Id. 366 Id. 367 Id. at 24, 27. 368 Id. at 26. 369 Id. at 27. 370 Id. at 64.

The court notes that Kelleher claimed the $10 million CD issued

in JVW’s name was replaced by BTCB with another $10 million CD ‘‘with the identical certificate number, but issued in bearer

form.’’ 363 This bearer CD, dated 6/28/98, is the CD that was placed

into Correspondent Services Corporation custody, to be held until

the CD’s 1-year maturity date.

After vigorous complaints about the bank to Bahamian bank regulators, SSBT agreed to release the funds deposited by Waggoner.

SSBT chose to do so by transferring the ACM mutual funds it had

purchased with the $10 million. SSBT transferred the mutual

funds to CSC, for further credit to BTCB, to benefit JVW.364 When

liquidated, the mutual funds produced about $7.7 million.365 The

court found that, by investing the $10 million in ACM mutual

funds, SSBT was responsible for a shortfall of about $2.2 million

from the $10 million originally deposited.366 The court noted that

Waggoner considered taking legal action against SSBT to recover

the $2.2 million, but did not do so.367 When a Minority Staff investigator asked why no legal action had been taken against SSBT,

Waggoner and JVWs legal counsel, Kenneth Caruso, declined to

discuss his clients’ legal strategy. Bahamian bank regulators provided a September 15, 2000 letter stating that an external audit of

SSBT had ‘‘ruled out any possibility of irregularity on the part of

[SSBT].’’ However, neither the government nor SSBT would

produce a copy of the audit report.

In any event, once his funds were lodged with BTCB, Waggoner

took action to eliminate Kelleher’s role in overseeing the BTCB investment. On November 10, 1998, Waggoner sent a letter to

Kelleher terminating his services for allegedly breaching their

agreement to locate a high yield investment program.368 On the

same date, Waggoner transferred all JVW shares to Wagonwheel

Trust, a new Dominican trust formed for him by BTCB and controlled by BTCB as the appointed trustee. The next day, November

11th, Wagonwheel Trust removed Kelleher from his position as sole

director of JVW, and replaced him with a BTCB subsidiary, International Corporate Services, Ltd. After that date, BTCB refused to

provide Kelleher with any information about JVW’s investments in

the BTCB high yield program or to pay him any portion of alleged

profits.369

In June 1999, the $10 million CD matured, and Kelleher claimed

a portion of the funds, leading to the interpleader action. On August 16, 2000, the U.S. district court held that Kelleher had no

ownership interest in the CD, but refused to dismiss, on summary

judgment, his claim for damages against Waggoner for failing to

act in good faith in their joint business dealings.370 The civil proceedings are ongoing.

JVW and BTCB. The interpleader action over the $10 million

CD opens a window on BTCB’s dealings with one of its clients and,

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371 Id. at 11–12. 372 Id. at 14–15.

in so doing, raises three sets of concerns about the bank’s internal

controls and investment activities. First, the proceedings expose

operational deficiencies and aggressive tactics at BTCB. Second,

they disclose troubling information about BTCB’s dealings with

SSBT, a small Bahamian bank with a poor reputation and limited

assets. Third, they illustrate problems with BTCB’s high yield investment program, including possibly fraudulent promises to pay

extravagant returns and possibly fraudulent misuse of investor

funds.

The civil litigation discloses, first, operational and internal control deficiencies at BTCB. The court found a number of inconsistencies and ambiguities in the documentation used to establish the

beneficial owner of the $10 million CD and JVW, requiring pages

of legal analysis to recite and resolve. The CD, for example, was

issued by BTCB in bearer form, despite a provision in the cooperative venture agreement calling for the CD to name JVW so that its

ownership would be clear. With respect to JVW, the court noted

that the ‘‘IBC order form’’ containing instructions for forming JVW,

including naming the company’s beneficial owner, was signed on

June 22, 1998—3 days after the company had been incorporated on

June 19th.371 JVW’s incorporation documents were signed by

BTCB’s subsidiary, ICS, again without indicating the corporation’s

beneficial owner.372 A letter sending ‘‘account opening forms’’ for a

JVW bank account at BTCB is dated June 23, 1998—5 days after

the $10 million had been sent to SSBT and an account opened.

The civil litigation also exposes BTCB’s willingness to engage in

aggressive tactics when intervening in a dispute over client funds,

even when the dispute is due, at least in part, to BTCB’s own

missteps. To resolve the dispute between Waggoner and Kelleher

over the $10 million CD, BTCB established and became the trustee

of a new Dominican trust, Wagonwheel Trust, in November 1999,

set up to benefit Waggoner. BTCB caused the trust to take possession of JVW’s bearer shares, and remove Kelleher as JVW’s sole director. In taking these actions, BTCB did not act as a neutral or

passive financial institution. To the contrary, it took an active

stance in favor of Waggoner and used the bank’s fiduciary powers

and subsidiary to help Waggoner wrest control of JVW away from

Kelleher. BTCB also took possession of Waggoner’s funds for placement in its high yield program, and refused Kelleher’s requests for

information about the investment or its alleged returns.

Second, the civil litigation exposes troubling information about

BTCB’s dealings with SSBT. The documentation in the civil proceeding makes it clear that BTCB actively assisted JVW in opening

an account and transferring funds to SSBT. For example, a fax

dated June 29, 1998, from Betts to Kelleher, provided BTCB’s account number at SSBT, approved a JVW letter to SSBT, and offered to forward the $10 million CD to SSBT on JVW’s behalf.

SSBT then refused for 3 months to release the $10 million. In an

8/27/98 letter to SSBT, Kelleher stated that an audited balance

sheet obtained from public records in the Bahamas showed that

SSBT was ‘‘extremely small with very little cash or assets and . . .

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373See 9/21/98 letter from Betts to Tucker Anthony; and undated letter from Kelleher to Tucker Anthony. Tucker Anthony held the ACM mutual funds for SSBT.

is indeed far smaller than the size of [JVW’s $10 million] deposit.’’

The letter expressed ‘‘doubt’’ about SSBT’s ‘‘stability and liquidity.’’

Bahamian Government officials told the investigation that SSBT

had a long history of regulatory problems requiring oversight. Yet

BTCB chose to do business with SSBT, despite its lack of assets

and poor regulatory history. In addition, neither BTCB nor SSBT

ever informed Citibank that BTCB was using SSBT’s Citibank account to transact business. Citibank told the investigation that it

had been completely unaware it was providing services to BTCB.

Even more troubling is information released in the course of the

civil litigation regarding BTCB’s high yield investment program.

Several of the documents indicate that Waggoner and Kelleher had

been told by BTCB that the $10 million investment would produce

$50 million or more in profits in less than 6 months. A 9/15/98 letter from Brazie, for example, suggested that the funds released by

SSBT be invested into ‘‘ongoing HYIPs’’ or high yield investment

programs at Global Investment Fund S.A. Brazie explained that

Global Investment Fund S.A. was ‘‘wholly owned by ICS/BTCB and

serve[d] as a ‘pooling’ and ‘masking’ entity for funds from other

IBC clients.’’ Handwritten notes by Kelleher on the letter, following

a telephone conversation with Brazie, stated: ‘‘Return min 25%/

wk.’’ One week later, a 9/23/98 letter from Waggoner to Kelleher

stated, ‘‘I want this project expedited and the delays/excuses ended. As my trustee, you must hurry to get my $50 million in profits to

me this year.’’ A letter to BTCB from Kelleher, dated 4/13/99, stated, ‘‘The sum over due and payable [to his company alone] . . . by

[BTCB] is we repeat: USD—58,660,200.’’ [Emphasis in original

text.] Dominican Government officials and U.S. bankers interviewed during the investigation uniformly expressed disbelief that

such returns were possible.

U.S. bank records also raise questions about what BTCB actually

did with the funds once they were in the bank’s possession.

Waggoner’s $10 million is the largest single investment in BTCB’s

high yield program uncovered by the investigation. The court

pleadings indicate that the ACM mutual funds purchased with the

$10 million were apparently transferred by SSBT in several stages

in September and October 1998, to CSC for liquidation.373

On 10/26/98, at BTCB’s request, CSC transferred $6.5 million to

BTCB’s account at Security Bank. The origination, timing and size

of this transfer suggests that the $6.5 million came from the JVW

funds; the investigation found no other transaction that could account for the source of funds used in this wire transfer. The next

day, on 10/27/98, BTCB transferred the $6.5 million to an attorney

trust account at First Union National Bank belonging to Robert

Garner. Garner is an attorney who has worked for both BTCB and

First Equity Corporation of Florida. Within a week of receiving the

funds, Garner transferred the $6.5 million, on 11/3/98, to an attorney trust account at Union Bank of Switzerland (‘‘UBS’’) in Zurich

belonging to Robert McKellar.

The $6.5 million was not the first time that U.S. bank records

showed funds moving among accounts belonging to McKellar, GarVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00679 Fmt 6621 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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ner and BTCB. Less than 2 weeks earlier, on 10/19/98, BTCB, had

wire transferred $3.5 million from its account at Security Bank to

‘‘McKellar’s Solicitors Unit.’’ The source of this $3.5 million is unclear, as is its relationship, if any, to the JVW proceedings. The

fact that the $3.5 million and $6.5 million sent to McKellar in October 1998 together add up to the $10 million at issue in the JVW

proceedings may be just coincidence.

Two 1998 BTCB financial statements further document the

movement of these funds. A BTCB financial statement as of 6/30/

98, which BTCB submitted to First Union when applying for a correspondent account, states in Note 3 that the bank had $10 million

in deposits at SSBT. There is no mention of deposits at UBS.

BTCB’s audited financial statement 6 months later, as of 12/31/98,

which was submitted to the Dominican Government, states in Note

4 that the bank had ‘‘10M in Union Bank of Switzerland.’’ The December 1998 financial statement made no reference to deposits at

SSBT. The logical inference, then, is that BTCB moved $10 million

from SSBT to UBS during the latter half of 1998. The timing, dollar amount and banks involved all suggest that the BTCB funds in

Switzerland came, in whole or in part, from the JVW funds.

Once the funds were placed in a Swiss bank account, little is

known about them, and it is unclear whether the funds were ever

placed in an investment. What is clear is that, 6 months later, on

4/26/99, U.S. bank records show McKellar wire transferring $6 million from the UBS account in Zurich to Garner’s account at First

Union. On the same day, Garner transferred the $6 million to

BTCB’s account at First Union. On the day before, 4/25/99, BTCB’s

First Union account balance was only about $77,000. The $6 million was a huge addition to an account that otherwise had few

funds. From 4/26/99 to the end of May, only six other deposits were

made into the BTCB account totaling about $217,000. The bank

records establish, then, that the majority of funds in the BTCB account at First Union, from April 26 until May 31, 1999, was attributable to the $6 million deposit.

The bank records also show that the $6 million deposit on 4/26/

99 was followed by a flurry of outgoing wire transfers, 43 in April

and 58 in May, in widely varying amounts to bank accounts around

the world. In the span of 1 month ending May 31, 1999, BTCB

transferred about $5.7 million out of its First Union account. The

three largest sets of wire transfers were the following:

—$1 million on 4/26/99 to BTCB’s account at Correspondent

Services Corporation;

—$1 million on 4/26/99 to BTCB’s account at Security Bank;

and

—1.4 million in four wire transfers on 4/26/99 and 5/7/99 to

four accounts, each of which referenced International Business Consultants Ltd., a participant in the Cook fraud described earlier.

U.S. bank records show another, possibly related set of transactions 6 months later. On 10/15/99, $999,976 was transferred from

an unidentified account at UBS in Zurich to Garner’s account at

First Union. Given earlier wire transfers, it is possible that these

671

funds came from the UBS account belonging to McKellar. Four

days later, on 10/19/99, Garner transferred the $1 million to

BTCB’s account at First Union. When the deposit was made,

BTCB’s account balance was only about $27,600. BTCB then disbursed the $1 million in the same way it had disbursed the $6 million, using multiple wire transfers to multiple bank accounts.

BTCB’s treatment of the JVW funds, once lodged with the bank,

raise unavoidable questions about whether the bank was misusing

investor funds. First, there is no clear evidence that the JVW funds

were ever invested, especially if the $6.5 million sent to Switzerland was, in fact, taken from the JVW investment. Second, the $6.5

million transferred from CSC to BTCB, was quickly transferred out

of the bank through two attorney trust accounts in the United

States and Switzerland. The reasons BTCB used two attorney trust

accounts to move the $6.5 million to Switzerland are unclear; possibly it was devised to conceal the movement of the funds or impede tracing them.

Third, when the $6 million came back from the Swiss account,

through Garner’s account, to BTCB in April 1999, the funds arrived at a time when BTCB’s primary U.S. correspondent account

was almost empty. The quick disbursement of the $6 million in

varying amounts to various bank accounts suggests that JVW investment funds were being used, in whole or in part, to pay BTCB’s

creditors and clients and to replenish BTCB’s coffers. The $1 million transfer from Switzerland in October 1999, seems to have followed the same pattern. When a Minority Staff investigator asked

legal counsel for Waggoner and JVW about how the JVW funds

were invested and whether Waggoner had any concerns about the

status of the funds, he declined to respond, other than to indicate

that his clients did not wish to discuss their financial affairs.

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

Technologies

In reviewing U.S. bank records and other information associated

with BTCB, the investigation came across additional evidence of

possible misconduct and ongoing civil and criminal investigations

involving funds at BTCB. This evidence included the following:

—KPJ Trust. U.S. bank records show that, on 9/21/98, Tiong

Tung Ming of Malaysia transferred $1 million to BTCB’s account at Security Bank. Tiong has since complained to Dominican, U.K. and U.S. Government officials, the Eastern Caribbean Central Bank, and Security Bank about his continuing inability to recover his funds. Tiong invested these funds with a

BTCB client, K.P.J. Trust S.A. (‘‘KPJ Trust’’), through Michael

Dibble and Rosemarie Roeters-Van Lennep, based upon a 9/15/

98 joint venture agreement promising ‘‘[t]rading profits . . .

[of] ONE HUNDRED FIFTY PERCENT (150%) during the duration of the program (40 weeks), which will be distributed on

a monthly basis.’’ [Emphasis in original text.]

A 9/17/98 letter on BTCB letterhead, signed by Betts, acknowledged receipt of the funds ‘‘from Ming Tung Tion [sic] in favor

of KPJ S.A.’’ However, after Tiong complained to Security

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Bank and others, Betts sent a 2/25/99, letter denying any

knowledge of Tiong. After additional correspondence, Betts

sent a 3/15/99 letter stating that Tiong’s funds had been

placed, through KPJ Trust, into a BTCB ‘‘Managed Accounts

Contract’’ for 1 year, and could not be returned to him until 9/

21/99. When Tiong continued to demand his funds and the KPJ

Trust later joined in those demands, a 5/11/99 letter from

Brazie stated that Tiong’s funds could be released earlier if ‘‘we

receive additional funds from other entities and those are committed to Global Investment Fund S.A. to replace your funds.’’

BTCB did not, however, release any funds, even at the end of

the 1-year period on 9/21/99.

Documents supplied by Tiong recite repeated broken promises

by BTCB to return the funds. Yet, at the same time, U.S. bank

records show that BTCB made $315,000 in payments to several

persons associated with the KPJ Trust:

—9/22/98 wire transfer of $200,000 from BTCB’s account at Security Bank to United Bank in Rustenburg, South Africa, for

‘‘W.H. Keyser . . . Ref. K.P.J. Trust S.A.,’’ returned on 9/29/

98 because United Bank could not locate the account;

—1/15/99 wire transfer of $5,000 from BTCB’s account at Security Bank to the Royal Bank of Scotland in London, for Ms.

Van Lennep and KPJ Trust SA, using the account of Stuart

Moss, a London resident who regularly works with BTCB;

—8/5/99 wire transfer of $25,000 from BTCB’s account at Security Bank to Wells Fargo Bank in Denver, Colorado, for Ms.

Van Lennep, ‘‘Ref. K.P.J. Trust S.A.’’;

—11/1/99 wire transfer of $110,000 from BTCBs account at

First Union to Wells Fargo Bank in San Francisco, California, for Ms. Van Lennep; and

—11/26/99 wire transfer of $175,000 from BTCB’s account at

First Union to Wells Fargo Bank in California for Ms. Van

Lennep.

The KPJ Trust allegations have clear parallels to other BTCB

matters examined by the investigation, including the references to BTCB’s high yield investment program and Global

Investment Fund subsidiary; BTCB’s insistence that the investor’s funds were unavailable for 1 year; and BTCB’s nonpayment of the funds to the investor, despite making payments

to the BTCB client who arranged for the funds to be deposited

at the bank in the first place.

—Brett Investors. Investors in Texas, California and Canada

have made complaints that funds invested with Scott Brett

and, on his instructions, wired to BTCB, have not been returned. Brett is a part owner of BTCB through Bailett International Ltd., according to documents supplied by BTCB to

U.S. banks, and other information linking Brett to John Long,

BTCB’s majority owner. Despite the limited information available about this matter, the investigation located U.S. bank

records showing over $763,000 in wire transfers involving inVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00682 Fmt 6621 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
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374Gold Chance, ‘‘Affidavit of Brent Binions’’ (4/20/00) at 2.

vestors who have complained of being defrauded or persons or

entities associated with Brett, including the following:

—2/10/98 wire transfer of $25,000 from unknown originator to

BTCB’s account at BIV for ‘‘Aurora Investments’’;

—2/25/98 wire transfer of $2,010 from unknown originator to

BTCB’s account at BIV for ‘‘Aurora Investments’’;

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

—4/22/98 wire transfer of $15,000 from unknown originator to

BTCB’s account at BIV for ‘‘Aurora Investments’’;

—10/22/98 wire transfer of $10,500 from Arthur W. Hogan, an

investor claiming to have been defrauded by Brett, to

BTCB’s account at Security Bank;

—10/27/98 wire transfer of $110,500 from Denver and Arlene

Hopkins in Louisiana to BTCB’s account at Security Bank

‘‘per Scott Brett’’;

—12/9/98 wire transfer of $250,000 from ‘‘Newcastle Enterprises Scott Brett’’ to BTCB’s account at Security Bank for

‘‘Aurora Investments’’;

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

—4/28/99 wire transfer of $220,000 from BTCB’s account at

First Union to Canadian Imperial Bank of Commerce in

Kelowna, British Columbia, for ‘‘Bearisto & Co. Trust’’ for

‘‘Aurora Investments S.A.’’

Civil and criminal investigations may be underway into these

complaints.

—Gendreau Investment. Plaintiffs’ filings in the Gold

Chance case provide information about a BTCB client in Minnesota, Michael Gendreau, who allegedly invested $390,000

with BTCB in 1998, and has been ‘‘unable to get his money

back.’’374 The U.S. Treasury Department and the FBI in Seattle have allegedly been informed and may be investigating

his claims against BTCB.

—Global/Vector Medical Technology Accounts. U.S. bank

records show BTCB’s involvement with a company headed by

an individual suspected of past securities fraud. The company

is Global Medical Technologies, Inc., a Florida corporation

which, on January 29, 1999, changed its name to Vector Medical Technologies, Inc. (‘‘Vector’’). Vector’s chairman and chief

executive is Dr. Michael H. Salit, a Florida resident who apparently received a medical degree in Israel, but has not been

licensed to practice medicine in any U.S. State including Florida. Salit was the subject of a 1996 SEC enforcement action for

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375SEC v. The Appletree Companies Inc. f/k/a Modami Services, Inc., Michael H. Salit, David

B. Lobel, Paul B. Kravitz, and W. Scott Long III (U.S. District Court for the Southern District

of Florida Civil Case No. 96–8675–Civ–Seitz). 376 Id., ‘‘Final Judgment of Permanent Injunction and Other Relief as to Defendants Salit and

Lobel’’ (3/3/00) at 5. 377 Vector has at least seven accounts at First Union, numbered 209–000–294–6659 (opened

9/30/98 until 11/1/99, and referred to as the ‘‘initial account’’); 998–324–6063 (opened 1/5/99 to

present, and referred to as the ‘‘CAP account’’); 200–000–276–0469 (opened 8/30/99 to present);

200–000–276–0375 (opened 9/8/99 to present); 200–000–748–1837 (opened 5/12/00 to present);

24021271 (brokerage account); and 4063000997 (money manager account, possibly opened in 8/

00). Vector may have additional accounts in First Union’s private bank.

securities fraud 375 which resulted in a March 2000 final judgment that required him, without admitting or denying SEC allegations, to pay $600,000 to the government and accept a

court order permanently enjoining him from engaging in securities fraud. The court excused Salit from paying all but

$25,000 of the required sum in light of a financial statement

showing him to be without assets. The court warned, however,

that the full $600,000 would become due if the SEC ‘‘obtain[ed]

information indicating that Defendants’ representations to the

[SEC] concerning their assets, income, liabilities, or net worth

were fraudulent, misleading, inaccurate or incomplete.’’ 376

Salit is a signatory on at least seven Vector accounts at First

Union, and U.S. bank records show a number of transactions

between BTCB and Vector.377 The bank records indicate that

Vector’s initial account was opened at First Union on 9/30/98,

well after the SEC enforcement action was underway. The

bank records indicate that, during 1999 and 2000, hundreds of

investors across the United States paid over $16 million into

Vector’s CAP account to purchase Vector shares. The bank

records show that BTCB paid $500,000 into Vector’s initial account soon after it opened, and subsequently received $1 million in payments from Vector over a 12-month period, several

installments of which were pass-through payments involving

BTC Financial.

The key transactions include the following:

—12/14/98 wire transfer of $300,000 with the notation ‘‘[promissory] note & investment,’’ and a 3/15/99 wire transfer of

$200,000, from BTCB’s account at Security Bank into Vector’s initial account at First Union, which provided virtually

all of the funds in the Vector account;

—1/6/99 wire transfer of $145,000 from Vector’s initial account

to its newly-opened CAP account, utilizing the funds provided by BTCB;

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

provided by BTCB in December;

—10/4/99 check for $200,000 written by Vector on its CAP account for BTCB, which BTCB deposited on 10/5/99 into its

First Union account, presumably in repayment of the funds

provided by BTCB in March;

675

—11/12/99 check for $100,000 written by Vector on its CAP account for BTC Financial Services which deposited the check

on the same day, waited for it to clear, and then wrote a

$100,000 check to BTCB, signed by Betts and dated 11/18/

99, which BTCB deposited into its First Union account on

11/19/99;

—12/14/99 check for $100,000 written by Vector on its CAP account for BTC Financial Services which deposited the check

on the same day, and immediately wrote a $100,000 check

to BTCB, signed by Requena. and dated 12/14/99, which

BTCB deposited into its Security Bank account on 12/15/99;

—1/10/00 check for $100,000 written by Vector on its CAP account for BTC Financial Services which deposited the check

on 1/11/00, and immediately wrote a $100,000 check to

BTCB, signed by David Cooper and dated 1/11/99, which

BTCB deposited into its Security Bank account on 1/12/00;

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

—2/29/00 check for $100,000 written by Vector on its CAP account for BTCB, with the notation ‘‘Final Payment,’’ which

BTCB deposited into its Security Bank account on 3/1/00.

A 1999 Vector financial statement indicates, in Note 8, that

the $500,000 provided by BTCB was a loan and, on October 4,

1999, apparently in connection with repaying the $500,000

principal, Vector agreed to pay BTCB a second $500,000 ‘‘as

payment in full of principal and interest as well as for the surrender and release by BTCB of all its right, title and interest

in Vector, including its stock ownership. BTCB had the right

to approximately 1,400,000 unissued shares of the Company’s

common stock.’’

BTCB either failed to conduct sufficient due diligence to discover Salit’s recent involvement with securities fraud allegations or decided to do business with Salit despite his past.

BTCB not only lent Vector significant funds—one of the few

business loans issued by this bank—but then allegedly acquired rights to 1.4 million in unissued Vector shares. BTCB

then supposedly surrendered these rights in exchange for a

portion of the $16 million the company was raising from new

investors. SEC and criminal investigations may now be underway to determine whether Vector Medical Technology venture

has any indications of securities fraud.

(7) Taves Fraud and the Benford Account

In April 2000, U.S. citizens Kenneth H. Taves and his wife Teresa Callei Taves were found liable by a U.S. district court for defrauding hundreds of thousands of credit card holders by billing

their credit cards for unauthorized charges totaling more than $49

million. About $7.5 million in fraud proceeds was traced to a European Bank account opened in the name of a Vanuatu corporation,

Benford Ltd. Benford Ltd. had been established by European Trust

and its bank account opened by European Bank, without any due

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378See FTC v. J.K. Publications, Inc. (U.S. District Court for the Central District of California

Civil Case Number CV 99–0044 ABC (AJWx)), complaint (1/5/99) and amended complaint (1/

20/99). 379See FTC v. J.K. Publications, Inc., temporary restraining order (1/6/99). 380See FTC v. J.K. Publications, Inc., order holding Taves in contempt for not disclosing

Malibu realty (5/4/99); order requiring Mr. and Mrs. Taves to produce documentation related

to Euro Bank account (5/5/99); and order granting summary judgment (4/7/00) at 3. 381See United States v. Taves (U.S. District Court for the Central District of California Criminal Case No. 00–CR–187–ALL), indictment (2/29/00); money laundering charges filed in the Cayman Islands (2/9/00). A trial is scheduled on the U.S. charges in January 2001. 382See FTC v. J.K. Publications, Inc., order granting summary judgment (4/7/00). 383 Id., at 51. 384 Id. at 17, 21, 51. 385 Id. at 12, 16–17, 20, 51. 386 Id. at 53. See also id. at 6, 16–18, 34–35, 51–52.

diligence research into the company’s beneficial owner or source of

funds. Even after learning that the $7.5 million came from the

Taves fraud victims, European Bank fought for more than 1 year

to prevent U.S. seizure of the $7.5 million from its correspondent

account at Citibank.

Taves Fraud. The Taves fraud first became public in January

1999, when the U.S. Federal Trade Commission (FTC) filed a civil

complaint in California charging the Taves and associated companies and individuals with unfair and deceptive business practices

arising from fraudulent credit card billing.378 In response, the court

issued a temporary restraining order freezing the Taves’ assets, requiring the defendants to provide an accounting of their activities

and assets, and appointing an FTC receiver to locate and return

fraudulently obtained monies.379

In May 1999, the court held Taves in criminal contempt for hiding assets from the FTC, including a $2 million house in Malibu

transferred to a corporation and $6.2 million deposited into a bank

account at Euro Bank in the Cayman Islands.380 Euro Bank is a

longstanding, Cayman licensed bank that has no affiliation with

European Bank or the Bayer family. The U.S. district court ordered

Taves imprisoned until he turned over the $2 million from the

house transfer to the FTC receiver. Imprisoned on May 4, 1999,

Taves was still in custody when he was indicted in February 2000,

in both the United States and Cayman Islands.381

In April 2000, the U.S. court issued findings of fact and conclusions of law holding the Taves and other defendants liable for

fraudulent credit card billing.382 The court ruled that ‘‘the uncontroverted evidence overwhelmingly demonstrate[d] that the defendants participated in a billing scheme by submitting unauthorized

[credit card] charges for processing.’’ 383 The court determined that,

in November 1997, the Taves’ companies paid a fee to Charter Pacific Bank in California to gain access to a credit card database

containing over 3 million credit card numbers.384 The Taves then

opened merchant bank accounts—accounts used to accept credit

card payments—at Charter Pacific Bank and Heartland Bank and

began billing small amounts, often $19.95, to thousands of credit

card numbers in the database.385 Although the defendants apparently alleged that the $19.95 was a monthly fee that the credit card

holders paid to access adult-content Internet web sites operated by

Taves-related companies, the court found that the defendants had

‘‘stole[n]’’ the credit card numbers from the database and ‘‘charged

card numbers without the cardholders’ authorization.’’ 386 The court

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387 Id. at 25. 388 Id. at 33–34. 389 Id. at 13. 390 Id. at 36–37. 391Documents attached to public court filings in the FTC case in the United States, includes,

for example, documents showing Taves’ paying Donegan, one of the Euro Bank employees, $4,000 per month for her efforts on his behalf and authorizing her to use his Cayman beach

house ‘‘for the purposes of spending a few leisurely hours there from time to time.’’ Another document shows Taves’ transferring one of his companies to her ‘‘free of charge’’ in February 1999,

apparently in a continuing effort to hide assets from the FTC and evade the January 1999 court

order imposing an asset freeze. 392FTC v. J.K. Publications, Inc., ‘‘Report of Receiver’s Activities Dated August 4, 1999,’’ (8/

6/99) at 1; interviews of Cayman Government officials in April 2000. 393See ‘‘Deed of Compromise, Release, Accord and Satisfaction’’ (7/26/99) at 2. 394This information is based upon affidavits filed by Phelps in various court proceedings, as

well as account documentation and other information. See, for example, Evans v. European

Bank (Civil Case No. 85 of 1999 before the Supreme Court of Vanuatu), Phelps affidavit (11/

22/99); Evans v. Citibank (Case No. 4999 of 1999 before the Supreme Court of New South Wales,

Sydney Registry, Equity Division), Phelps affidavit (12/17/99).

found that, in 1998 alone, over $49.6 million was deposited into the

Taves’ merchant accounts 387 from unauthorized charges billed to

over 783,000 credit card numbers in the Charter Pacific database.388 The funds were then used for various purposes, including

paying Mr. and Mrs. Taves a ‘‘salary’’ of $1.8 million each.389 The

court found that $25.3 million of the $49.6 million had been transferred to offshore bank accounts at Euro Bank.390

In February 2000, the Cayman Government charged three senior Euro Bank officials with money laundering, citing the $25.3 million

transferred to the bank from the Taves fraud. These charges,

brought against Ivan Richard Wykeham Burges, Brian Leslie Peter

Culma, and Judith Mary Donegan, are the first money laundering

prosecutions brought against Cayman bank officials in the country’s history. Criminal charges were also brought against six other

individuals, including Taves for money laundering.391

In May 1999, due to money laundering concerns arising not only

from the Taves fraud but other matters as well, the Cayman Government closed Euro Bank.392 In June 1999, Euro Bank’s shareholders placed the bank in voluntary liquidation, and the bank

began winding up its affairs. On July 26, 1999, Euro Bank’s liquidators agreed to provide the FTC with ‘‘information and documents in the Bank’s possession’’ relating to the Taves fraud in exchange for releasing the Bank from damage claims related to the

bank’s actions in that matter.393 After the agreement was approved

by the Cayman Grand Court, the FTC receiver reviewed Euro

Bank information and found the $7.5 million transfer from Tavesrelated accounts at Euro Bank to the Benford account at European

Bank in Vanuatu.

Establishing Benford Ltd. The Benford account was opened in

February 1999, at the request of Euro Bank employee Ivan Burges,

later charged with money laundering on behalf of Taves. The account was opened by Susan Phelps, who is both a European Bank

director and employee, and a European Trust officer.394 On 2/3/99,

Burges sent a fax to European Bank inquiring about establishing

a Vanuatu corporation and opening a corporate bank account for an

unnamed client. Phelps faxed Burges the requested information.

On 2/8/99, Burges requested incorporation and account opening

forms and, the next day, faxed an ‘‘urgent’’ request to establish a

Vanuatu corporation called Benford Ltd., still without naming the

client on whose behalf he was acting. Phelps supplied him with the

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395The State Department’s INCSR 2000 report states that one of the key deficiencies in

Vanuatu’s anti-money laundering laws is its corporate secrecy laws which ‘‘shield the identity

and assets of beneficial owners of business entities. . . . The anonymity and secrecy provisions

available through ownership of Vanuatuan [corporations], along with the ease and low cost of

incorporation, make them ideal mechanisms for tax evasion and money laundering schemes.’’ INCSR (March 2000) Money Laundering and Financial Crimes Country Reports, Vanuatu. 396For example, the ‘‘constitution’’ used to establish Benford Ltd. names only one ‘‘incorporator,’’ Atlas Corp. Ltd., a Bayer group company. The constitution is signed on 2/17/99, by

Phelps, on behalf of Atlas Corp. Ltd. A Benford corporate resolution, signed by Phelps on 2/18/

99 on behalf of Atlas Corp. Ltd., appoints Benford’s sole director, Diract Ltd., and its sole corporate officer, Lotim Ltd., which are two more Bayer group companies. A ‘‘share certificate’’ purporting to issue 100 Benford shares to a company called Meldrew Ltd., is signed by Phelps on

behalf of Diract Ltd. and by another European Bank employee, David Outhred, who signed the

certificate on behalf of Lotim Ltd. Bayer said during his interview that Meldrew Ltd. is owned

by European Trust. Together, Benford Ltd.’s official incorporation documents, corporate resolutions and share certificate never mention Clyde, the company’s true owner. 397The document states that Meldrew Ltd. ‘‘hereby admits that the above mentioned shares

are your absolute property and that they only stand registered in our name at your request as

your nominee in Trust for you absolutely and that we have no beneficial interest therein whatsoever.’’ [Emphasis in original text omitted.] It is signed by Phelps and Outhred on behalf of still

two more European Trust companies, Zenith Inc. and Orion Inc., which are apparently

Meldrew’s officers. 398See Evans v. European Bank (Civil Case No. 85 of 1999 before the Supreme Court of

Vanuatu), Phelps affidavit (11/22/99), paragraph (3), ‘‘I did not speak to Mr. Burges during the

course of the correspondence . . . and verily believe nobody else from [European Bank or European Trust] spoke to Burges.’’ CG 6439–43.

requested forms as well as wire transfer instructions for sending

funds to European Bank’s correspondent account at Citibank in

New York.

On 2/17/99, Burges faxed an application to incorporate Benford

Ltd. providing minimal information about the person who would be

the corporation’s beneficial owner. Burges provided nothing more

than her name, Vanessa Phyllis Ann Clyde, a London address, a

copy of her passport photograph, and a one-word description of her

occupation as ‘‘business.’’ On the same day Burges wire transferred $100,000 from Euro Bank to Citibank in New York, for European

Bank. Without asking any questions or obtaining any additional information, 24 hours later on 2/18/99, European Trust Incorporated

Benford Ltd. Phelps faxed a copy of the incorporation papers to

Burges on 2/19/99, and asked where to send the originals. He instructed her to send them to Clyde in London.

The documents created by European Trust to establish Benford

Ltd. never identify the company’s beneficial owner by name nor

refer to Clyde.395 Instead they reference a series of shell corporations which Bayer said in his interview are controlled by ‘‘the

Bayer group’’ of companies.396 Only one European Trust document—not part of the company’s official incorporation papers—actually named Clyde. Entitled ‘‘Nominee Declaration’’ and bearing

the same date, 2/18/99, as the official incorporation papers, it declared that European Trust’s nominee company, Meldrew Ltd,. was

holding Benford’s shares as a nominee for Clyde.397 Bayer explained that this nominee declaration was typically the key document European Trust used to establish the beneficial ownership of

a Vanuatu company it formed. He said that typically European

Trust would maintain a copy in its files, but would not supply a

copy to European Bank.

Opening the Benford Account. After incorporating Benford

Ltd. through European Trust, Phelps put on her European Bank

hat and opened a bank account for corporation. Phelps admitted in

court pleadings that, throughout the bank account opening process,

she never spoke with either Burges or Clyde.398 The documentation

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399One European Bank form, entitled ‘‘Declaration of the Beneficial Owner’s Identity,’’ appeared to require disclosure of a bank account’s beneficial owner but was completed without

doing so. The copy of this form provided by European Bank to the Subcommittee was signed

by Phelps, dated 2/25/99, and identified ‘‘the beneficial owner of the assets deposited with the

bank’’ as ‘‘Benford Limited.’’ Bayer indicated this was a common way for European Trust to complete the form for companies they managed. He explained that the purpose of the form was not

to reveal a company’s true owner, but to establish that the accountholder is also the owner of

the deposits placed into the account.

The Minority staff investigation later discovered a second version of this form, also signed

by Phelps on 2/25/99, which was attached to an affidavit filed by Bayer in a Vanuatu court proceeding. See In re European Bank (Company Case No. 8 of 1999 before the Supreme Court of

Vanuatu), Bayer affidavit (7/28/99), Exhibit L. The form stated that the ‘‘beneficial owner of the

assets deposited with the bank’’ in the Benford account was ‘‘Vanessa P A Clyde.’’ During his

interview, Bayer was unable to explain why there were two versions of this document or why

he had failed to supply the investigation with the same version he filed in court. 400The document states: ‘‘The deposits to be credited to the above mentioned account holder

are not derived from, nor proceeds of, any forms of unlawful activity whatsoever nor were these

assets (including the funds to be deposited) obtained in any manner contrary to the laws of the

country whence they came or any other relevant country.’’

also makes it clear that European Bank opened the Benford account without conducting any due diligence research into Clyde,

the source of her wealth, or the origin of the initial deposit of

$100,000.

The European Bank forms used to open the Benford bank account provide even less due diligence information than the European Trust forms used to establish the corporation. The account

opening questionnaire, as well as a Benford corporate resolution

and mandate to open the bank account, are all signed by Phelps.

None mentions Clyde.399 None provides additional due diligence information about Benford Ltd. Bayer indicated that these forms

were filled out in the usual way for bank accounts opened for companies formed by its affiliate, European Trust.

One of the European Bank forms, entitled a ‘‘Statutory Declaration of Account Holder In Relation to the Operation of the Account,’’ was apparently intended, in part, to protect the bank

against money laundering. European Bank provided a copy of this

completed form for the Benford account. It stated that the ‘‘beneficial owner’’ of the Benford account was ‘‘Benford Limited,’’ again

without making any reference to Clyde, and essentially declared

that the funds deposited into the Benford account were not derived

from criminal activities.400 But the declaration was not signed by

Clyde or Burges. The form was instead signed by Phelps, on 2/25/

99, prior to her making any inquiry into the origin of the Benford

funds or conducting any substantive due diligence. Her signature

was witnessed by Bayer, who also signed the form without having

any knowledge of the account funds or Clyde. When asked how this

document protected European Bank from money laundering, when

it was signed by its own employee and not based on any factual

knowledge, Bayer said that the Benford form had been completed

in a routine manner similar to other accounts at the bank.

Bayer explained that, although Clyde’s name never appeared on

a bank document connected with the Benford account, European

Bank had access to her identity through European Trust. Although

Vanuatu law generally prohibits trust companies from disclosing a

Vanuatu corporation’s ownership, he explained that this prohibition could be waived by the company owner to open a bank account. Bayer said that European Bank could have simply asked

European Trust at any time for the identity of the corporate beneficial owner. He noted that, in the case of Benford Ltd., that step

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401 Clyde indicated on several occasions her preference for keeping the funds in U.S. dollars

in a secure but liquid investment. For example, on 2/23/99, Clyde sent Phelps a fax asking

whether the bank could ‘‘place Benford client funds in a market account . . . [i.e.,] a New York

brokerage fund and keep privacy.’’ European Bank ultimately placed the funds in U.S. dollar,

interest-bearing accounts at its correspondent banks. 402 Citibank records show that the $7 million was deposited in three wire transfers: $2.8 million on 3/17/99; $750,000 on 4/9/99; and $3.88 million on 4/9/99. 403Letter dated 5/22/00 from Bayer to Senator Levin at 8. 404 Id.

was unnecessary since Phelps worked for both the bank and the

trust company and had the knowledge on hand for both entities.

Increasing Deposits and Increasing Concerns About the

Benford Account. The Benford bank account application and related documents were dated 2/24/99 and 2/25/99. The Benford account was apparently opened on 2/26/00, when $97,900 out of the

$100,000 transferred from Euro Bank on 2/17/99, was credited by

European Bank to the newly opened Benford account, and the

other $2,100 was kept by European Trust to pay for Benford’s incorporation expenses.

About 2 weeks after the Benford bank account was opened, on

March 17, 1999, Burges telephoned European Bank and spoke with

Phelps for the first time. He included in the telephone conversation

a woman whom he alleged to be his client Clyde, who spoke with

an American accent, despite her British passport. According to

Phelps’ sworn affidavit, this was the first of several telephone conversations she had in March and April discussing how Clyde

wished to invest her funds.401

During these 2 months, Burges also wired more than $7 million

to the Benford account.402 All of the funds came from Taves-related

accounts at Euro Bank. All were made after the 1/6/99 court order

freezing Taves’ assets. All were wire transferred to European

Bank’s U.S. dollar correspondent account at Citibank in New York.

Bayer indicated in a letter to the Subcommittee that these funds

were unexpected 403 and prompted additional due diligence efforts.

After the March deposit of $2.8 million, according to Bayer, European Bank contacted Euro Bank to ask about the nature of the

funds, and Euro Bank promised to ‘‘get back to us with the answers.’’ 404 Phelps then asked European Bank’s senior vice president, Douglas Peters, if he could find out more about Euro Bank.

On 3/29/99, Peters sent a fax to persons he knew in the Cayman

Islands asking about Euro Bank. One of the persons responded by

fax the same day stating that she would like to speak to him by

telephone. Peters’ handwritten notes of the telephone conversation

on 3/30/99 state the following about Euro Bank:

Small locally incorporated bank, with a local banking license,

20/30 people on the staff, corporate activities too, not a good

reputation locally, has its door open to business when other

doors are closed to it, very much lower end of the local banking

business, dubious, 3 months ago there were rumors that they

might fail, not well respected, advise caution when dealing

with them. Barclays would not accept a reference from them

and would certainly not do business with them.

According to Bayer, Peters communicated this information to

both Phelps and to Bayer himself.

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405See letter dated 5/27/99 from Maples and Calder to European Bank. 406See also Evans v. Citibank (Case No. 4999 of 1999 before the Supreme Court of New South

Wales, Sydney Registry, Equity Division), affidavit of Susan Phelps (12/17/99), CG 6519–22. 407 Id. Phelps affidavit at paragraph (7). 408Documentation and interviews indicate the following U.S. dollar placements involving the

$7.5 million:

—30 day placement from 7/20/99 until 8/20/99 at Westpac Bank;

—30 day placement from 8/20/99 until 9/20/99 at Citibank;

—30 day placement from 9/20/99 until 10/20/99 at ANZ Bank;

Continued

Despite this negative portrayal of Euro Bank—the sole reference

for the Benford account—European Bank left open the account, accepted additional funds, and chose not to try to verify any information about Clyde or her assets. Bayer explained the bank’s actions

by saying that Euro Bank had referred other clients with no negative consequences, the client was not asking to withdraw the funds,

and Clyde had reassured Phelps by explaining that Clyde was retired and diversifying her holdings as part of an estate planning

process. When asked how that information fit with Clyde’s passport

information indicating she was 61, and her incorporation application describing her as still in business, Bayer said that the bank

had been satisfied with her explanation and did not feel any concern at the time. He acknowledged that the bank did not undertake

any effort to independently verify Clyde’s background or assets, or

to obtain additional references for her.

By April 1999, the Benford deposits totaled about $7.5 million.

Bayer said in his interview that Benford Ltd. had become a ‘‘huge

client’’ for the bank, and agreed that its $7.5 million represented

about 15% of the bank’s total deposit base of $50 to $60 million at

the time.

In May 1999, two incidents suddenly cast new suspicion on the

Benford funds. The first was on 5/25/99, when Phelps received a

telephone call about the account from a Clyde with an English accent, instead of an American accent. Phelps reported the call and

a fax received the next day to Bayer who said during his interview

that it was the first time European Bank appeared to have two different persons claiming to be the beneficial owner of an account at

the bank. On 5/29/99, a Friday, European Bank received another

fax, a letter dated 5/27/99, from a firm representing Euro Bank.405

It stated that Euro Bank had been placed into receivership and the

$7.5 million previously transferred to the Benford account appeared to be associated with the Taves fraud. Bayer indicated that,

in response to these two events, the bank immediately froze the

Benford account internally and, on Monday, 5/31/99, filed a report

with the Vanuatu police.406

Bayer indicated, and bank documentation substantiates that,

prior to May 1999, European Bank had followed its usual practice

of directing the Benford funds into a series of ‘‘placements’’ at its

correspondent banks, in order to maximize the interest earned on

the funds. After freezing the funds, Bayer indicated that European

Bank transferred them internally into a new, non-interest bearing

account from which client withdrawals were prohibited.407 However, even after moving the Benford deposits into a non-interest

bearing account within the bank, European Bank continued to

place the $7.5 million with the correspondent bank paying the

highest interest rate on the funds.408 A series of placements by EuVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00691 Fmt 6621 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
682

—placement from 10/20/99 until November 2000 at Citibank, after which the funds were

seized and taken into custody by the United States. 409 A review of European Bank’s U.S. dollar correspondent account records at Citibank and

ANZ Bank show no other deposit, transaction or placement, in 1998 or 1999, which could have

given rise to these $7.5 million placements, other than the Benford deposits. 410See Phelps email dated 5/26/99, CG 6497. 411See Phelps affidavit and notes, CG 6509–11. 412 In re European Bank (Company Case No. 8 of 1999 before the Supreme Court of Vanuatu). 413 Evans v. European Bank (Civil Case No. 85 of 1999 before the Supreme Court of Vanuatu).

ropean Bank with its correspondents for $7.5 million plus interest

appear to have been paid for with the Benford funds.409 In his

interview, Bayer said that while he was ‘‘not denying’’ that these

placements included the Benford deposits, he maintained that they

also included non-Benford funds, such as European Bank’s own interest earnings from the deposits and possibly $20,000 to $40,000

belonging to one or two other clients. Despite a request, Bayer did

not identify these other clients or provide documentation showing

how or when other client funds may have been combined with the

frozen $7.5 million in Benford funds and included in these placements.

In June 1999, after freezing the Benford funds internally, European Bank attempted to find out more about their origin. Bayer indicated and documentation suggests that inquiries directed to Euro

Bank and Burges were unanswered. Phelps had already attempted,

without success, to verify Clyde’s London address and telephone

number.410 She also asked Clyde to send a notarized copy of her

passport photograph, which Clyde did and which matched the one

the bank had on file for the Benford account. On 6/15/99, Phelps

asked Clyde in a telephone conversation about the origin of the

funds. She wrote this summary of the conversation:

[Clyde] said I should have got this info from Burges. I said the

funds had just arrived without supporting documentation. . . .

English was asked to open the a/c. Doesn’t know when. . . .

Doesn’t know how much. Wasn’t responsible. for putting funds

in. Not her personal funds. Extremely uncomfortable. . . . If

somebody had taken funds she doesn’t want to be tarred.411

Vanuatu and Australia Court Proceedings. Within months

of the $7.5 million being deposited, European Bank had notice and

evidence of their suspect origin. Yet when legal proceedings ensued

in Vanuatu and then Australia, European Bank steadfastly opposed releasing the funds or remitting them to the FTC receiver

representing the Taves fraud victims.

The litigation began in the summer of 1999. On July 2, 1999,

someone claiming to be Clyde attempted to withdraw $700,000

from the Benford account. Because the account was frozen, European Bank refused the request but, according to Bayer, also realized that it had no statutory basis or court order supporting its refusal. On 7/28/99, European Bank filed a lawsuit in Vanuatu court

asking for a court order freezing the Benford account, which the

court issued on the same day.412 On 8/25/99, the FTC receiver filed

a civil suit in the Vanuatu court seeking information about the account and restraining Benford Ltd. from transferring any funds.413

The court consolidated the two cases and granted the FTC receiver

access to the information in the first suit.

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414 Evans v. European Bank, Clyde affidavit (9/22/99). 415See FTC v. J.K. Publications, ‘‘Report of Receiver’s Activities dated August 4, 1999,’’ at 5–

6. 416See Evans v. Citibank (Case No. 4999 of 1999 before the Supreme Court of New South

Wales, Sydney Registry, Equity Division), affidavit of Douglas Edmund Raftesath, Australian

counsel for the FTC receiver (12/17/99) at 3. 417On 9/23/99, the Vanuatu police asked the court to impose a freeze under criminal law on the $7.5 million, pending an investigation of Benford Ltd. for money laundering. Despite requests by Benford Ltd. and the FTC receiver to attend the hearing on this request, the court

heard from the police on an ex parte basis, issued the requested order, declined to allow release

of the $7.5 million to the FTC receiver, and ordered additional proceedings. On 10/29/99 and

11/22/99, Phelps filed two affidavits in the case providing additional information and stating

that, despite the bank’s role in establishing the corporation, opening its bank account and man- aging the $7.5 million, European Bank did not know the true identity of Benford Ltd.’s beneficial owner. 418 Information filed before the Supreme Court of Vanuatu (Criminal Case No. 754 of 1999).

On 12/2/99, pursuant to the request of the police, the Vanuatu court issued still another order

freezing the Benford funds. On 12/3/99, Clyde filed a new civil suit in Vanuatu court requesting

an order declaring her the sole beneficial owner of Benford Ltd. and requiring Meldrew Ltd.,

the European Trust nominee company, to transfer all Benford shares to the Vanuatu counsel

working with the FTC receiver. In re Benford Ltd. (Company Case No. 14 of 1999 before the

Continued

On 9/22/99, Clyde filed a pleading in the Vanuatu case stating

that, ‘‘subject to the Order of this Honorable Court,’’ she would like

to remit all of the Benford funds to the FTC receiver.414 Her sworn

affidavit stated:

I knew nothing of the founding of Benford Limited, nor of the

opening of an account with European Bank Limited, until I received, unsolicited, a copy of the Benford’s Articles of Incorporation and a summary of charges from European Bank. . . . In

late January of 1999, I was living in . . . Malibu, California

. . . [and] an old and close friend of my family, Gretchen Buck

. . . told me that . . . I would earn a helpers fee of at least

$10,000 if I would assist her in opening an offshore account for

‘‘a friend.’’ I was assured that the purposes of the account were

totally aboveboard and the ‘‘friend’’ was of unimpeachable integrity with a few legitimate business problems but a person

who craved anonymity. I agreed to assist, and at Buck’s request, signed 40 pieces of blank paper. I have not seen these

papers since. . . . I became suspicious thereafter when Buck

was not forthcoming . . . [and] would say . . . ‘‘Its best you

don’t know.’’

Gretchen Buck is an associate of Taves, a former Euro Bank

accountholder, and one of the individuals indicted in the Cayman

Islands for money laundering. She apparently directed the transfer

of more than $3 million to the Benford account.415

Attached to Clyde’s pleading were documents indicating that she

intended to transfer control over Benford Ltd. from European

Trust’s nominee companies to the FTC receiver’s legal counsel in

Vanuatu, so that the $7.5 million could be paid to the FTC. European Trust’s nominee companies, however, opposed this change in

control over Benford Ltd. and opposed remitting the $7.5 million to

the FTC receiver.416

More litigation in Vanuatu followed, including a criminal investigation of Benford Ltd. by the Vanuatu police for money laundering.417 On 11/30/99, the Vanuatu police charged Benford Ltd.

with possession of property ‘‘suspected of being proceeds of

crime.’’ 418

684

Supreme Court of Vanuatu). The intent of her lawsuit was, again, to facilitate the transfer of

the $7.5 million to the FTC receiver. 419See ‘‘Interest Bearing Deposit Confirmation,’’ dated 10/12/99, issued by European Bank to

Benford Ltd., CG 4625. 420The letter placed Citibank ‘‘on notice that [the FTC receiver] assert[s] priority claims over

any funds originating from this fraud, including the funds on deposit with you.’’ According to Citibank, this letter was the first notice they had of any problem with the $7.5 million deposit

made by European Bank. See Evans v. Citibank (Case No. 4999 of 1999 before the Supreme

Court of New South Wales, Sydney Registry, Equity Division), affidavit of Christopher Schofield

Moore (12/16/99). 421 Evans v. Citibank summons (12/10/99). The pleadings stated, in part, that while the FTC

receiver had obtained freeze orders for the funds in Vanuatu, the funds ‘‘had already been transferred before the orders could be carried out . . . [and] there is a real risk that any moneys

held by Citibank . . . may be transferred out of Citibank’s accounts.’’ Affidavit of Douglas Edmund Raftesath, Australian counsel for the FTC receiver (12/10/99) at 3. 422 In a 12/10/99 fax to Citibank Sydney, CG 4810, Bayer informed Moore for the first time

about the suspicious activity surrounding the Benford account beginning 6 months earlier, in

May 1999, the ongoing money laundering investigation by the Vanuatu police, and the Vanuatu

court orders freezing the funds. Bayer wrote:

‘‘We of course will not be distributing the [Benford] funds to anyone without the direction

of the Vanuatu Supreme Court. Unfortunately for your bank, it has not been the high bidder for this deposit upon rollover and I confirm our request that you follow our instruction

to transfer the funds to Westpac Banking Corporation for the credit of their Port Vila

branch, for the further credit of ourselves (copy enclosed). I assure you that the decision

to move the funds has been purely a commercial one and not one driven by any hidden

agenda. We will continue to favor Citibank whenever possible in support of our relationship

with your bank which we value greatly.’’ 423 European Bank contended that the freeze order was inappropriate because the funds on

deposit with Citibank ‘‘are not funds belonging to Benford but are funds belonging to European

Bank.’’ Evans v. Citibank, affidavit of Susan Phelps (12/17/99) at paragraph (14). 424 12/15/99 fax from European Bank to Citibank Sydney, CG 4686–87. He stated further,

‘‘The monies have never ‘fled the jurisdiction.’ They have always been on deposit in US$ with

European Bank and nowhere else. European Bank . . . placed the funds in various banks to

get the best return.’’

Legal proceedings began in Australia after the FTC located a

document notifying Benford Ltd. that its funds had been transferred to ‘‘Citibank Limited, [Offshore Bank Unit] Sydney.’’ 419 On

11/30/99, the FTC receiver sent a letter to Citibank offices in Sydney, Australia (‘‘Citibank Sydney’’), alerting it to the Taves fraud

and its relation to the Benford funds deposited by European

Bank.420 On 12/10/99, the FTC receiver filed suit in Australia to

freeze the $7.5 million on deposit with Citibank.421

Unknown to the FTC receiver at the time of its filing, European

Bank had, in fact, taken steps that same day to transfer the funds

from Citibank to one of its correspondent banks in Vanuatu.422 Before any transfer took place, however, the Australian court issued

an order freezing the funds.

Additional pleadings followed in Australia from the Vanuatu

Government, European Bank and FTC receiver, all seeking control

of the $7.5 million. At first, European Bank alleged that the frozen

$7.5 million was unrelated to the Benford funds and Taves

fraud,423 and the FTC receiver’s Australian legal counsel agreed to

drop the suit. That was on a Friday. According to Moore, European

Bank asked Citibank to transfer the funds to Westpac Banking

Corp. in Vanuatu on the following Monday. However, on Sunday,

the Australian federal police filed an emergency request to freeze

the funds pending further investigation, and the Australian court

reinstated the freeze.

On 12/15/99, European Bank sent a fax to Citibank complaining

that the FTC receiver was trying ‘‘every trick in the book’’ to ‘‘force

the monies to be sent to the USA.’’ 424 Bayer concluded the fax with

these observations:

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425 ‘‘Vanuatu Goes After $US7.5m of Laundered Money,’’ Trading Post Vanuatu (12/4/99). 426 United States v. $8,110,073.30 in U.S. Currency, Representing $7,593,532.48 Deposited by

European Bank at Citibank NA (Sydney Branch) on or about October 20, 1999, Plus Accrued

Interest Since the Date of Deposit (U.S. District Court for the Central District of California Civil

Case No. CV–00–13328 (CBM)), complaint (12/21/00).

Locally [European Bank] has been perceived as being the bank

that uncovered the suspicious transactions and took all the

right steps to assist the authorities. Now in Australia we are

being cast as money launderers and probable accomplices. I

fear the Australian authorities would like to believe that.

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

The Vanuatu Government could find themselves with a US$7.5

million (v982 million) windfall cash gift if the Public Prosecutors office are successful in convicting . . . Benford Ltd. of

laundering money here from the illicit proceeds of one of the

biggest credit card frauds in history. . . . [The FTC receiver]

has been travelling the world tracking down the missing

money. He advised, ‘‘There are a couple of countries in the Caribbean, . . . Channel islands, . . . Europe and Vanuatu where

stolen money was sent. . . . [U]nfortunately, Vanuatu is the

only country that is trying not to return the funds to the rightful owners. . . .’’ [M]embers of the Finance Centre believe that

if the government do confiscate it, a clear message will be sent

to the outside world not to launder the proceeds of crime

through Vanuatu’s Finance Centre. This case is however a sensitive one. Vanuatu may have a fight on its hands if it tries

to confiscate the funds owing to ordinary people around the

world that the court in California USA has ordered to be returned.425

The Vanuatu and Australian litigation continued throughout

2000.

U.S. Court Proceedings. Almost 1 year later, on November 29,

2000, at the request of the FTC, the U.S. Department of Justice

filed legal proceedings to seize the Benford funds from Citibank in

New York. It was able to file the pleadings in the United States,

because Citibank Sydney had always kept the Benford funds in

U.S. dollars in a U.S. account at Citibank in New York. When presented with the seizure warrant, issued by a U.S. magistrate,

Citibank New York, delivered the funds to the United States. On

December 21, 2000, the United States filed a civil forfeiture action

seeking to eliminate any other claim to the Benford funds.426 The

complaint alleged that the funds were the proceeds of the Taves

credit card fraud, and the FTC receiver had ‘‘tried to obtain the

funds from European Bank through a Vanuatuan court proceeding,

but failed to obtain relief in Vanuatu.’’

During more than a year of litigation in three countries, Clyde

has supported sending the Benford funds to the FTC, but European

Bank has vigorously opposed it. When asked why, Bayer gave three

reasons during his interview: (1) the ownership of the funds remained unclear, since Clyde had admitted that they were not her

funds and she did not know their origin; (2) the allegation that the

funds came from the Taves fraud should be established in Vanuatu

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427 However, the State Department’s INCSR 2000 report warns: ‘‘Case law in Vanuatu has

shown that proving the criminal origins of proceeds, especially of offenses committed abroad,

is extremely difficult. Linking criminal proceeds seized in Vanuatu with the offense committed

abroad through a complex series of financial transactions conducted by related corporations operating in several offshore jurisdictions is all but impossible.’’ INCSR Report 2000 at 751.

court and, if true, the Vanuatu Attorney General could reimburse

the fraud victims, rather than pay the monies to the FTC receiver

who might exhaust the entire sum through fees and expenses; 427

and (3) European Bank had to defend itself from the risk of inconsistent court decisions which might order it to pay the $7.5 million

twice, once to the Vanuatu Government in connection with the

Benford money laundering prosecution and once to the FTC receiver seeking funds for the Taves fraud victims. At times, Bayer

also argued that the $7.5 million deposit at Citibank represented

European Bank’s own funds, unrelated to the Benford matter, although at other times he acknowledged the Benford deposits made

up the bulk of the Citibank placement.

The $7.5 million, now swelled with interest earnings to $8.1 million, remains in the custody of the United States, while the litigation in Vanuatu, Australia and the United States continues.

(8) IPC Fraud

In February 1999, the same month it opened the Benford account, European Bank opened another ill-fated account under a

credit card merchant agreement with a Florida corporation called

Internet Processing Corporation (‘‘IPC’’). As in the Benford matter,

European Bank opened the account without a due diligence review

of the prospective client. IPC used unauthorized credit card charges

to obtain $2 million in payments from European Bank and then absconded with the funds. By the time it learned of the fraud, European Bank was unable to locate IPC, the company’s owner, or the

missing $2 million. It ultimately suffered a $1.3 million loss which

threatened the solvency of the bank.

IPC Merchant Account. According to Bayer, the IPC account

was one of about a half a dozen new accounts that European Bank

opened in 1999 in an effort to expand the bank’s check clearing

business into credit card clearing. Bayer said that the bank had not

then understood the financial exposure involved in credit card

clearing, and its negative experience with IPC and two other companies has since led to its getting out of that line of business for

at least the short term.

Bayer explained that the credit card clearing business essentially

involved European Bank’s earning fees for providing advance payments at a discounted rate to merchants seeking the quick processing of credit card charges. He said that, in 1999, European Bank

worked with a Netherlands credit-card processing company called

TNT International Mail (‘‘TNT’’) to make advance credit card payments. Essentially, a company with a European Bank merchant account would send its credit card slips to European Bank; European

Bank would forward the data to TNT; TNT would advance the total

amount of credit card charges, discounted at a certain rate, to European Bank; and European Bank would, in turn, advance certain

payments to the merchant by depositing the funds into the company’s merchant account. European Bank would then wait for the

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428For example, Bayer said that, for every $100 in credit card charges posted by a merchant

referred by Media World, European Bank would have kept $6 and, from that $6, paid Media

World perhaps $1 for referring the merchant.

credit card charges to clear, earning its profits from the payments

ultimately made by the cardholders.

Bayer explained that European Bank had undertaken a variety

of steps to protect the bank from the credit risk associated with advancing credit card payments to merchants, including: (1) requiring

its merchants to make a large security deposit; (2) charging its

merchants a 6% discount rate instead of the usual 2.5% to 3.5%;

(3) retaining 10% of incoming payments from TNT until the merchant’s credit card charges cleared; and (4) performing random reviews of credit card orders to detect fraud or misconduct. According

to Bayer, what the bank had not taken into account was the possibility of a massive credit card fraud by a merchant who would abscond with the payments made by European Bank for unauthorized

credit card charges that would never clear.

Bayer said that the IPC account was first referred to European

Bank by a company called Media World which worked with telemarketers and, among other services, earned a fee for bringing

them together with banks willing to provide merchant accounts.428

Bayer said that Media World was owned by Michael Okun, a U.S.

citizen living in Florida who had referred two other merchants to

European Bank as well. Bayer said that he thought Media World

had investigated IPC and was recommending the company, but

later learned that Media World had simply referred IPC, without

any prior investigation into the company’s reputation or reliability.

The documentation indicates that Media World first contacted

European Bank about the IPC account around 2/15/99, when Okun

sent an email to Kely Ihrig alerting her to expect account opening

documentation from IPC. Ihrig had recently been hired by European Bank as its operations manager. The next day, IPC letters

and materials arrived by fax, with 49 pages of account opening information.

Ihrig actually opened the IPC account 1 week later on 2/23/99.

As with the Benford account, the IPC account was opened based

upon written materials and correspondence, without any telephone

conversation or direct client contact. Further, despite the credit

risk involved, the documentation indicates that the bank performed

virtually no due diligence prior to opening the IPC merchant account.

The IPC account opening questionnaire, dated 2/12/99, was

signed by Mosaddeo Hossain. It indicated that IPC had been incorporated just 10 days earlier, on 2/2/99. Questions asking about

IPC’s assets and liabilities were left blank. The company address

in Florida, which European Bank did not attempt to verify, was actually the address of a ‘‘Kwik Serve Food Store’’ in a questionable

area of town. IPC’s business activities were described as ‘‘Outbound

Telemarketing of Tours & Time Shares,’’ which Bayer said referred

to selling vacation and travel packages on the Internet. Bayer said

that while European Bank generally considered telemarketers a

credit risk, it had been reassured by IPC’s providing numerous

pages of information about the travel packages it was marketing.

Bayer indicated that, later, the bank was unable to find any eviVerDate 11-MAY-2000 11:19 Aug 16, 2001 Jkt 000000 PO 00000 Frm 00697 Fmt 6621 Sfmt 6602 71166.TXT SAFFAIRS PsN: SAFFAIRS
688

429 A form entitled, ‘‘Verification of the Beneficial Owner’s Identity,’’ listed IPC as the beneficial owner of the assets deposited with European Bank, but did not provide the ‘‘identity’’ of

IPC’s owner. Bayer said this was not a mistake, because the beneficial ownership form was not

intended to identify a company’s true owner, but merely to verify that the entity opening the

account was the true owner of any funds deposited into its account. When asked whether the

bank had noticed the lack of information about IPC’s ownership, Bayer indicated that had not

been noticed at the time, but the bank had later determined that Hossain was the sole company

shareholder. 430 In this instance, the Bangladeshi passport was marked as having expired 7 years earlier,

in 1992, a fact that Bayer said was not noticed at the time. 431When asked whether European Bank had any concern about the geographic logic of a

Bangladeshi doing business in the United States and using a bank in Vanuatu, Bayer indicated

that had not been a concern. He said that the United States was a nation of immigrants, and

Hossain had listed a U.S. telephone number, a U.S. address, and a U.S. bank account, so the

bank reasonably believed he was a U.S. resident. Bayer said they had assumed IPC was using

a Vanuatu bank because the company was so new that it had been unable to convince a U.S.

dence that IPC had actually marketed any products on the Internet, although it may have made some telephone sales.

The questionnaire listed two references for IPC. The first was

Mike Okun of Media World. According to Bayer, Okun later indicated that he was unaware that IPC had listed him as a reference,

and knew little about either the company or Hossain. The second

reference was ‘‘Bank Atlantic Hillsboro Office,’’ which turned out to

be BankAtlantic, a Federal savings bank in Florida. The questionnaire states that IPC had ‘‘banked with them for 1 years/months,’’ without indicating whether the correct time period was 1 year or

1 month. As part of the account opening process, European Bank

asked IPC for a written reference letter from BankAtlantic. In response, BankAtlantic provided a very brief letter, dated 2/19/99,

addressed to ‘‘whom it may concern,’’ stating that IPC ‘‘has maintained an account with BankAtlantic, and has handled [the] account as agreed.’’ Bayer said during his interview that this letter

had caused European Bank to assume IPC had a mature association with BankAtlantic. However, the bank learned later that the

Florida bank account had been opened on 2/5/99, 2 weeks prior to

the date of the reference letter; it held only $1,500 at the time of

the letter; and it represented the first time Hossain had done business with BankAtlantic.

No inquiry was made by European Bank and no information was

provided by IPC about any aspect of the company’s finances, such

as its initial capitalization or account balances. Nor was any information provided about the company’s ownership.429 The file did include copies of IPC’s incorporation papers, but the documents contained primarily boiler plate language and virtually no due diligence information other than listing Hossain as the company’s sole

incorporator, sole director, sole officer and sole registered agent.

Hossain was, in fact, the only individual named in any of the IPC

account opening documentation. Despite his key role, the account

opening questionnaire provided minimal information about him— nothing more than his name, a Florida address, his Bangladeshi

nationality, and his passport photograph—essentially the same

skeletal information provided in the Benford account opening documentation.430 Hossain did list himself on the questionnaire as

IPC’s accountant, but Bayer indicated that the bank did not know

whether Hossain was actually a member of the accounting profession. He admitted that the bank had not obtained any information

about Hossain’s business background, past employment or finances.431

689

bank to open a merchant account and so began looking abroad. He acknowledged that the bank

had subsequently been unable to locate Hossain’s personal residence, either in the United States

or elsewhere, and that the company address provided also proved false.

European Bank opened the IPC bank account within 1 week of

being contacted for the first time by the company. Despite opening

a merchant account involving credit risk and services beyond that

of a run-of-the-mill corporate bank account, European Bank conducted virtually no due diligence investigation of IPC or Hossain.

It did not inquire into the company’s ownership, double check its

references, ascertain its capital or bank account balances, or verify

its physical address. With respect to Hossain, it did not inquire

into his business or employment background, obtain any personal

or professional references, check his credit history, or verify any

personal or professional information about him. The only facts that

the bank had were that IPC was a brand new company with a new

Florida bank account, and Hossain was willing to pay unusually

high charges to open a merchant account at a Vanuatu bank.

When asked whether he thought the bank’s due diligence effort

was adequate, Bayer said that, at the time, European Bank had

not understood its exposure and had thought it was dealing with

a U.S. corporation that had sufficient bona fides to open a U.S.

bank account. He indicated that the bank later learned to its detriment that its due diligence efforts had been insufficient to protect

it from loss.

IPC Fraud. European Bank approved opening the IPC merchant

account in February, but the account did not become operational

until late March 1999, after European Bank had obtained a merchant identification number for IPC from several credit card companies. During the 1-month waiting period, emails from Okun and

Hossain inquired into the status of the account. Hossain indicated

that he had already sold numerous travel packages and had credit

card charges piling up that needed processing.

The Bayer interview and other documentation indicate that as

soon as its merchant account became operational, IPC filed numerous credit card charges which, in less than 3 months, totaled about

$13 million. Bayer indicated in his interview that the vast majority

of these charges, about 85%, would later be disputed by cardholders who refused to pay the billed amounts. He said there were

also indications, never proven, that IPC may have illegally obtained the credit card numbers from a database and simply fabricated the unauthorized charges.

In April 1999, the first month the IPC account was operational,

European Bank processed about $3.5 million in charges and paid

IPC over $2 million. The documentation shows that European

Bank sent the $2 million in four payments through its U.S. dollar

account at Citibank to the IPC account at BankAtlantic. The payments were:

—$705,775.41 wire transferred by European Bank on 4/1/99;

—$333,641.68 wire transferred by European Bank on 4/9/99;

—$358,333.59 wire transferred by European Bank on 4/15/99;

and

—$728,098.90 wire transferred by European Bank on 4/22/99.

690

432 Bank documentation indicates the following four transfers:

—Following European Bank’s payment of about $705,000 on 4/1/99, IPC transferred $700,000 on 4/5/99 to Bank Leumi in Tel Aviv, Israel, and an unspecified accountholder

withdrew the funds on 4/9/99. —Following European Bank’s payment of about $333,000 on 4/9/99, IPC transferred $330,000 on 4/12/99 to Union Bank for Savings and Investment in Amman, Jordan, and

Paul Al Marjai, the accountholder, withdrew the funds on 4/15/99. —Following European Bank’s payment of about $358,000 on 4/15/99, IPC transferred $342,000 on 4/21/99 to the same Union Bank in Jordan, and Marjai withdrew the funds

on 4/26/99. —Following European Bank’s payment of about $728,000 on 4/26/99, IPC transferred $734,000 on 4/22/99 to Union Bank in Jordan, and Marjai withdrew the funds on 4/29/

99.

On 4/21/99, European Bank received an email from TNT, its

credit card processing company, describing a phone call reporting

‘‘a possible fraud of cardholders of your merchant: Internet Processing Corp.’’ European Bank attempted to find out more, but was

unable to obtain any new information for several days. On 4/23/99,

it asked Citibank to recall its latest payment to IPC of $728,000,

and Citibank sent a 4/23/99 telex to BankAtlantic asking it to return the funds. Although BankAtlantic apparently acknowledged

on 4/26 receiving the Citibank telex, BankAtlantic failed to return

the $728,000. Instead, on the same day, 4/26/99, at IPC’s request, it wire transferred all but about $11,000 from the IPC account to

a small bank in Jordan.

The documentation indicates that the 4/26 transfer was just the

latest in a series of transfers by IPC within days of receiving a payment from European Bank. In each instance, IPC transferred the

funds across international lines to a bank in either Israel or Jordan.432

When asked to describe BankAtlantic’s response to the possible

IPC fraud, Bayer characterized it as ‘‘abysmal.’’ He noted that

BankAtlantic never returned the $728,000; failed to promptly alert

the banks in Israel and Jordan to the possible IPC fraud; and

failed to provide effective assistance in locating Hossain, IPC or the

missing $2 million. The Minority Staff investigation contacted

BankAtlantic directly about the IPC account. BankAtlantic neither

confirmed nor denied that it had opened the IPC account based

upon an expired Florida drivers license, expired passport, and an

unverified company address. BankAtlantic indicated that it did not

normally issue a bank letter of reference for a 2-week old account

with minimal funds, and speculated that the BankAtlantic letter

provided to European Bank might have been a forgery. When

asked whether the bank had any concerns in April 1999 when IPC

began moving large sums from Vanuatu to banks in the Middle

East, BankAtlantic indicated that the events had taken place so

quickly, within the space of a month, that it had no documentation

indicating concerns prior to being contacted by European Bank. Despite a request, BankAtlantic did not provide an explanation of

why it transferred the $728,000 payment to a Jordan bank on 4/

26/99, instead of returning the funds to European Bank as requested.

European Bank alerted U.S. law enforcement, including the Secret Service, to the IPC fraud. On 5/7/99, European Bank faxed urgent messages to Bank Leumi in Israel and Union Bank in Jordan

about the IPC fraud, but neither bank returned any funds or provided investigative leads. Bank Leumi stated in a 6/10/99 fax that

691

433 Email dated 7/13/99 from Okun of Media World to Ihrig at European Bank. 434See 7/1/99 memorandum from European Bank to Moore at Citibank, CG 3966–67.

‘‘under Israeli law, banks owe a strict duty of confidentiality to

their customers, which prevents us from providing any additional

information other than by compulsion of law.’’ European Bank

asked Media World for assistance in locating IPC and Hossain;

Okun agreed and stated in an email that, ‘‘to avoid this absolute

mess in the future, my investigating team will investigate any and

all people we bring to you.’’433 European Bank was unable to find

any trace of IPC, Hossain or the missing $2 million.

European Bank calculated that, after taking into account IPC’s

security deposit, the bank’s discount rate and holdbacks, it actually

lost about $1.3 million from the IPC fraud. On 5/17/99, Citibank

sent a letter asking about the fraud: ‘‘Citibank feels it would like

to have an understanding of what . . . happened, and what will be

done to avoid a repeat, given that we have placed very considerable

weight on European Bank’s management.’’ In an internal Citibank

memorandum dated 5/18/99, the relationship manager for the European Bank account, Christopher Moore, indicated that the loss

appeared to be a substantial one, given European Bank’s thin capitalization. He wrote:

The real risk for us in the future is that some transactions that

cause loss finish up in accounts with us . . . and they don’t

have the resources to cover us. . . . [W]e have to decide if this

event is terminal for us.

In the end he recommended requiring European Bank to keep $1

million on deposit at Citibank until the IPC matter was fully resolved. European Bank eventually sent Citibank a more detailed

explanation of the IPC fraud.434 The memorandum by bank president Robert Bohn stated in part:

The fraud occurred in the business of credit card clearing for

a U.S. merchant that had been recommended . . . by an existing client and which very quickly turned out to be bad. Our

normal due diligence . . . on that merchant, including a trade

reference and a reference from his USA bank, as well as a financial assessment, revealed no obvious warning signals.

When asked about this memorandum, Bayer explained that the

‘‘existing client’’ and ‘‘trade reference’’ both referred to Okun at

Media World, and the ‘‘financial assessment’’ was the bank’s determination that, because IPC was so new, the bank would use its

most cautious merchant account terms, requiring a 6% discount

rate and 10% holdbacks on incoming credit card payments. Bayer

said that, even with those precautions, the loss had been a ‘‘very

serious matter’’ for the bank, had required him to deposit $1 million to cover the lost funds, and could have resulted in a bank failure, if the exposure had been greater. He said, however, that European Bank appears to have weathered the damage to its solvency.

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