U.S. GOVERNMENT PRINTING OFFICE

61–699 cc WASHINGTON : 2000

S. Hrg. 106–428

PRIVATE BANKING AND MONEY LAUNDERING:

A CASE STUDY OF OPPORTUNITIES AND

VULNERABILITIES

HEARINGS

BEFORE THE

PERMANENT

SUBCOMMITTEE ON INVESTIGATIONS

OF THE

COMMITTEE ON

GOVERNMENTAL AFFAIRS

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

NOVEMBER 9 AND 10, 1999

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

WILLIAM V. ROTH, Jr., Delaware

TED STEVENS, Alaska

SUSAN M. COLLINS, Maine

GEORGE V. VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

ARLEN SPECTER, Pennsylvania

JUDD GREGG, New Hampshire

JOSEPH I. LIEBERMAN, Connecticut

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

ROBERT G. TORRICELLI, New Jersey

MAX CLELAND, Georgia

JOHN EDWARDS, North Carolina

HANNAH S. SISTARE, Staff Director and Counsel

JOYCE A. RECHTSCHAFFEN, Minority Staff Director and Counsel

DARLA D. CASSELL, Administrative Clerk

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

SUSAN M. COLLINS, Maine, Chairman

WILLIAM V. ROTH, JR., Delaware

TED STEVENS, Alaska

GEORGE V. VOINOVICH, Ohio

PETE V. DOMENICI, New Mexico

THAD COCHRAN, Mississippi

ARLEN SPECTER, Pennsylvania

CARL LEVIN, Michigan

DANIEL K. AKAKA, Hawaii

RICHARD J. DURBIN, Illinois

MAX CLELAND, Georgia

JOHN EDWARDS, North Carolina

K. LEE BLALACK, II, Chief Counsel and Staff Director

LINDA J. GUSTITUS, Minority Chief Counsel and Staff Director

MARY D. ROBERTSON, Chief Clerk

(III)

C O N T E N T S

Opening statements: Page

Senator Collins ................................................................................................. 1, 71

Senator Levin .................................................................................................... 4, 72

Senator Specter ................................................................................................. 8

Senator Cochran ............................................................................................... 9

WITNESSES

TUESDAY, NOVEMBER 9, 1999

Robert L. Roach, Counsel to the Minority, Permanent Subcommittee on Investigations ................................................................................................................ 10

Elise J. Bean, Deputy Chief Counsel to the Minority, Permanent Subcommittee on Investigations ................................................................................ 13

Amy C. Elliott, Vice President, Citibank Private Bank, New York .................... 18

Albert Misan, Vice President, Citibank Private Bank, New York ....................... 20

Alain Ober, Vice President, Citibank Private Bank, New York .......................... 36

G. Edward Montero, Senior Executive, Citibank Private Bank, New York ....... 37

John Reed, Chairman and Co-Chief Executive Officer, Citigroup, New York,

accompanied by Todd Thomson, Chief Executive Officer, Citibank Private

Bank, New York, and Mark Musi, Chief Compliance and Control Officer,

Citibank Private Bank, New York ...................................................................... 50

WEDNESDAY, NOVEMBER 10, 1999

Antonio Giraldi, Former Private Banker, currently in Federal Prison for

Money Laundering ............................................................................................... 74

Raymond W. Baker, Guest Scholar in Economic Studies, The Brookings Institution, Washington, DC ....................................................................................... 84

Ralph E. Sharpe, Deputy Comptroller for Community and Consumer Policy,

Office of the Comptroller of the Currency, Department of the Treasury,

Washington, DC ................................................................................................... 92

Richard A. Small, Assistant Director, Division of Banking Supervision and

Regulation, Federal Reserve System, Washington, DC .................................... 96

ALPHABETICAL LIST OF WITNESSES

Baker, Raymond W.:

Testimony .......................................................................................................... 84

Prepared statement with an attachment ....................................................... 1053

Bean, Elise J.:

Testimony .......................................................................................................... 13

Prepared statement (Minority Staff Report on Private Banking and

Money Laundering: A Case Study of Opportunities and Vulnerabilities) ......................................................................................................... 872

Elliott, Amy

Testimony .......................................................................................................... 18

Prepared statement .......................................................................................... 940

Giraldi, Antonio:

Testimony .......................................................................................................... 74

Prepared statement .......................................................................................... 1003

Misan, Albert:

Testimony .......................................................................................................... 20

Prepared statement .......................................................................................... 946

Montero, G. Edward:

Testimony .......................................................................................................... 37

Prepared statement .......................................................................................... 953

Page

IV

Ober, Alain:

Testimony .......................................................................................................... 36

Prepared statement .......................................................................................... 950

Reed, John:

Testimony .......................................................................................................... 50

Prepared statement with attachments ........................................................... 957

Roach, Robert L.

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

Prepared statement (Minority Staff Report on Private Banking and

Money Laundering: A Case Study of Opportunities and Vulnerabilities) ......................................................................................................... 872

Sharpe, Ralph E.:

Testimony .......................................................................................................... 92

Prepared statement .......................................................................................... 1079

Small, Richard A.:

Testimony .......................................................................................................... 96

Prepared statement .......................................................................................... 1101

EXHIBITS

Note: ‘‘Citibank PBG’’ refers to Citibank Private Bank Group, an organizational unit within Citigroup

1. Chart: Structure of Trocca, Ltd. ...................................................................... 111

2. Chart: Flow of the Salinas Funds ................................................................... 112

3. Chart: Salinas Cashiers Checks Through Citicorp Mexico ............................ 113

4. 4/92 Citibank documentation policy ................................................................ 114

5. 5/92 Salinas account opening documentation ................................................. 123

6. 9/91 Citibank client acceptance policy ............................................................ 127

7. Excerpt from 3/1/95 Salinas client profile ...................................................... 133

8. 9/15/92 e-mail from Reynaldo Figueiredo on ‘‘Client Information—Policy

and Procedures’’ ................................................................................................ 134

9. 12/8/93 e-mail from G. Edward Montero on ‘‘Client Profile/Suitability/

Sales Practices’’ ................................................................................................. 136

10. ‘‘Rumors of Corruption Besiege Mexico’s President,’’ Sacramento Bee,

(8/11/93) ............................................................................................................. 138

11. a. Excerpts from transcript of 3/1/95 telephone conversations among

Citibank Private Bank personnel (Amy C. Elliott, Pedro Homen, and

Sarah Bevan) ................................................................................................ 141

b. Excerpts from transcript of 3/1/95 telephone conversations between

Citibank Private Bank personnel (Pedro Homen and Amy C. Elliott) ... 142

12. 1996 President Bongo’s client profile .............................................................. 143

13. 6/25/97 KYC [Know Your Client] Deficiencies review of Abacha sons’

client profile ...................................................................................................... 144

14. 4/28/97 e-mail to Alain Ober and others from Christopher L. Rogers

on President Bongo’s press clippings .............................................................. 145

15. 11/6/98 e-mail to Salim Raza from Christopher L. Rogers on closing

President Bongo’s accounts .............................................................................. 147

16. 9/15/98 Citibank Private Bank memorandum from Belma Kusoglu to

Credit Committee regarding $39.1 million overdraw .................................... 148

17. Excerpts from Citibank Private Bank brochure ............................................. 149

18. Excerpts from transcript of 3/1/95 telephone conversations among Citibank Private Bank personnel (Hubertus Rukavina, Pedro Homen, Tom

Salmon, Sarah Bevan, Joanne Sciortino) ....................................................... 151

19. 4/14/97 Citibank Private Bank memorandum to File from Alain Ober

regarding source of funds in President Bongo’s accounts ............................. 154

20. 6/18/97 OCC memorandum to Bank File from Steven D. Lindsey, OCC

National Bank Examiner regarding ‘‘Related files of El Hadj Omar Bongo,

President of Gabon (Africa)’’ ............................................................................ 155

Page

V

21. U.S. General Accounting Office Report to the Ranking Minority Member,

Permanent Subcommittee on Investigations, Committee on Governmental

Affairs, U.S. Senate, Private Banking: Raul Salinas, Citibank, and Alleged Money Laundering, October 1998 .......................................................... 159

22. Statement for the Record of Robert H. Hast, Acting Assistant Comptroller

General for Investigations, Office of Special Investigation, U.S. General

Accounting Office, Private Banking: Paul Salinas, Citibank, and Alleged

Money Laundering, November 9, 1999 ........................................................... 171

23. Statement for the Record of Thomas J. McCool, Director, Financial Institutions and Markets Issues, General Government Division, U.S. General

Accounting Office, Money Laundering: Observations on Private Banking

and Related Oversight of Selected Offshore Jurisdictions ............................. 182

24. Statement for the Record of Stuart E. Eizenstat, Treasury Deputy Secretary ................................................................................................................. 198

25. Supplemental questions and answers for the record of the Permanent

Subcommittee on Investigations’ Minority Staff ............................................ 204

26. Supplemental questions and answers for the record of John Reed, Chairman, Citigroup, Inc. .......................................................................................... 206

27. Supplemental questions and answers for the record of Ralph Sharpe,

Deputy Comptroller, Community and Consumer Policy, Office of the

Comptroller of the Currency ............................................................................ 216

28. Supplemental questions and answers for the record of Richard A. Small,

Assistant Director, Division of Banking Supervision and Regulation,

Board of Governors of the Federal Reserve System ...................................... 224

29. Citibank comments on the Permanent Subcommittee on Investigations’

Minority Staff Report on Private Banking and Money Laundering ............. 231

30. Documents relating to Raul Salinas:

a. Citibank summary of Salinas account totals and client net revenue

[CB21344] ...................................................................................................... 238

b. 6/92 monthly business letter projecting Salinas account of $15–$20

million [CB24979–82] ................................................................................... 239

c. 6/16/92 memorandum from Jim Parker [CB24610–12] ............................. 243

d. 1992 client acceptance checklists with public figure designations

[CB24613–14; CB24572] .............................................................................. 246

e. Review memorandum for Trocca, Ltd. account [CB24483–84] ................. 249

f. 8/17/93 document on lunch with Salinas, Rhodes, Montero, Elliott

[CB9453] ......................................................................................................... 251

g. 7/11/94 memorandum from Ariana Fleischmann on meeting between

Confidas personnel and Mr. and Mrs. Salinas [CB24617–18] .................. 252

h. Memorandum from Amy C. Elliott on revealing client name [CB24907–

8] .................................................................................................................... 254

i. 3/1/95 memorandum from Sara Bevan regarding Salinas ‘‘Public Figure’’ classification and origin of wealth [CB23250] .................................... 256

j. 3/3/95 memorandum from Amy C. Elliott on accepting Mr. Salinas

as a client [CB7178–79] ................................................................................ 257

k. 11/14/95 memorandum from Clark Kall on Swiss meeting with Mrs.

Salinas [CB24607] ........................................................................................ 259

l. 9/18/95 memorandum from Clark Kall and Ariana Fleischmann on

closing accounts [CB24978] .......................................................................... 260

m. 11/21/94 memorandum from Robert D. Agosti on documents for requesting parties [CB9449] ........................................................................... 261

n. Minutes of Citibank Board of Directors meetings summarizing discussions of the Salinas matter: ......................................................................... 262

11/21/95 [CB21345];

12/19/95 [CB21347–8]

o. 11/18/97 communication from John Reed to Citibank Board, including

discussion of the Salinas matter [CS7462–63] ........................................... 265

Page

VI

p. Tape transcripts of Citibank employee conversations regarding management and status of Salinas’ accounts: ................................................... 267

3/1/95 11:07 AM [CB22428–54];

3/1/95 1:59 PM [CB22319–27];

3/1/95 2:38 PM [CB22328–32];

3/1/95 2:47 PM [CB22079–81];

3/1/95 2:51 PM [CB22467–72];

3/1/95 3:02 PM [CB22456–57];

3/1/95 3:11 PM [CB22458–60];

3/1/95 4:31 PM [CB24655–64];

3/2/95 11:41 AM [CB22336–40];

11/14/95 3:08 PM [CB24640–41]

q. Undated memorandum from Bob Fox on management of Salinas’ accounts in Mexico City [CB4584–85] ............................................................ 339

r. Chart entitled, ‘‘Preliminary list of FX and Funds Transfers,’’ describing transfers of Salinas’ funds from Citibank’s Mexico City branch

to a concentration account in New York [CB25018] .................................. 341

s. Documents related to cash flows and balances in Salinas’ accounts: ....... 342

Two 1-page memoranda on 1993 and 1994 cash flows [CB23079,

CB1128];

6/29/93 memorandum from Amy C. Elliott [CB22908];

1/95 documents on sending Salinas’ funds through another bank

[CB23412–14];

11/15/95 memorandum from Amy C. Elliott detailing certain fund

transfers from Salinas’ accounts [CB7180–83];

2/2/96 document prepared by Scotland Yard on transactions in Salinas’ accounts

t. Documents related to due diligence policies and implementation: ........... 355

1992 concentration account memos [CB24896–903];

9/25/92 memorandum from Edward J. Kowalcyk on client profiles

[CB14628–30];

1/22/93 memorandum from Albert Misan on due diligence [CB15410];

3/11/93 memorandum from Edward J. Kowalcyk on BR&C review

[CB15836–39];

12/8/93 memorandum from G. Edward Montero on client profiles

[CB14626–27];

One page summary of deadlines and required reviews established

in 12/8/93 memorandum [CB11455];

1/94 review of Mexico team client profiles in New York [CB24909–

49; CB7236];

5/6/94 memorandum from Albert Misan on client profile audit

[CB18311–21];

2/21/95 memorandum from Albert Misan with 9/30/94 memo on profiles [CB14631–39];

6/1/95 memorandum from G. Edward Montero on client profiles

[CB16534–36];

9/7/95 memorandum from Albert Misan on cash deposits [CB11909];

12/22/95 memorandum from Edward J. Kowalcyk on Mexico-New

York team BR&C review [CB24904];

4/10/96 memorandum from Albert Misan with 4/9/96 memorandum

from G. Edward Montero on client profiles [CB15398–400]

u. Citibank Client Account Management System [CAMS] Screen profiles

of Raul Salinas: ............................................................................................ 416

3/1/95 [CB17293];

3/8/95 [CB17286];

3/15/95 [CB17281];

11/22/95—includes handwritten edits [CB21433];

11/29/95 [CB7196]

v. List of meetings that Citibank personnel had with Mr. and Mrs. Salinas, prepared by Citibank [CB23814–16A] ................................................ 421

Page

VII

w. Documents related to corruption allegations involving Raul Salinas: .... 425

‘‘Rumors of Corruption Besiege Mexico’s President,’’ Sacramento Bee

(8/11/93);

‘‘Raul’s Shady Business at CONASUPO,’’ Proceso (12/4/95);

Este Pais excerpts (8/1/92);

‘‘Agricultural trade—big business for U.S. and Mexico,’’ U.S. Dept.

of Agriculture (3/92)

x. Documents related to the structure of Salinas’ Trust and PICs: ............. 435

Diagram of Trust-PIC structure [CB2418];

UK Non-Residence Declaration Form for Trocca, Ltd. [CB24579];

Register of Directors and Officers of Trocca, Ltd. [CB23446];

7/22/92 Declaration of Trust, Brennan Ltd. [CB23686];

6/30/93 Declaration of Trust, Brennan Ltd. [CB23677];

11/24/92 memorandum from Carlos Gomez forwarding a request from

Amy C. Elliott for documentation confirming to Raul Salinas that

he is the beneficial owner of Trocca, Ltd. [CB23361];

2/16/95 memorandum from Arthur Vogt regarding another Salinas

PIC, Birchwood Heights Ltd. [CB23901];

Register of Shareholders of Birchwood Heights Ltd. [CB23976]

y. 6/5/96 memorandum from Alvaro de Souza on Citibank’s position on

a Salinas matter [CB16996–97] .................................................................. 443

31. Documents relating to Asif Ali Zardari:

a. 2/27/95 Swiss Form A identifying Asif Ali Zardari as the beneficial

owner of the Capricorn Trading S.A. account in the Citibank Private

Bank in Switzerland [600] ........................................................................... 445

b. Wire transfer records documenting transfers of $18 million into Mr.

Zardari’s Capricorn Trading S.A. account in Dubai and transfers of

$18.3 million out of the Dubai account into the Capricorn Trading

S.A. account in Citibank Private Bank in Switzerland: ............................ 446

10/5/94 transfer of $5 million from A.R.Y. International Exchange

into the Capricorn Trading S.A. account in Citibank in Dubai

[X6903–4];

10/6/94 transfer of $5 million from A.R.Y. International Exchange

into the Capricorn Trading S.A. account in Citibank in Dubai

[X6900–2];

2/24/95 transfer of $8 million from Morgan NYC into the Capricorn

Trading S.A. account in Citibank in Dubai [X6905–8];

3/6/95 transfer of $8.1 million from the Capricorn Trading S.A. account in Citibank in Dubai into the Capricorn Trading S.A. account

in Citibank Private Bank in Switzerland [X6894–99];

5/3/95 transfer of $10.2 million from the Capricorn Trading S.A.

account in Citibank in Dubai into the Capricorn Trading S.A. account

in Citibank Private Bank in Switzerland [X6890–93];

5/4/94 record of Citibank Private Bank in Switzerland credit of $10.2

million to account of Capricorn Trading S.A. [599]

c. Mandate Agreement between Asif Ali Zardari and Jens Schlegelmilch

concerning Bomer Finance, Inc. [601–2] ..................................................... 466

d. Mandate Agreement between Begum Nusrat Bhutto and Jens

Schlegelmilch concerning Mariston Securities, Inc. [603–4] ..................... 468

e. British Virgin Islands Certificate of Incorporation for Capricorn Trading S.A. [605] ................................................................................................. 470

f. 6/29/94 letter from Cotecna Inspection S.A., stating that if it receives

a contract from the government of Pakistan for the inspection and

price verification of imported goods, it will pay Mariston Securities,

Inc., 6 percent of the payments made under the contract [597] ................ 471

g. 12/11/97 communication from John Reed to Citibank Board, including

a discussion of the Zardari matter [CS7464–5] .......................................... 472

h. List of meetings between Mr. Zardari and Citibank personnel, provided

by Citibank ................................................................................................... 474

Page

VIII

32. Documents relating to El Hadj Omar Bongo:

a. Attachment A to 9/23/99 letter to Subcommittee from Citibank legal

counsel, summarizing accounts related to Omar Bongo, President of

Gadon, referred to as ‘‘Client 1a,’’ and his offshore corporation, Tendin

Investments, Ltd., referred to as ‘‘Client 1b’’ ............................................. 478

b. 15-year record, 1985–1999, of Tendin account funds, prepared by

Citibank Private Bank [X2557] ................................................................... 479

c. 5/95 Tendin Investments Ltd. 1-page document [X4318] .......................... 480

d. Excerpts from client profiles prepared by Citibank PBG for President

Bongo’s accounts: .......................................................................................... 481

New York PBG profile, 1996 [X2444, 2448, 2450, 2451, 2454];

New York PBG profile, prepared before or on 2/13/97 [X4328];

New York PBG ‘‘Full Profile’’ prepared after 10/31/97 [X6695–98];

London PBG KYC Client Acceptance Checklist, 1998 [X6320–21,

6326];

London PBG ‘‘Extended Entity Profile,’’ 1999 [X6301–3]

e. Excerpts from OS account documentation: ................................................. 497

New York PBG ‘‘Client File’’ [X3340–43];

10/24/95 OS account opening documentation [X3353–56, 3358, 3360–

61];

2/9/96 letter from President Bongo to New York PBG [739];

2/9/96 Security Agreement [737–38];

2/12/96 memorandum to ‘‘Credit’’ from Luella A. Gentles, senior account officer [736]

f. 3/9/95 memorandum to Donnelle Knowles from Alain Ober on using

codes [X2374] ................................................................................................. 512

g. 6/92 documents on $100,000 cash withdrawal [734] ................................. 513

h. 5/94 documents on $69,035 check [714] ...................................................... 514

i. Excerpts from documentation related to extensions of credit to President Bongo, 1986–1998: ................................................................................ 515

1986 credit approval recommendation [851];

1/9/90 e-mail to William Owen from C.O. Grant [769];

8/30/90 e-mail to Christopher L. Rogers from Len Maestra [770];

7/92 credit approval document for $24.4 million [757];

8/92 credit approval document for $27.5 million [756];

2/16/93 e-mail to Angelica De Robien from Rudolph Thomson on

overdraft facility [847];

2/17/93 letter to Angelica De Robien from Tendin Investments, Ltd.,

on overdraft facility [848];

2/18/93 document by William P. Owen on Tendin overdraft facilities

and loans [755];

11/93 credit approval document for $47.7 million [751–52];

2/94 credit approval document for $50.1 million [750];

4/94 credit approval/annual review [X2536–37];

4/95 credit approval/annual review [X2528, 2530];

4/95 facility renewal recommendation, Paris PBG [X7043–44];

6/20/95 e-mail to Salim Raza from Alain Ober on Product Suitability

[X2286];

2/96 facility memorandum [X2525];

4/96 credit approval/annual review [X2522, 2524];

6/96 and 7/96 e-mails related to overdraft facilities [X7059–60];

10/97 credit approval/annual review [X2504];

10/98 credit approval/annual review [X2418]

Page

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j. Excerpts from documents related to internal Citibank PBG inquiries

into President Bongo’s accounts: .................................................................. 540

1996 Sensitivity Hot Sheet [X6887];

10/21/96 memorandum to Alain Ober from Angelo Fusaro regarding

Tendin accounts, with an attachment [835–43];

12/4/96 handwritten reply from Alain Ober with an attachment

[X6874, 6876];

6/12/98 PBG call report from Alain Ober with reference to attempted

fraud [X2479]

k. Documents related to Federal Examiners review of President Bongo’s

accounts: ........................................................................................................ 553

12/10/96 memorandum to Christopher L. Rogers from Alain Ober

on $52 million [X2283];

12/11/96 reply from Christopher L. Rogers to Alain Ober [X7056];

2/26/97 memorandum to Nuhad Saliba from Alain Ober on credit

extensions [X7066]

l. Documents related to 1996 and 1997 deposits into President Bongo’s

accounts: ......................................................................................................... 556

12/96 e-mails on transfer from Gabon treasury to Tendin accounts

[X7063];

1/7/97 e-mail to Donnelle Knowles from Alain Ober on Gabon treasury funds deposit [X7064];

2/97 e-mails on deposits into President Bongo’s accounts [X7065];

2/25/97 facsimile to Donnelle Knowles from Alain Ober on failure

to invest deposited funds [X7067–68];

2/26/97 e-mail to Donnelle Knowles from Alain Ober on deposits

to ‘‘OS’’ and Tendin accounts [X4314]

m. Documents related to OCC review of President Bongo’s accounts: ......... 562

4/9/97 memorandum to Alain Ober from Christopher L. Rogers on

source of funds [X4315–17];

4/11/97 memorandum to File from Alain Ober on source of funds

[X6694];

4/14/97 memorandum to File from Alain Ober on source of funds

[693];

4/28/97 e-mail to Alain Ober from Christopher L. Rogers on FranceGabon Paris Press Clippings [X7054–55];

6/18/97 memorandum to Bank File from OCC National Bank Examiner Steven D. Lindsey on President Bongo’s accounts [689–92] (Also

printed above in Exhibit 20.)

n. 1998 Quality Assurance—KYC Scorecards: ............................................... 573

Tendin accounts [X2477–78];

OS accounts [X3414–15]

o. Documents related to closing President Bongo’s accounts: ....................... 577

11/6/98 e-mail to Salim Raza from Christopher L. Rogers [X7045];

12/24/98 e-mail to Salim Raza from Christopher L. Rogers [X7048];

1/15/99 e-mail to Anjum Z. Iqbal from Christopher L. Rogers [X7049];

2/1/99 e-mails on closing accounts [X7051];

3/1/99 e-mail to Salim Raza and Anjum Z. Iqbal from Christopher

L. Rogers [X7052];

6/99 Transaction monitoring report, London PBG, on Tendin withdrawal [X6284];

7/27/99 letter from President Bongo to Citibank PBG, Paris on closing Leontine Ltd. account [CS2150];

8/99 e-mails on closing President Bongo’s accounts [CS2156–57];

8/99 e-mails on closing accounts and Bongo nephew [CS2158];

8/99 document with figures related to President Bongo’s accounts

[CS2149]

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p. Documents related to French criminal investigation of Elf Aquitaine

and Elf Gabon: .............................................................................................. 588

‘‘Brief History and Current Status of the French Investigation of

the Elf Money Laundering Scheme,’’ The Library of Congress Law

Library (No. 99–7539, 10/99);

‘‘Relations Between France and Gabon Worsened over the Elf Affair,’’

Le Monde (4/2/97, translated by The Library of Congress Law Library);

‘‘Gabon Chief Threatens Oil Deals After Fraud Charges,’’ The Guardian (London) (4/8/97);

‘‘Omar Bongo Could Be Implicated in the Elf Affair,’’ Le Monde

(4/8/97), translated by The Library of Congress Law Library);

‘‘Pas si joli,’’ Africa Confidential (5/9/97);

‘‘The Swiss Justice Refuses to Unfreeze the Bank Account of President Bongo, Jacques Verges Becomes the Attorney of Omar Bongo

in the Elf Affair,’’ Le Monde (8/6/97, translated by The Library of

Congress Law Library);

‘‘Swiss Investigators Seize Gabon President’s Bank Account,’’ AFX

News (8/27/98);

‘‘President of Gabon’s Appeal Against Account Block Rejected,’’ AP

Worldstream (11/2/98);

‘‘A Swiss Account,’’ La Lettre du Continent (11/19/98, translated by

The Library of Congress Law Library);

‘‘No Immunity in Switzerland,’’ La Lettre du Continent (4/15/99,

translated by The Library of Congress Law Library);

‘‘Judge Perraudin’s Investigation Uncovers ELF’s Secret African Affairs,’’ Le Monde (10/25/99, translated by The Library of Congress

Law Library)

33. Documents relating to Abacha sons:

a. Attachment D to 8/9/99 letter to Subcommittee from Citibank legal

counsel summarizing accounts related to Mohammed and Ibrahim Sani

Abacha, referred to as the ‘‘first and second individuals identified in

Item 2(l)’’ ....................................................................................................... 610

b. 9/27/99 letter to Subcommittee from Citibank legal counsel on Abacha

sons’ accounts ................................................................................................ 611

c. Excerpts from client profiles prepared by Citibank PBG for Abacha

sons’ accounts: ............................................................................................... 612

New York PBG profile, 1997, Gelsobella account [CS7178, 7182–

83, 7185, 7189];

New York PBG profile, 1997, Chinquinto account [CS7159, 7163–

65, 7170];

London PBG ‘‘Combined Client Profile/Account Plan,’’ 1998 [CS3250,

3252–53];

London PBG ‘‘Existing Client KYC Approvals,’’ 1998 [CS2733–38]

d. KYC Deficiencies, 6/25/97 [CS3281] ............................................................ 631

e. Excerpts from account documentation: ....................................................... 632

2/28/92 Call Plan/Call Report from Alain Ober on opening New York

accounts [CS2064];

3/3/92 e-mail to Alain Ober from Michael Mathews providing client

reference [CS2071];

7/29/93 Call Plan/Report from Michael Mathews [CS2937];

11/11/94 Numbered Account Opening Form for London account

[CS3285];

1995 documents on using codes for Abacha sons’ accounts [CS1970–

71, 1967, 3157];

1997 documents on cash purchase of London apartment [CS3189,

3179, 3171];

5/1/96 statement for Navarrio account showing $10 million transfer

on the order of Morgan Procurement Corp. through Citibank New

York [CS2955];

Page

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e. Excerpts from account documentation—Continued

5/1/97 statement for Navarrio account showing $4.5 million transfer

through Citibank New York [CS2969];

4/97 and 6/97 documents related to Abacha sons’ requests and

Citibank PBG London’s providing them with a bank reference to

Goldman Sachs International [CS3277, 3169–70, 3215–17]

f. Documents related to Citibank PBG inquiries into suspicious activity

in Abacha sons’ accounts: ............................................................................. 651

1/18/95 InterOffice Memo to Files from Luella Gentles on Chinquinto

account [CS1953];

1/20/95 Account Summary for Chinquinto account [CS1955];

12/22/94 Account Summary for Gelsobella account, and particular

account transactions [CS1904–11];

8/95 e-mails, facsimiles, and draft documents related to request by

Abacha sons for Advanced Payment Guarantee [CS3211–12, 3190–

96]

g. Documents related to closing Abacha sons’ accounts in New York: ......... 670

8/21/96 letter to Yaya Abubakar from Citibank PBG, New York

[CS1986];

11/15/96 letter to Mohammed Sani from Alain Ober [CS1985];

11/24/96 letter to Alain Ober from Mohammed Sani and Yaya

Abubakar [CS1975];

9/13/96 memorandum to D. Terry from Alain Ober [CS7491];

3/5/97 e-mail to Carl Brome from Alain Ober [CS7488];

10/3/97 memorandum to Linda Schuster from Alain Ober [CS1900]

h. Documents related to 1998 transfer of $39.1 million: ............................... 676

9/15/98 memorandum to Credit Committee from Belma Kusoglu

[CS3360];

10/7/98 memorandum to Claude Poppe from David Oxford [CS3371];

9/18/98 Margin System, Detailed Assets document describing time

deposits used in $39 million transfer [CS3373];

9/98 Account Statement showing $39 million transfer [CS2995–96];

10/98 Transaction Monitoring inquiry regarding $39 million transfer

[CS3136]

i. Documents related to 1999 freezing of Abacha sons’ accounts in London: ................................................................................................................. 682

3/19/99 amended civil complaint filed in High Court of Justice,

Queen’s Bench Division, Commercial Court, in London, freezing

Abacha accounts in London;

Transaction Monitoring inquiry regarding $2.5 million withdrawal,

containing dates ranging from 11/98 until 6/99 [CS3130];

6/99 Transaction Monitoring inquiry on $298,600 withdrawal from

Abacha sons’ account;

6/3/99 e-mail to Salim Raza from Michel Accad on High Court freeze

order [CS7474]

j. Documents related to Nigerian government actions taken with respect

to Abacha family: ........................................................................................... 696

7/99 e-mails among Citibank Private Bank personnel in New York

on Nigerian government efforts to seize misappropriated funds from

Abacha family and requesting information on existence of Abacha

accounts [CS2153];

‘‘How the grand lootocracy beggared Nigeria’s people,’’ The Observer

(11/22/98);

‘‘London court freezes accounts of late Nigerian ruler,’’ Agence France

Presse (6/3/99);

‘‘Nigeria seeks help in tracing billions ‘taken’ by former military

leaders,’’ FinancialTimes (London) (7/23/99;

‘‘Abacha’s accounts frozen as provisional measure,’’ press release from

Federal Office for Police Matters, Switzerland (10/14/99);

Page

XII

j. Documents related to Nigerian government actions taken with respect

to Abacha family—Continued

‘‘Swiss freeze accounts of Nigeria’s Abacha,’’ Reuters (10/14/99);

‘‘Abacha son on trial for Mrs. Abiola’s murder,’’ Reuters (10/14/99);

‘‘Switzerland provides mutual legal assistance in the Abacha case,’’

press release from Federal Office for Police Matters, Switzerland

(1/21/2000);

‘‘One billion Swiss Francs involved: The subject of stolen Nigerian

funds takes gigantic amplitude,’’ Le Temps (1/22/2000) (with translation from French)

34. Documents relating to Citibank Private Bank accounts of public figures:

a. Citibank Private Bank’s 6/98 Public Figure Policy [CB21476–80] ........... 716

b. 6/98 memorandum from Shaukat Aziz, Citibank PBG head, on new

Public Figure Policy [973] ............................................................................ 721

c. 1999 KYC Annual review standards at Citibank Private Bank

[CB14922–23] ................................................................................................ 722

d. 6/20/95 memorandum to Marcelo Mendoza from Alan Robinson on

‘‘Public Figure’’ Policy [CB24678] ................................................................ 724

e. Excerpts from Public Figure annual reviews in Europe, Middle East,

Africa (EMEA) Division: ............................................................................... 725

5/96 reviews [CS1895–97];

10/96 reviews [CS1891–94, 3254–55];

3/97 reviews [X4319, 7070–73];

10/97 reviews [CS1888–90];

1/99 reviews [CS1882–87, 2135–38, 2140–41];

2/99 reviews [CS2144–46, 2148];

8/99 reviews [CS2154–55]

f. Excerpts from ‘‘The Private Banking Group—Western Hemisphere Public Figure Review Recommended Action List as of May 17, 1999’’

[CB24972–73] (Reprinted below in Exhibit 35i.) ........................................ 760

35. Materials relating to former Venezuelan President Jaime Lusinchi:

a. Attachment A to 8/9/99 letter to Subcommittee from Citibank legal

counsel, summarizing accounts related to former President Lusinchi,

referred to as ‘‘Client 1g,’’ and his wife, referred to as ‘‘Client 1h’’ .......... 762

b. 2/22/94 memorandum from Nicolas Yanes describing review of Mr.

Lusinchi’s account [X4279] .......................................................................... 763

c. 4/6/94 memorandum from Rodrigo K. Alvarez placing conditions on

the Lusinchi account [X4278] ....................................................................... 764

d. 4/7/99 memorandum from Jose Luis Daly concurring with Rodrigo K.

Alverez 4/6/94 memorandum [X4280] ......................................................... 765

e. ‘‘Venezuela Mulls Extradition of Ex-President’s Wife,’’ Reuters North

American Wire (7/14/94) ............................................................................... 766

f. 8/31/97 Sensitivity Hot Sheet listings, indicating Mr. Lusinchi had been

listed on the sheet since 4/94 [X6887] ......................................................... 768

g. October 1998 Business Background/Source of Wealth Update for Mr.

Lusinchi [X4276–77] ..................................................................................... 769

h. 10/26/98 Public Figure Sheet indicating decision had been made to

retain Mr. Lusinchi as a client [CB24977] ................................................. 771

i. The Private Banking Group—Western Hemisphere Public Figure Review Recommended Action List as of May 17, 1999, recommending

closing account of Mr. Lusinchi [CB24972–73] ........................................... 772

j. Public Figure Annual Approval Form, 5/99, recommending terminating

the relationship with Mr. Lusinchi [CB24974–75] ..................................... 774

k. 6/16/99 letter from Thomas M. Lahiff requesting that Mr. Lusinchi

transfer his accounts to another financial institution [X3779] ................. 776

36. Materials relating to former Indonesian President Raden Suharto:

a. Attachment C to 9/7/99 letter from Citibank legal counsel to the Subcommittee, summarizing accounts related to two daughters of former

President Suharto, referred to as ‘‘Client 2(h)’’ and ‘‘Client 2(j)’’ ............. 777

Page

XIII

b. Excerpts from 2/15/00 letter from Citibank legal counsel to Senator

Levin, summarizing accounts related to two daughters and one son

of former President Suharto, referred to as ‘‘Clients 2e, 2g, and 2h’’ ...... 778

37. Materials relating to former Citibank private banker Carlos Gomez:

a. 1998 Carlos Gomez Fraud Summary and Action Plan, prepared by

Citibank PBG [607–10] ................................................................................ 779

b. 1998 Federal criminal indictment of Carlos Gomez (Case No.

1:98CR00195–001, United States District Court, Southern District of

New York) ..................................................................................................... 783

c. 1998 Judgment In A Criminal Case, based upon guilty plea to bank

fraud ............................................................................................................... 788

d. 1998 Judgment for $23,226,661.00 in Citibank v. Gomez (Index No.

600401/98, Supreme Court of the State of New York, County of New

York) .............................................................................................................. 793

38. Materials relating to foreign secrecy laws:

a. Citibank Private Bank form requiring employee acknowledgment of

Swiss bank secrecy laws .............................................................................. 797

b. J.P. Morgan Private Bank form requiring employee acknowledgment

of Swiss bank secrecy laws .......................................................................... 798

c. 1998 exchange of letters between Bankers Trust Private Bank and

Federal Reserve Bank of New York regarding disclosing information

on beneficial owners of private investment companies that are clients

of the Bankers Trust Private Bank ............................................................. 799

d. 10/27/99 The Library of Congress Law Library reports on corporate

secrecy laws in the Bahamas, the Cayman Islands, the Channel Islands, Hong Kong, the Netherlands Antilles, Panama, Singapore and

Switzerland [LL File No. 99–7799] ............................................................. 812

39. 4/9/98 Shaukat Aziz and Philippe G. Holderbeke memos on Citibank

Private Bank’s KYC efforts [CB21635–41] ..................................................... 843

40. Selected documents from 545 pages of documents produced by Citibank

on 1/26/00, more than 2 months after the November hearings:

a. 1/26/00 letter from Citibank Private Bank’s legal counsel producing

545 pages of documents ............................................................................... 850

b. Documents related to $1.9 million transfer on 2/22/95 from Gabon

treasury to Citibank Private Bank accounts controlled by President

Bongo: ............................................................................................................ 851

2/22/95 e-mail to Alain Ober (at Citibank Private Bank in New

York) from Kayembe Nzongola (at Citibank Gabon) [X7216];

3/1/95 e-mail to Donnelle Knowles and others from Alain Ober

[X7208];

c. Documents related to $2.9 million transfer on 7/30/96 from Gabon

treasury to Citibank Private Bank accounts controlled by President

Bongo: ............................................................................................................ 853

Transaction record of incoming funds transfer on 7/30/96 [X7290];

Transaction journal, including incoming funds transfer on 7/30/96

[X7289];

7/31/96 e-mail to Donnelle Knowles from Alain Ober [X7293];

7/31/96 handwritten notes of Alain Ober regarding telephone conversation with Laure Gondjout, assistant to President Bongo [X7308];

7/31/96 e-mail to Salim Raza from Alain Ober [X7295];

8/1/96 e-mail to Alain Ober from Salim Raza [X7296]

d. Documents related to $1.891 million transfer on 12/24/96 from Gabon

treasury to Citibank Private Bank accounts controlled by President

Bongo: ............................................................................................................ 859

Transaction record of incoming funds transfer on 12/24/96 [X7541];

Transaction journal, including incoming funds transfer on 12/24/96

[X7540]

Page

XIV

e. Documents related to $20 million deposit of funds into President Bongo’s accounts: ................................................................................................. 861

3/20/97 e-mail to Christopher L. Rogers from Alain Ober [X7526];

3/21/97 handwritten notes of Alain Ober [X7482];

3/24/97 memorandum to Alain Ober and others from Christopher

L. Rogers [X7486];

3/25/97 e-mail to Alain Ober and others from Christopher L. Rogers

[X7482]

f. Documents related to due diligence review of President Bongo’s accounts, status of Elf criminal investigation, and possible termination

of President Bongo’s relationship: ................................................................ 865

2/21/97 memorandum to Tony Nzongola and others from Nuhad

Saliba [X7481];

7/29/98 e-mail to Alain Ober from Michael Mathews (at Citibank

Private Bank in London) [X7568];

7/29/98 e-mail response to Michael Mathews from Alain Ober and

7/30/98 e-mail reply to Alain Ober from Mathews [X7565]

g. Miscellaneous documents: ............................................................................ 868

8/19/99 handwritten notes regarding President Bongo’s accounts

[X7615–16];

1/8/99 letter to Alain Ober from President Bongo [X7625];

3/13/95 e-mail to Alain Ober and others from Donnelle Knowles (at

Cititrust in the Bahamas) about proposed coding system for President Bongo’s accounts [X7202]

41. SEALED EXHIBITS: (* Retained in the files of the Subcommittee)

a. Excerpts from Citicorp Internal Audits and Reviews of the Citicorp

Private Bank, 1995–1998 ............................................................................. *

b. Excerpts from Federal Reserve Analysis of Citicorp Private Bank,

1996–1998 ..................................................................................................... *

(1)

PRIVATE BANKING AND MONEY LAUNDERING: A CASE STUDY OF OPPORTUNITIES

AND VULNERABILITIES

TUESDAY, NOVEMBER 9, 1999

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

OF THE COMMITTEE ON GOVERNMENTAL AFFAIRS,

Washington, DC.

The Subcommittee met, pursuant to notice, at 10:03 a.m., in

room SD–628, Dirksen Senate Office Building, Hon. Susan M. Collins, Chairman of the Subcommittee, presiding.

Present: Senators Collins, Cochran, Specter, and Levin.

Staff present: K. Lee Blalack, II, Chief Counsel and Staff Director; Mary D. Robertson, Chief Clerk; Kirk E. Walder, Investigator;

Brian C. Jones, Investigator; Linda Gustitus, Minority Staff Director and Chief Counsel; Elise J. Bean, Minority Deputy Chief Counsel; Robert L. Roach, Counsel to the Minority; Claire Barnard,

Detailee/HHS; Leo Wisniewski, Detailee/Secret Service; Carl Gold,

Congressional Fellow; Robert Slama, Detailee/Secret Service; Regina Keskes, Intern; Ryan Blalack, Intern; Justin Tatham, Intern;

Morgan Frankel, Senate Legal Counsel; Brian Benczkowski (Senator Domenici); Michael Loesch (Senator Cochran); Frank Brown

(Senator Specter); Anne Bradford (Senator Thompson); Julie Vincent (Senator Voinovich); Nanci Langley (Senator Akaka);

Marianne Upton (Senator Durbin) Jonathan Gill, GAO Detailee

(Senator Lieberman); and Shelly O’Neill (Senator Akaka).

OPENING STATEMENT OF SENATOR COLLINS

Senator COLLINS. Good morning. This Subcommittee will come to

order.

During the next 2 days, the Permanent Subcommittee on Investigations will examine the confidential, complex world of private

banking and whether private banks are—by their very nature—

particularly susceptible to money laundering. At the outset, I

should note that this is not the first time that this Subcommittee

has investigated money laundering. Our colleague, Senator Roth, in

the mid-1980’s, chaired a series of Subcommittee hearings which

exposed how criminals used offshore banks to launder their dirty

money. The Subcommittee’s findings prompted passage of the

Money Laundering Control Act of 1986, which defined money laundering as a freestanding criminal offense for the first time.

More recently, Congressman Leach in the House of Representatives has held a series of hearings on money laundering.

2

These hearings, which were initiated by the Ranking Minority

Member, Senator Levin, are very timely. Our banking system’s vulnerability to money laundering is once again a focal point of debate

in the wake of recent disclosures that billions of dollars were siphoned out of Russia into accounts at the Bank of New York and,

within a few days or even a few hours, rerouted to multiple accounts all over the world.

What happened at the Bank of New York, as well as the cases

that we will highlight today, should be a cautionary tale for the

rest of the banking industry, law enforcement, and Congress. We

cannot allow the integrity of our banking system to be sullied by

the dirty money that fuels the engine of criminal enterprises both

here at home and abroad. Our banks must be vigilant in their efforts to detect and report criminal activity and avoid acting as conduits for money laundering. Stop money laundering, and you dry

up much of the seed capital criminal organizations need for their

operations.

Today’s hearing will focus on one aspect of our banking system—

private banking—that may be particularly attractive to criminals

who want to launder money. Private banking is probably unfamiliar to most Americans since, by and large, private banks cater

to extremely wealthy clients. Indeed, most of the private banks examined by the Subcommittee require their clients to deposit assets

in excess of $1 million. The banks charge their customers a fee for

managing those assets and for providing the specialized services of

the private banks.

Some of those services include traditional banking services such

as checking and savings accounts. But private banks go far beyond

providing routine banking services. They market themselves to clients by offering services to meet the special needs of the very

wealthy, including providing investment guidance, estate planning,

tax assistance, offshore accounts, and, in some cases, complicated

schemes designed to ensure the confidentiality of financial transactions.

The private banker coordinates the management of the client’s

wealth and acts as the client’s personal advocate to the rest of the

bank. If a client needs to set up an offshore trust, for example, the

private banker takes care of it. He serves as a liaison between the

client and the bank’s trust managers, investment specialists, and

accountants. In short, private bankers are expected to provide personalized can-do service for their wealthy clientele.

Historically, private banking was a specialty business dominated

by Swiss banks. In the last 30 years, however, large banks in the

United States have aggressively pursued private banking business

and sought to increase their market share. Private banking is profitable, competitive, and a growing business in the United States,

and private banking services are now an established line of business in many American banks.

Private banks offer their wealthy clients not only first-class service but confidentiality as well. While the average passbook savings

depositor at a community bank in Maine has very little, if any,

need for Swiss bank accounts, some wealthy and prominent people

seek the anonymity of the financial services offered by private

3

banks. And, it is fair to say that private banks sell secrecy to their

customers.

The Subcommittee’s investigation found that private banks routinely use code names for accounts, concentration accounts that disguise the movement of client funds, and offshore private investment corporations located in countries with strict secrecy laws—so

strict, in fact, that there are criminal penalties in those jurisdictions for disclosing information about the client’s account to banking regulators in the United States.

These private banking services—which are designed to ensure

confidentiality for the client’s account—present difficult oversight

problems for banking regulators and even law enforcement. For instance, in one of the cases examined by the Subcommittee, the private bank opened special accounts for the client using the fictitious

name ‘‘Bonaparte.’’

The difficulties associated with identifying clients to account activity worsen when private banks use concentration accounts to

transfer their clients’ funds. In one case examined by the Subcommittee, the private banker’s use of a concentration account,

which commingles bank funds with client funds, cut off any paper

trail for millions of dollars of wire transfers. The concentration account became the source of funds wired from Mexico, and investment accounts in Switzerland and London became the destination.

I want to emphasize that private banking is a legitimate

business. There can be bona fide reasons why private banks offer

products designed to ensure anonymity and confidentiality. The

problem, however, is that what makes private banking appealing

to legitimate customers also makes it particularly inviting to criminals.

The Subcommittee found that criminals can easily employ private banking services to move huge sums of money. In one of the

cases examined by the Subcommittee involving Rau ́l Salinas—the

brother of the former President of Mexico—the General Accounting

Office determined that private banking personnel at Citibank

helped Mr. Salinas transfer between $90 and $100 million out of

Mexico in a manner that ‘‘effectively disguised the funds’ source

and destination, thus breaking the funds’ paper trail.’’

Mr. Salinas received first class service from Citibank’s private

bank. My concern is that this gold-plated service included disguising the source, flow, and destination of funds that may have

been the proceeds of the illegal activity.

Now, I want to emphasize that the Subcommittee has uncovered

no evidence that Citibank or any other private bank knowingly

helped Mr. Salinas or other criminals launder dirty money. We

have, however, found that some private banks neglected their own

internal procedures designed to detect and report suspicious activity as they are required to do by law.

For example, too often Citibank’s private bank essentially paid

lip service to its own procedures. Moreover, and even more troubling, it continued to do so even in the face of highly critical internal audits and warnings from banking regulators that there was a

risk of exposure to money laundering.

One of the purposes of these hearings is to determine why those

internal policies were neglected and why it took Citibank so long

4

to correct the problem. A second goal of these hearings is to examine whether our banking regulators have done and are doing

enough to ensure that banks—especially private banks—take seriously their obligation to implement internal procedures designed to

report potential money laundering. Finally, these hearings will examine whether Congress needs to do more to combat this problem.

At this time, I would like to call upon the distinguished Ranking

Minority Member, Senator Levin, for his opening statement. Before

doing so, however, I want to once again commend Senator Levin

and his staff for the fine in-depth work that they have done on this

investigation and for initiating these hearings.

Senator Levin.

OPENING STATEMENT OF SENATOR LEVIN

Senator LEVIN. Thank you, Madam Chairman.

Thirteen years ago, with the passage of the first money laundering statute in 1986, Congress made clear its desire not to allow

U.S. banks to function as conduits for dirty money. Since that time,

the world has experienced an enormous growth in the accumulation of wealth by individuals around the globe, and wealthy individuals have turned in growing numbers to a category of banking

called ‘‘private banking’’ as the mechanism for managing their

money.

Estimates are that $500 billion to $1 trillion of international

criminal proceeds are moved internationally and deposited into

bank accounts annually. It is estimated that half of that money

comes to the United States.

Today we are looking at how private banking can provide management not only for legal money, but also for the wealth of international criminals and corrupt government officials.

Private banking is a very competitive and very profitable business, often bringing in a 20 to 25 percent return to a bank. Private

bankers are marketers and promoters who are expected to attract

wealthy clients to the bank. Once a person becomes a client of a

private bank, the bank’s primary goal generally has been to service

that client, and servicing a private bank client almost always

means using services that are also the tools of money laundering:

secret trusts, offshore accounts, secret name accounts, and shell

companies called private investment corporations.

These private investment corporations, or PICs, are designed for

the purpose of holding and hiding a person’s assets. The assets

could be real property, money, stock, art, or other valuables. The

nominal officers, trustees, and shareholders of these shell corporations are often themselves shell corporations controlled by the private bank.

The PIC then becomes the holder of the various bank and investment accounts, and the ownership of the private bank’s client is

buried in the records of so-called secrecy jurisdictions, such as the

Cayman Islands.

Private banks keep prepackaged PICs on the shelf, awaiting activation when a private bank client wants one. Shell companies in

secrecy jurisdictions managed by shell corporations which serve as

directors, officers, and shareholders—shells within shells within

5

shells, like Russian Matryoshka dolls, which in the end can become

impenetrable to legal process.

Private bankers specialize in secrecy. Even if a client doesn’t ask

for secrecy, a private banker often encourages it. In the brochure

for Citibank’s Private Bank on their international trust services, in

the table of contents, it lists the attractiveness of secrecy jurisdictions this way: ‘‘The Bahamas, the Cayman Islands, Jersey, and

Switzerland, the best of all worlds.’’

This brochure also advertises the advantages of using a PIC. One

advantage it lists is this one: ‘‘PIC assets are registered in the

name of the PIC, and your ownership of the PIC need not appear

in any public registry.’’

Secrecy is such a priority that private bankers have at times

been told by their superiors not to keep any record in the United

States disclosing who owns the offshore PIC established by the private bank.

One former private banker told us that he and his fellow bankers

had to hide cheat sheets in their desks because they weren’t allowed to keep names of the offshore accounts that they were managing. Since they couldn’t remember the names and the numbers

of all those accounts when they needed them, they would keep a

secret list in their desks or with a secretary to help them remember. When the list was discovered, the banker was reprimanded.

American banks aren’t allowed to maintain secret accounts in the

United States that are not subject to legal process, so U.S. private

bankers often establish secret accounts and secret corporations in

countries that do allow them. Then they manage the money in

those accounts and the assets in those corporations from their offices in the United States. In short, American banks help wealthy

customers do abroad what the customer and the bank can’t do in

the United States under U.S. law.

Today we are looking at the Private Bank of Citibank. Citibank

is the largest bank in the United States. It has one of the largest

private bank operations. It has the most extensive global presence

of all U.S. banks, and it has had a rogue gallery of private bank

clients.

Citibank, for instance, has been private banker to Rau ́

l Salinas,

brother of the former President of Mexico, now in prison in Mexico

for murder and under investigation in Mexico for illicit enrichment;

Asif Ali Zardari, husband of the former Prime Minister of Pakistan,

now in prison in Pakistan for kickbacks and under indictment in

Switzerland for money laundering; Omar Bongo, President of

Gabon, and subject of a French criminal investigation into bribery;

sons of General Sani Abacha, former military leader of Nigeria, one

of whom is now in prison in Nigeria on charges of murder and

under investigation in Switzerland and Nigeria for money laundering; and Jaime Lusinchi, the former President of Venezuela, indicted for money laundering in Venezuela.

Other private banks have similar accounts. The Bankers Trust

counsel, when describing one of its clients, told our staff words to

the effect that ‘‘these are bad people.’’ Well if the bank thinks they

are bad people, why are they accepting them as customers of the

private bank?

6

In the Bankers Trust case, it appears that the bank did know its

client. But what it knew was that the client was bad, and it continued to do business with him.

Today we are going to look at some of the cases in greater detail

to learn how these individuals became clients of Citibank, what efforts Citibank made to implement its due diligence policies and ascertain the source of the client’s wealth, and what Citibank did to

help disguise the client’s accounts.

America cannot have it both ways. We cannot condemn corruption abroad, be it officials taking bribes or looting their treasuries,

and then tolerate American banks making profits off that corruption.

Private banking has a legitimate function, but it has too often

been used to manage dirty money. We must end the use of private

banking by the criminals and by the corrupt.

I want to thank our Chairman for her support of these hearings

and this investigation, and her staff for their hard work in helping

to bring these about. And I particularly want to thank my Minority

staff for their work, which can only be described as Herculean.

Thank you, Madam Chairman.

[The prepared opening statement of Senator Levin follows:]

PREPARED OPENING STATEMENT OF SENATOR LEVIN

Thirteen years ago, with the passage of the first money laundering statute, Congress made clear its desire not to allow U.S. banks to function as conduits for dirty

money. This Subcommittee, through a series of hearings and reports in the 1980’s

on money laundering and off-shore secrecy jurisdictions, contributed significantly to

the enactment of that law. Money laundering is now a Federal crime and our banks

and financial institutions are required by law to establish and implement antimoney laundering programs.

Since that time the world has experienced an enormous growth in the accumulation of wealth by individuals around the globe, and wealthy individuals have turned

in growing numbers to a category of banking called ‘‘private banking’’ as the mechanism for managing their money.

Raymond Baker, a Guest Scholar in Economic Studies at Brookings and a witness

at tomorrow’s hearing, estimates that $500 billion to $1 trillion of international

criminal proceeds and hundreds of millions of dollars from tax evasion are moved

internationally and deposited into bank accounts annually. He estimates that half

of this money comes to the United States. Today we are looking at how private

banking can provide management not only for legal money but also for the wealth

of international criminals and corrupt government officials.

We need to first understand what private banking is. Most private banks are a

bank within a larger bank, distinguished by the size of the accounts they hold and

the presence of a one-on-one private banker or relationship manager assigned to

manage the assets of each client. To open an account in a private bank, prospective

clients—and we estimate that there are over 200,000 private bank clients at U.S.

banks today—must deposit a substantial sum, usually $1 million or more. In return

for this deposit, the private bank assigns a private banker to act as a liaison between the client and the bank and to facilitate the client’s use of a wide range of

services offered by the bank. The client pays either a flat fee, a fee based on a percentage of the assets under management or both.

Private banking is a very competitive and very profitable business, often bringing

in a 20 to 25 percent return to a bank. Private bankers are marketers and promoters who are expected to attract wealthy clients to the bank. Once a person becomes a client of a private bank, the bank’s primary goal is to service that client,

and servicing a client almost always means using services that are also the tools

of money laundering—secret trusts, offshore accounts, secret name accounts, and

shell companies called private investment corporations.

These private investment corporations or PICs are designed for the purpose of

holding—and hiding—one person’s assets. The assets can be real property, money,

stock, art or other valuables. The nominal officers, trustees, and shareholders of

7

these shell corporations are, in turn, often shell corporations controlled by the private bank. The PIC then becomes the holder of the various bank and investment

accounts, and the ownership of the private bank’s client is buried in the records of

so-called secrecy jurisdictions, such as the Cayman Islands. Private banks keep prepackaged PICs ‘‘on-the-shelf,’’ awaiting activation when a private bank client wants

one. They have shell companies in secrecy jurisdictions managed by shell corporations which serve as directors, officers and shareholders. There are shells within

shells within shells—like Russian Matyoshka Dolls—which in the end can become

impenetrable to legal process.

Private bankers specialize in secrecy. Even if a client doesn’t ask for secrecy, the

private banker encourages it. Look at this brochure for Citibank’s private bank on

their international trust services. In the table of contents it lists the attractiveness

of secrecy jurisdictions this way: ‘‘The Bahamas, the Cayman Islands, Jersey and

Switzerland: The best of all worlds.’’ This brochure also advertises the advantages

of using a PIC. One advantage it lists is this one:

‘‘PIC assets are registered in the name of the PIC and your ownership

of the PIC need not appear in any public registry.’’

Secrecy is such a priority that private bankers are often told by their superiors

not to keep any record in the United States disclosing who owns the offshore PICs

established by the private bank. One former private banker told us he and his fellow bankers had to hide cheat sheets in their desks, because they weren’t allowed

to keep names of the offshore accounts they were managing. Since they couldn’t remember the names and numbers of all those accounts when they needed them, they

would keep a secret list in their desks or with a secretary to help them remember.

When the list was discovered, the banker was reprimanded.

Secrecy is so important that private bankers sometimes speak in code to each

other in phone calls across the Atlantic to disguise the beneficial owner of the account they are talking about, so other bank employees won’t know the beneficial

owners of the very accounts they are working on. One private banker in Citicorp

London had worked for years on the Salinas account and never knew Raul Salinas

was the beneficial owner. Raul Salinas was always referred to by a code, CC2, or

the name of his PIC, Trocca, Ltd. The private banker said she was surprised when

she learned Raul Salinas owned one of her accounts.

American banks aren’t allowed to maintain secret accounts in the United States,

so U.S. private bankers establish secret accounts and secret corporations in countries that do allow them. Then they manage those accounts from their offices in the

United States. In short, American banks help wealthy customers do abroad what

the customer and the bank can’t do within the boundaries of the United States.

Today we are looking at the private bank of Citibank. It is the largest bank in

the United States, and it has one of the largest private bank operations. It has the

most extensive global presence of all U.S. banks, and it has had a rogues’ gallery

of private bank clients. Citibank has been private banker to:

—Raul Salinas, brother to the former President of Mexico; now in prison

in Mexico for murder and under investigation in Mexico for illicit enrichment;

—Asif Ali Zardari, husband to the former Prime Minister of Pakistan; now

in prison in Pakistan for kickbacks and under indictment in Switzerland

for money laundering;

—Omar Bongo, President of Gabon; subject of a French criminal investigation into bribery;

—sons of General Sani Abacha, former military leader of Nigeria; one of

whom is now in prison in Nigeria on charges of murder and under investigation in Switzerland and Nigeria for money laundering;

—Jaime Lusinchi, former President of Venezuela; charged with misappropriation of government funds;

—two daughers of Radon Suharto, former President of Indonesia who has

been alleged to have looted billions of dollars from Indonesia;

—and, it appears General Albert Stroessner, former President of Paraguay

and notorious for decades for a dictatorship based on terror and profiteering.

And these are just the clients we know.

Other banks have similar accounts. The legal counsel for Bankers Trust private

bank asked the Subcommittee not to make public any information about an account

of a certain Latin American client because the private banker was concerned that

the banker’s life would be in danger if the information were revealed. The Bankers

Trust counsel, when describing one of its clients, told our staff words to the effect

8

that, ‘‘These are bad people.’’ If the bank thinks they’re ‘‘bad people,’’ why are they

accepting them as customers of the private bank? In the Bankers Trust case it appears the bank does know its client; but what it knows is that its client is ‘‘bad.’’

Today we’re going to look at some of these cases in greater detail to learn how

these individuals became clients of Citibank, what effort Citibank made to implement its due diligence policies and ascertain the source of the client’s wealth, and

what Citibank did to help disguise the clients’ accounts.

No one is suggesting that private banking is an improper banking activity or that

banks should not be making a profit on the services they offer their clients. As several of Citibank’s top managers said to us, the question is how you conduct private

banking in an ‘‘honorable’’ way.

The key factor to banking in an ‘‘honorable way’’ is the exercise of due diligence

in learning who a client is and the source of the client’s wealth and then taking

appropriate action. This is a fundamental requirement for a strong anti-money laundering program.

America can’t have it both ways. We can’t condemn corruption abroad, be it officials taking bribes or looting their treasuries, and then tolerate American banks

making fortunes off that corruption.

The Federal Reserve, the Office of the Comptroller of the Currency, the State Department, and the General Accounting Office all have concluded that private banking is vulnerable to money laundering. We will ask today’s witnesses, private bankers from Citibank, about some specific cases showing us how and why that’s true.

At tomorrow’s hearing we will look at generic private banking practices, the role of

the Federal regulators, and the significance of private banking in the global movement of money.

Private banking has a legitimate function, but it has too often been used to manage dirty money. We must end the use of private banking by the criminals and the

corrupt.

I thank the Chairman for her support for these hearings and her staff for their

hard work in helping us to bring these about. I also thank my Minority staff for

their excellent work.

Senator COLLINS. Senator Specter, we are pleased to have you

here with us today, and I would call upon you for any opening remarks you might have.

OPENING STATEMENT OF SENATOR SPECTER

Senator SPECTER. Well, thank you very much, Madam Chairwoman. I shall be brief.

First, I compliment you for scheduling these hearings in the tradition of this very important Subcommittee, and I compliment Senator Levin for the extraordinary Minority report, some 63 pages,

and I have not seen hearings start with such a comprehensive

analysis in advance. It gets these hearings off to a running start.

They are certainly extremely important because money laundering is instrumental on drug trafficking and organized crime,

and they are also extremely important from the point of view that

the United States is making very substantial financial contributions to many countries where individuals have access to U.S.

funds for their own private purposes.

The information about money laundering on Russian officials

suggests a direct conduit for the very substantial funds which the

United States is advancing to Russia, and with the Salinas case in

Mexico, the bailout, while you can’t trace the specific dollars, there

is a very strong inference that U.S. taxpayers’ dollars are going

into private pockets aided and abetted by these private banks.

Where you have provisions such as Dubai law that the bank is

not required to know the beneficial owner but only the signatory

party, it is just an open invitation to the kind of secrecy which both

Senator Collins and Senator Levin have outlined here.

9

1The three GAO statements appear as Exhibits 21–23 in the Appendix on pages 159–197.

As Senator Levin identifies it, shells within shells, it is the quintessential shell game. And I believe on the basis of what is of

record and in this Minority report, there is very substantial evidence at this time of wrongdoing. And these hearings will give the

public notice as to what is going on and, I think, set the stage for

some very important remedial action.

My Subcommittee on Labor, Health, Human Services is going to

be negotiating with White House officials a little later this morning, so I am going to have to study the record as opposed to being

here. But I wanted to come and commend what you are doing here

today and give you my support. Thank you.

Senator COLLINS. Thank you very much.

Senator Cochran, we are also delighted to have you with us

today.

OPENING STATEMENT OF SENATOR COCHRAN

Senator COCHRAN. Thank you very much, Madam Chairman.

Our Subcommittee staff has done an enormous amount of work

to obtain information about the effectiveness of U.S. laws and regulations to combat money laundering. I look forward to hearing the

report of our staff and to the consideration of the results of this investigation and the issues that have been raised by the staff in this

important review.

Thank you very much.

Senator COLLINS. Thank you.

Due to time constraints, the Subcommittee was unable to invite

all the parties affected by this issue to present oral testimony. We

have received a written statement from the General Accounting Office. We expect to receive one from Stuart Eizenstat, Treasury Deputy Secretary, as well as from other interested officials. The hearing record will remain open for 14 days for the inclusion of such

statements, and the ones we have received, without objection, will

be included in the printed hearing record.1

At this time I would like to welcome our first panel of witnesses.

We have with us two members of the Subcommittee’s Minority staff

who will present an overview of the Subcommittee’s investigation

of the private banking industry and its vulnerabilities to money

laundering. We will first hear from Robert Roach, who is the Minority Counsel. Mr. Roach will be followed by Elise Bean, who is

the Deputy Chief Counsel.

Pursuant to Rule VI, all witnesses who testify must be sworn in,

so at this point, I would ask that you stand. 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. ROACH. I do.

Ms. BEAN. I do.

Senator COLLINS. Thank you.

Mr. Roach, you may proceed. As you know better than most witnesses who appear before us, we ask that you limit your oral testimony to no more than 10 minutes.

Mr. ROACH. I will watch for the light.

10

1The Minority Staff Report entitled ‘‘Private Banking and Money Laundering: A Case Study

of Opportunities and Vulnerabilities,’’ appears in the Appendix on page 872. 2See Exhibit No. 1 which appears in the Appendix on page 111.

TESTIMONY OF ROBERT L. ROACH, COUNSEL TO THE

MINORITY, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

Mr. ROACH. Senator Collins, Senator Levin, and Members of the

Subcommittee, good morning. We appreciate the opportunity to appear before the Subcommittee today to summarize the staff investigation to date into the private banking industry and its vulnerability to money laundering.

Private banks provide financial services to wealthy individuals

who usually must deposit $1 million or more to open an account.

All U.S. banks are required by law to have an active anti-money

laundering program. Regulators and banks have interpreted this

requirement to include due diligence reviews of bank clients and

their transactions, including understanding the source of large deposits into a client’s account, and reporting any suspicious activity.

This responsibility with respect to private banking is significantly greater than retail accounts because clients have high net

worth, transactions routinely involve large amounts of funds often

crossing international jurisdictions, and private bankers become

personally involved with clients and in-house advocates for their interests.

We have prepared a report which describes the private banking

industry in the United States, explains why certain private banking features and services increase money-laundering opportunities,

and details four case histories taken from the Citibank Private

Bank illustrating a number of anti-money-laundering issues. We

ask that that report be made part of the record.1

Senator COLLINS. Without objection.

Mr. ROACH. In the interest of time, our oral presentation will be

limited to three case histories to be reviewed at today’s hearing:

Rau ́l Salinas; El Hadj Omar Bongo, President of Gabon; and the

sons of General Sani Abacha, former military leader of Nigeria.

First, the Rau ́l Salinas case. Citibank’s management of the Salinas account raises three major issues: Lack of due diligence, the

bank’s willingness to satisfy a client’s demand for extreme secrecy,

and the tension that exists between a bank’s desire to please its

clients and its legal obligation to combat money laundering.

First, secrecy. The private bank, through the direction of Amy Elliott, private banker to Mr. Salinas, established a shell company for

Mr. Salinas with layers of disguised ownership. It permitted a

third party using an alias to deposit funds into the accounts, and

it moved the funds out of Mexico through a Citibank concentration

account that aided in the obfuscation of the audit trail.

Cititrust in the Cayman Islands activated a Cayman Island shell

corporation called a PIC, or private investment corporation, called

Trocca, Ltd., to serve as the owner of record for the Salinas private

bank accounts. We tried to provide somewhat of a graphic description of how Trocca, Ltd. was structured.2

Cititrust used three Panamanian shell companies to function as

Trocca’s Board of Directors. Cititrust also used three Cayman IsVerDate 11-SEP-98 10:07 Apr 05, 2000 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6601 61699.TXT SAFFAIRS PsN: SAFFAIRS
11

1See Exhibit No. 2 which appears in the Appendix on page 112.

2See Exhibit No. 3 which appears in the Appendix on page 113.

land shell companies to serve as Trocca’s officers and principal

shareholders.

Cititrust controls all six of these shell companies and routinely

uses them to function as directors and officers of PICs that it

makes available to private clients.

Later, Citibank established a trust, identified only by a number,

to serve as the owner of Trocca, Ltd. Rau ́l Salinas was the secret

beneficiary of the trust.

The result of this elaborate structure was that the Salinas name

did not appear anywhere on Trocca’s incorporation papers.

The Trocca, Ltd. accounts were established in London and Switzerland. The private bank did not disclose the identity of Trocca’s

owner to any private bank personnel other than the personnel who

administered the company and personnel required by Swiss law to

know the beneficial owner. And Ms. Elliott, who knew Mr. Salinas

was a client, did not know the name of his shell corporation. The

private bank did not use Mr. Salinas’ name in bank communications, but instead referred to him as ‘‘Confidential Client No. 2,’’

or ‘‘CC–2.’’

To accommodate Mr. Salinas’ desire to conceal the fact that he

was moving money out of Mexico, Ms. Elliott introduced Mr. Salinas’ then-fiancee Paulina Castan ̃

on as Patricia Rios to a service officer at the Mexico City branch of Citibank. Operating under that

alias, Ms. Castan ̃on would deliver cashiers checks to the branch

where they would be converted into dollars and wired into a concentration account in New York.

The concentration account is a business account established by

Citibank to hold funds from various destinations prior to depositing

them into the proper accounts. Transferring funds through this account enables a client’s name and account number to be removed

from the transaction, thereby clouding the audit trail. From there,

the money would be transferred to the Trocca, Ltd. accounts in

London and Switzerland.1

Between October 1992 and October 1994, more than $67 million

was moved from Mexico to New York and then on to London and

Switzerland by way of this system.2

Second, lack of due diligence. A private bank is obligated by law

to take steps to ensure that it does not facilitate money laundering.

All bankers are required to conduct due diligence on clients in

opening and managing accounts. However, the private bank accepted Mr. Salinas as a client without any specific review of his background and without determining the source of funds that would be

deposited into his account.

Ms. Elliott acknowledged to us that she relied on the verbal reference provided by Carlos Hank Rhon, a long-time private bank client, and her general knowledge of the reputation and wealth of the

Salinas family. She acknowledged that she did not investigate Mr.

Salinas’ employment, financial background, or assets, despite

Citibank’s written policy to obtain all relevant client information

and account documentation in writing. In fact, in 1995, after Mr.

12

Salinas was arrested, Ms. Elliott reviewed the Salinas profile, and

it was blank.

The failure to perform due diligence when opening the Salinas

accounts was compounded when Mr. Salinas began depositing tens

of millions of dollars into Trocca’s offshore accounts. In just 2

years, Mr. Salinas deposited an aggregate of $67 million, well over

the $15 to $20 million that Ms. Elliott had projected in 1992. Yet

no one questioned Mr. Salinas about the origin of these funds. Far

from inquiring about the sources of the funds, Ms. Elliott wrote to

her colleagues in June 1993 that the Salinas account ‘‘is turning

into an exciting, profitable one for us all. Many thanks for making

me look good.’’

After Mr. Salinas was arrested, Mrs. Salinas told Ms. Elliott that

some of the funds had come from other individuals.

When questioned about his lack of intervention in this matter,

Mr. Misan, then the private bank’s Mexico country head and Ms.

Elliott’s superior, stated that when he took his position as Mexico

country head, his superiors in the bank, Mr. Figueiredo and Mr.

Montero, informed him that there were some accounts that he

should not supervise. Mr. Misan told us that he did not supervise

the Salinas accounts as a result of that directive.

Finally, the desire to please the client versus responsibilities

under the law. After Mr. Salinas was arrested, Hubertus Rukavina,

the head of Citibank Private Bank at the time, suggested that the

Salinas accounts in London be transferred back to Switzerland because they would be afforded more secrecy there.

Also, according to Mrs. Salinas, Ms. Elliott advised her that it

might be wise to move the Trocca, Ltd. account out of Citibank because it might be more difficult for Mexican authorities to obtain

account information from a non-U.S. bank.

After Mr. Salinas’ arrest in February 1995, private bank attorneys and officials had restricted the activities in the Trocca, Ltd.

account, put it under the control of the legal department, made a

decision to terminate the relationship, and secured repayment of

an outstanding loan because they were concerned that the bank’s

funds would be at risk if a government froze the assets in the accounts. Yet no criminal referral form was filed until 6 months later,

after Mrs. Salinas was arrested. And that referral made no mention of the Trocca, Ltd. accounts, even though it was Trocca, Ltd.

that held almost all of the clients’ assets and was the account that

was the subject of all the actions Citibank took 6 months earlier.

It is one thing for a private bank to provide reasonable levels of

confidentiality. It is another for a private bank to provide the

means for an individual to deposit tens of millions of dollars in

Swiss accounts in ways that even an auditor would find difficult to

detect.

When products and services are structured to satisfy a client’s

demand for secrecy, they become much more vulnerable to money

laundering.

Now my colleague, Ms. Bean, will address the two other cases.

Thank you.

13

TESTIMONY OF ELISE J. BEAN, DEPUTY CHIEF COUNSEL TO

THE MINORITY, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

Ms. BEAN. The second case history involves El Hadj Omar Bongo,

the President of Gabon for the past 30 years and a long-time private bank client of Citibank. The Bongo accounts also raise due

diligence and secrecy issues, including the extent to which a private bank should service personal accounts belonging to a senior

government official when government funds appear to be a major

source of large deposits into the official’s personal accounts.

The Bongo relationship includes consumer and private bank accounts in Gabon, London, New York, Paris, and Switzerland. The

largest accounts are held in the name of Tendin Investments, a Bahamian PIC established by Citibank for President Bongo in 1985.

Over 14 years, the Tendin accounts have held more than $130 million. The private bank has also issued President Bongo loans exceeding $50 million, secured by his deposits.

Citibank has accommodated President Bongo’s desire for secrecy

through using code names, setting up PICs in secrecy jurisdictions,

using special credit arrangements, and opening a special name account for him in New York called simply ‘‘OS.’’

These and other arrangements kept knowledge of the Bongo accounts within a small circle in the private bank until a 1996 inquiry by the Federal Reserve. The Federal Reserve became concerned about how little information Citibank had about the source

of funds in the Bongo accounts. The client profile in August 1996

contained only this explanation of President Bongo’s background:

‘‘Head of State for over 25 years. . . . Self-made as a result of position. Country is oil producer.’’

The private banker who managed the account, Alain Ober, his

immediate supervisor at the time, Sal Mollica, and a division head,

Edward Montero, have all acknowledged that this client profile was

wholly inadequate.

The Federal Reserve became so concerned about the Bongo accounts that in February 1997 it asked Citibank’s regular bank examiner, the Office of the Comptroller of the Currency, or OCC, to

take a closer look. The OCC was given a revised client profile

which stated that the President’s funds were ‘‘created as a result

of [his] position and connection to French oil companies.’’

Like the Federal Reserve, the OCC found no documentation explaining how the President’s position led to the funds in his personal account or what oil interests produced them. The OCC also

found that the source of over $20 million in deposits made in 1997,

the largest deposits to the Bongo accounts in 10 years, was unexplained.

When the OCC examiner pressed Citibank for specific documentation of the source of the funds in the Bongo accounts, Mr.

Ober wrote an April 1997 memorandum which his superiors gave

to the OCC. It identified just one source for the Bongo funds: The

Gabon budget. The memo stated that in 1995 the Gabon budget authorized $111

million for President Bongo’s use, and similar amounts were set

aside in 1996 and 1997. The OCC examiner told the Subcommittee

staff that he accepted the memo as a sufficient explanation for the

14

funds in President Bongo’s personal accounts, because he assumed

President Bongo had ‘‘carte blanche authority’’ over his government’s funds. He did not attempt to double-check the information.

The Subcommittee staff did double-check the information with

Gabon budget experts from the IMF and the World Bank. They

were unanimous in their rejection of the Citibank memo, explaining that no Gabon budget during the 1990’s had set aside funds for

the President’s personal use.

The Gabon budget experts indicated that anyone attempting to

verify the budget items could easily have determined that the 1995

Gabon budget did not authorize a $111 million set-aside for the

President’s personal use and that such a set-aside was plainly contrary to Gabon’s budget policy. The IMF also noted, however, that

Gabon was spending money in ways not specified in its official

budget and that $62 million of these ‘‘extrabudgetary expenditures’’

in 1997 and 1998 had caused the IMF to cut off further loans to

the country pending an independent review of its spending.

At the same time Citibank was preparing the April 1997 memo

for the OCC, a new set of red flags went up about the Bongo accounts. Articles began appearing in major papers raising questions

about President Bongo’s role in an unfolding scandal involving

bribes paid to government officials by the French oil company, Elf

Aquitaine, and its subsidiary, Elf Gabon. Among other allegations,

the articles reported that two Swiss bank accounts containing millions of dollars in allegedly improper payments by Elf had been frozen by Swiss authorities at the request of French criminal investigators. These accounts, a PIC and a special name account at

banks other than Citibank, were both linked to President Bongo.

Mr. Ober told the Subcommittee staff that he was aware of the

press articles and the allegations against President Bongo, but did

not attempt to find out more and did not discuss the matter with

his supervisors. After his interview, however, Citibank provided a

copy of an e-mail dated April 28, 1997, in which the private bank’s

African marketing head, Christopher Rogers, urged Mr. Ober and

others not to make judgments based on the press reports and to ‘‘be

extremely careful about sharing such information with regulatory

authorities because we can’t answer for it.’’

On August 6, 1997, Le Monde, a major French newspaper, reported that a Swiss prosecutor had declared in open court that

President Bongo was ‘‘the head of an association of criminals.’’

Two months later, in October 1997, President Bongo’s accounts

came up for formal review as part of the private bank’s annual examination of its public figure accounts. The papers prepared for

this review state in the entry for President Bongo ‘‘newspaper reports 4/1997 claim he has accepted bribes from ELF-Aquitaine.’’

But the decision made in October 1997 was to leave the accounts

open. This decision was made despite the private bank’s awareness

of the criminal probe and the Swiss court orders freezing bank accounts linked to President Bongo. In addition, apparently no one

connected with the 1997 review asked Mr. Ober to explain or document the source of the $20 million in 1997 deposits even though

they were the largest deposits into the Bongo accounts in 10 years.

In addition to these due diligence issues, the Bongo case history

raises an issue unique to private banks managing personal acVerDate 11-SEP-98 10:07 Apr 05, 2000 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6601 61699.TXT SAFFAIRS PsN: SAFFAIRS
15

counts for senior government officials with influence over bank operations.

The Private Bank’s legal counsel informed Federal regulators

that in the summer of 1996, Citibank considered terminating the

relationship with President Bongo, but did not, because it was concerned for the safety of its bank personnel in Gabon. As late as November 1998, when Citibank was again considering terminating

the Bongo accounts, their top manager in Africa, Mr. Rogers, wrote

the following warning about closing the Bongo accounts:

‘‘We ought to insure that we face this issue and its possible

implications with our eyes wide open. Whatever internal

considerations we satisfy, the marketing fallout is likely to

be serious. . . . [President Bongo’s] family and friends extend far. . . . The impact on [the Private Bank’s] marketing in Francophone, Africa will be serious.’’

In January 1999, the Private Bank decided to close the accounts.

As of October 1999, however, millions of dollars are still in the

Bongo accounts, which are not expected to close completely until

sometime in the year 2000.

The third case history involves Mohammed, Ibrahim, and Abba

Sani Abacha, three sons of General Sani Abacha, former military

leader of Nigeria from 1993 until his death in 1998. General

Abacha has been widely condemned as responsible for one of the

most corrupt and brutal regimes in Africa. During his regime, the

State Department and Citibank identified Nigeria as a high-risk

country for money laundering.

General Abacha’s sons, Mohammed and Ibrahim, first became

clients of Citibank Private Bank in 1988. They began by opening

accounts in London and later opened accounts in New York. Over

time they required, and the Private Bank agreed to provide, a

number of secrecy measures, including three special name accounts, an offshore shell corporation, and the use of two sets of

codes to refer to funds transfers. The London accounts held as

much as $60 million at one time. The New York accounts generally

stayed under $2 million, but in one 6-month period saw deposits

and withdrawals of almost $47 million.

A few weeks after General Abacha’s death in June 1998, and the

initiation of a Nigerian Government investigation into bank accounts held by him, his family and associates, the General’s wife

was stopped at a Lagos airport with 38 suitcases full of cash, and

his son was found with $100 million in cash. These and other funds

were seized by the Government of Nigeria.

Mr. Ober, one of the private bankers managing the Abacha accounts, told the Subcommittee that he was aware of these events,

but did not discuss them with his colleagues or supervisors. Mr.

Ober also told the Subcommittee staff that he had stopped traveling to Nigeria due to the corruption there.

In September 1998, while the Nigerian Government investigation

was ongoing, the Abacha sons made an urgent request to Citibank

to transfer $39 million out of their London accounts. The funds

were then in a time deposit that would not mature until the end

of September, and which, if the deposits were withdrawn prematurely, would result in a hefty penalty. The Abacha sons asked,

16

and the Private Bank agreed, to approve an overdraft, a loan in the

amount of $39 million, which the sons used to immediately transfer

their funds to Swiss banks and elsewhere. Citibank then satisfied

the loan when the time deposit matured 2 weeks later. In this way

Citibank assisted the Abacha sons in moving $39 million out of

their Citibank accounts in the face of an ongoing Nigerian Government investigation into their funds, without even incurring a financial penalty.

The primary private banker in London who opened and managed

the accounts was Michael Matthews; in New York it was Alain

Ober. Both Mr. Matthews and Mr. Ober were required to perform

due diligence reviews of the Abacha sons prior to accepting them

as clients and while managing their accounts. Mr. Ober has indicated, however, that he was unaware for 3 years, from 1993 until

1996, that the sons’ father had become the military leader of Nigeria, until a Citibank colleague mentioned it to him by chance in

January 1996. The documents suggest that Mr. Matthews was also

uninformed of General Abacha’s status.

Beginning in 1996, large additional deposits were made to the London accounts. The funds almost tripled from $18 million to $60

million. The account documentation contains little information

about the source of these new funds.

At the same time the funds were increasing, the client profiles

for the London accounts twice failed reviews by Citibank quality

assurance personnel. A review conducted in June 1997 found the

London client profile deficient in every category tested, from source

of wealth, to business background, to source of funds used to open

the account. A 1998 review states: ‘‘Lack of detail in Source of

Wealth on these profiles. . . . [A]greed to pass [quality assurance

review] on basis that we are exiting these relationships.’’

In New York, no client profiles were provided for the accounts during 1994 and 1995, when $47 million passed through the accounts in a 6-month period. Mr. Ober told the Subcommittee staff

he could not recall the source of the $47 million, and no account

documentation explains the sudden influx in funds.

Sometime in the first quarter of 1999, the Private Bank decided

to close the accounts. None of the persons interviewed provided a

specific rationale. Before the accounts were actually closed, a London Court issued an order in a civil suit in March 1999, freezing

all funds in Citibank’s London office related to General Abacha and

his family. In October 1999, the Swiss Government issued an order

freezing all Swiss bank accounts related to General Abacha, his

family and certain associates. Citibank has told us, however, it has

no Abacha-related accounts in Switzerland. The Swiss have also, at

the request of the Nigerian Government, opened an investigation

into money laundering.

In conclusion, like the Salinas and Bongo case histories, the

Abacha sons’ accounts raise issues of due diligence, secrecy and

anti-money laundering controls. The private banker handling the

accounts in New York was unaware for 3 years that his clients

were the sons of the Nigerian dictator, never discussed press reports that one of the account holders was caught with $100 million

in cash amid allegations of corruption, never asked questions about

a 6-month influx of $47 million. His London counterparts helped

17

1See Exhibit No. 25 which appears in the Appendix on page 204.

the sons move $39 million to other banks in September 1998, amid

a Nigerian Government investigation. Altogether, the Private Bank

allowed these accounts to operate for 10 years with few questions

asked.

These case histories are three of hundreds of public figure accounts at Citibank Private Bank. On paper, they were supposed to

be subject to the highest level of scrutiny provided by the Private

Bank. In practice, the public figure accounts reviewed by the Subcommittee staff were characterized more by customer deference

than due diligence.

Thank you very much. We are happy to answer questions.

Senator COLLINS. I want to thank you both for your excellent and

very detailed testimony.

We are now in the middle of a series of votes, and I am going

to suggest that we recess the hearing for 15 minutes. Whoever gets

back first will reconvene the hearing, so you can be assured we will

be quick.

Senator LEVIN. Madam Chairman, could I just note the presence

of Maxine Waters, Congresswoman from California, who has been

a pioneer in the area of anti-money laundering. She has got a very

important bill and initiative in the House of Representatives, and

it is going to help us a great deal in our thought processes and

analysis, and I want to just note her presence here.

Senator COLLINS. We welcome the Congresswoman to the hearing, and again, I want to add my thanks to that of Senator Levin

for her work in this important area.

The Subcommittee will be recessed upon the call of the Chair.

[Recess.]

Senator COLLINS. The Subcommittee will come to order.

Pursuant to Rule 14 of the Permanent Subcommittee on Investigations Rules of Procedure, Citibank has requested, through its

counsel, that a series of questions be directed to the two staff witnesses on its behalf.

After reviewing Citibank’s request and the questions, I have decided to submit the questions for the record, and to require the

staff to respond within 24 hours. The questions and the answers

will be made public at the start of tomorrow’s hearings.1

I now would like to call upon Senator Levin to see if he has any

questions for these witnesses.

Senator LEVIN. Madam Chairman, I did have some questions,

but given the hour, I would be happy to pass on questions, ask

some also for the record, whatever is your wish on that. Given the

time though, perhaps we should move to the next panel.

Senator COLLINS. Thank you.

I again want to thank our two staff witnesses for their excellent

testimony. I appreciate your hard work.

Our next panel of witnesses will please come forward: Amy Elliott, who is a private banker for Citicorp, and Albert Misan, the

Mexico Country Head for Citibank’s Private Bank.

Ms. Elliott has been with Citibank’s Private Bank in New York

for 16 years and was a private banker for Rau ́l Salinas and his

18

1The prepared statement of Ms. Elliott appears in the Appendix on page 940.

wife. Ms. Elliott will testify about her involvement with Mr. Salinas’ Private Bank account.

Mr. Misan began his career with Citibank in 1972, and in 1985

he was posted to Mexico City, where he first became involved with

private banking. Mr. Misan was the Country Head in Mexico for

Citibank’s Private Bank, and was Ms. Elliott’s supervisor.

Pursuant to Rule 6, all witnesses are required to be sworn in. I

would ask that you stand and 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?

Ms. ELLIOTT. I do.

Mr. MISAN. I do.

Senator COLLINS. Thank you. We would ask that you limit your

oral testimony to 10 minutes. Your written testimony will, however, be printed in the record in its entirety, and Ms. Elliott, I

would ask that you proceed.

TESTIMONY OF AMY C. ELLIOTT,1 VICE PRESIDENT, CITIBANK

PRIVATE BANK, NEW YORK, NEW YORK

Ms. ELLIOTT. Good morning, Madam Chairman, Senator Levin,

Members of the Permanent Subcommittee on Investigations.

My name is Amy Elliott. I work at Citibank’s Private Bank, and

have been an employee of the bank for the last 32 years.

This hearing will explore how banks might be vulnerable to

money laundering and what banks can do to avoid unknowingly accepting money from drug dealers and other criminals. I view this

as a very important topic. I share the Subcommittee’s concern

about money laundering, and I appreciate my responsibilities in

this matter as a citizen and my fiduciary responsibility.

As a banker I have always tried to be alert to the risks of money

laundering and to the possibility that a client might be trying to

deposit tainted money.

Before discussing Mr. Salinas’ account, I would like to provide a

little personal background. I was not born in the United States. I

was born in Cuba, and emigrated alone to this country in 1961,

when I was 17 years old. My parents were not able to leave Cuba

until a few years later. My grandparents were never able to leave

Cuba, and their property and wealth were confiscated by the Castro Government. When I came to America, I ended up in Nebraska,

where I went to college.

I joined Citibank in 1967 and worked in a variety of positions

until 1983, when I joined the Private Bank. In 1992, when Rau ́l

Salinas became a client of Citibank and I became his relationship

manager, I was the Mexico Team Leader in New York.

When I first met Rau ́l Salinas in early 1992, his brother, Carlos

Salinas, was the President of Mexico. President Salinas was a hero,

both in his own country and abroad. President Salinas was a Harvard-educated reformer who had pledged to revive Mexico’s economy, combat drug dealing, and stamp out corruption. He was a

guest of President Bush at the White House, and both Presidents

Bush and Clinton worked with him in passing NAFTA to increase

19

trade between Mexico and the United States. In Mexico in the

early 1990’s the Salinas’ were known as an old, distinguished family that had wealth going back generations. By 1992, I had been

working with Mexican clients for about 8 years, and my clients

spoke glowingly about the Salinas family.

Rau ́l Salinas was referred to me by one of our most valued clients, who personally brought him to the bank in New York. At the

time, the referring client had maintained accounts at Citibank for

at least 10 years, and I had been managing those accounts for almost 4 years. Long before referring Rau ́

l Salinas to Citibank, the

client had told me that he had been close friends with Rau ́l Salinas

since childhood, and that he had worked with him on business

projects.

My supervisor in New York and I met with them and discussed

the possibility of Mr. Salinas opening an account. Mr. Salinas confirmed to us at that time some of the background information the

referring client had previously given me. Mr. Salinas requested

that his accounts be structured in the same manner as the accounts of the client who referred him to the bank. Mr. Salinas established a personal investment company, or PIC, to hold his investments, and the shares of that corporation were owned by a

trust. This was a very standard account structure in the international private banking industry, including Citibank. Such an account structure provides for confidentiality and also allows for efficient tax and estate planning. Many wealthy Mexicans have a

heightened sensitivity to confidentiality of financial information because they are frequently the targets of kidnappings and other violent crimes in their country. Mr. Salinas initially deposited $2 million, money in fact that was

being returned to him by the referring client as a result of a joint

venture that had not gone through. In mid-1993, Mr. Salinas started to deposit larger amounts of money at Citibank. By this time I

believed that his wealth had grown from a number of sources.

First, I believed he had sold his construction company. Second, I

knew that Mr. Salinas was a member of one of Mexico’s wealthy

families, and in Mexico children often receive their inheritance—or

patrimonio—while their parents are still alive. Third, I knew that

the Mexican stock market had done very well, and I believed that

his investments and the patrimonio had grown considerably.

Fourth, Mr. Salinas married Paulina Castan ̃on in June 1993, and

I learned that she had received a substantial divorce settlement

from a prior marriage.

For all these reasons, I felt completely comfortable accepting his

additional deposits in mid-1993 and thereafter. Mr. Salinas’ deposits also made sense because Citibank’s investment managers had

done a good job investing the money he had deposited with us up

to that point. It is for this reason that he had decided to deposit

a larger percentage of his total assets with Citibank. The activity

in the account never appeared suspicious to me at any time; in fact,

quite the opposite. It seemed entirely consistent with what I knew

about Rau ́l Salinas and his family.

The public’s perception of the Salinas name today, however, is

very different than it was when I first met Rau ́l Salinas. In 1992,

when I accepted Rau ́l Salinas as a client of Citibank, there were

20

1The prepared statement of Mr. Misan appears in the Appendix on page 946.

simply no questions about the integrity of Rau ́l Salinas or the Salinas’ family name. Now, Carlos Salinas is in self-imposed exile.

After he left office at the end of 1994, his successor devalued the

peso, and that was the beginning of the end of his sterling reputation.

There is more context. The account relationship with Rau ́l Salinas was one of seven or eight that I personally managed. Today the

spotlight shines on this account, but at the time, however, Rau ́l Salinas’ account was not the largest, not the most profitable, and not

the most important account I managed. In fact, it was one of the

smallest accounts and one of the least active. As large as the

amounts seem to us in personal terms, they were not unusual in

the context of the wealthy Mexican businesspeople who are clients

of the Private Banks.

Finally, Mr. Salinas’ decision to transfer money out of Mexico

and from Mexican pesos and into U.S. dollars in 1993—which was

the year before the Mexican Presidential election—is exactly what

many other wealthy Mexicans, including my clients, were doing at

the time. This is, sadly, a tradition in Mexico because of the political and economic instability that occurs in that country around

Presidential elections. The value of the peso and the Mexican stock

market usually drop preceding Presidential elections. And there

seems to be a fear that with political transition, one could suddenly

find oneself under enormous political attack. So there were large

amounts of money leaving Mexico in the 1993–1994 time frame, including the funds of Rau ́

l Salinas. That, in the context of Mexican

politics, was not surprising, and it was certainly not illegal; rather,

it was prudent and happened like clockwork every Presidential

election year.

Of course, this idea is quite foreign to many Americans, who

since birth have enjoyed living in this very stable country of ours.

It is easy to ignore the context I have described and instead to

focus on isolated details in this matter and make them seen questionable. The world in which I operated as a relationship manager

in the early 1990’s was different from the private banking environment today. Procedures, technologies and safeguards are very different today at Citibank. Today, more than 7 years later, given all

the changes that have taken place at the bank and in the regulatory and legal environments, there is much more I would be required to do to accept a new private banking client such as Rau ́

l

Salinas.

I am ready to answer your questions. I only ask you, with all due

respect, to keep in mind the broader picture I have described as

you frame your inquiry to me.

Thank you.

Senator COLLINS. Mr. Misan.

ALBERT MISAN,1 VICE PRESIDENT, CITIBANK PRIVATE BANK,

NEW YORK, NEW YORK

Mr. MISAN. Senator Collins, Senator Levin, Members of the Subcommittee, and members of the Subcommittee staff, good morning.

21

My name is Albert Misan, and I have been a banker for almost

all my professional life.

I was born in 1949 in Alexandria, Egypt. Being of Jewish descent, my family was under tremendous pressures, and after the

Suez War of 1956, my family left—felt compelled to leave Egypt.

Half of my family emigrated to Australia, while the other half, including my immediate family went to Rio de Janeiro, Brazil. My father had a successful career in the shipping business in Egypt, but

he was forced to give it up and surrender all of our assets when

we left Egypt.

When we arrived in Brazil we therefore had no money, and none

of us spoke the language. Fortunately, my father was able to get

a job working at a private British elementary school, where my siblings and I attended for free. I got a scholarship at an American

High School in Brazil, and later I was able to get a partial scholarship to attend a university in the United States. In order to pay

for college, during the summers I got my union card with the AFL–

CIO and worked as a union laborer.

I graduated from college in 1972 and returned to Rio, where I got

a job in the Human Resources Department of Citibank. I successfully completed the training program, and in 1974, I was promoted

to work for the Consumer Bank, working on accounts of high net

worth individuals. In 1977, I was transferred to the Corporate

Bank, where I was first an account manager, and later a supervisor in Citibank’s Sao Paolo office.

In 1983, I got my first opportunity to work in New York when

I was asked to join the Citibank team that was working on the restructuring of the Brazilian debt. I worked on this project through

1985, when I was named the head of the Corporate Bank in Ecuador. In 1987, I was transferred to the Corporate Bank in Mexico.

In early 1988, I was asked to join the Private Bank, and my first

assignment was to establish what was referred as the ‘‘onshore’’

presence of the Private Bank in Mexico. At the outset I was virtually alone, but by the end of the first year I had hired a professional staff which included four private bankers. In 1990, there

were seven bankers reporting to me in Mexico City, and at about

that time I was given responsibility for the private banking offices

in San Diego, Los Angeles, and Houston. In 1992, I was named the

Mexico country head, and in that capacity was placed in charge of

the Private Bank’s Mexico business within the Western Hemisphere Division, including the business managed out of New York.

I was not a private banker in the sense that I was not responsible for managing any particular relationship. Although I did meet

with customers on occasion, my principal responsibilities were administrative. My immediate supervisor, during the early 1990’s,

was Reynaldo Figueiredo, who was headquartered in New York.

Mr. Figueiredo, in turn, reported directly to G. Edward Montero,

who was until recently the Private Bank’s Division Executive in

charge of the Western Hemisphere. My colleague, Amy Elliott, was

the head of the Mexico team in New York and a senior private

banker. I continued to be the country head for the Private Bank

in Mexico until 1996, when I moved to New York to manage the

Private Bank’s investment advisory business for the Western

Hemisphere. My responsibilities have expanded over time, and now

22

include the Private Bank’s onshore local currency investment business throughout Latin America.

As I indicated in the outset of my statement, I have been a banker for virtually all my professional life. Bankers are, by and large,

conscientious by nature and conservative by training and inclination. When I started in banking, one of the fundamentals of the

business was knowing one’s customers. At that point, the reasons

for doing so were principally credit driven. If you loaned money to

an individual or a company, you wanted to be able to have a degree

of confidence that the loan would be repaid. Everything you could

learn about your client added to your ability to evaluate credit risk.

If you know your customer, the risk of doing business with the customer declines materially.

Over time, reasons why it was important to know one’s customer

became more evident, for example, to adequately address suitability issues which relate to insuring that a customer’s risk profile

matches the investment selected by the customer’s portfolio. Another reason that emerged, was the growing awareness that a bank

had to be vigilant against the possibility that its customers might

be engaged in money laundering. The focus in this regard was at

first principally on cash transactions, but the component of ‘‘knowyour-customer’’ that focused on anti-money laundering procedures

was clearly taking root.

At the same time in the early 1990’s, management began emphasizing the importance not only of a banker knowing his or her customer, but that there be adequate documentation of that knowledge. From a management perspective—and I was a manager—this

‘‘know-your-customer’’ effort introduced a new issue. How do you

get relationship managers, who are first and foremost interested in

marketing efforts, to spend valuable time filling out forms? Furthermore, for some, the documentation appeared superfluous since

the information that was being recorded was already known to the

private banker in question, and therefore, readily available when

necessary. We had always expected our private bankers to be, in

effect, walking sources of ‘‘know-your-customer’’ information, but

we were now taking a further step and requiring that the information be memorialized. Unfortunately, it took longer to bring the

know-your-customer documentation to the levels we wanted. The

documentation of know-your-customer was a difficult task, as many

of our clients had been with the bank for a long time, some for 40

or 50 years. At times it was difficult for a new private banker to

go back to these longstanding clients and ask them a series of detailed financial questions. We did so, but it took longer than we anticipated to get all our questions answered.

Since the outset, our private bankers were conscientious of

money laundering. Their awareness and sensitivity to these issues

has grown over time as we strove to constantly raise the bar, and

today it has become a routine part of their thought processes when

dealing with clients.

In closing, I would like to emphasize that in 1999, Citibank Private Banking has evolved from what it was in the early and mid1990’s, and that the Private Bank’s current policies have tightened

the procedures and systems to insure significant improvement on

the overall operation of the Private Bank.

23

At this point I have completed my prepared remarks and would

be pleased to take questions from the Subcommittee. Thank you.

Senator COLLINS. Thank you for your statement.

Ms. Elliott, in 1994 you testified at a trial in which money laundering charges had been brought against a Citibank private banker, and at the trial you described at length Citibank guidelines that

had been in effect in 1986, 1987, 1988, which focused on the importance of knowing your customer, knowing your client, and the very

serious consequences that could ensue if a bank did business with

a customer who turned out to be undesirable or to be involved in

criminal activity.

In your testimony you were also very clear about the need for

two written bank references because oral references were not sufficient. Yet the year before your testimony, you did not follow that

process in opening accounts for Mr. Salinas.

Could you explain to us—and obviously, we are very aware of the

bank’s own internal requirements and the problems that could result if they were not followed—why you did not follow those standard procedures in opening the account for Mr. Salinas?

Ms. ELLIOTT. Yes, Madam Chairman. I did follow the bank’s policy at the time. The bank’s policy, at the time, required that we

should get two references. They could either be from someone within the bank—another area of the bank—from another client or another personal source, and/or a financial reference, meaning from

another bank. And it required two references.

The policy as well, however, allowed for waiving one or both of

the references by one of the team leaders, and I was a team leader

at the time. So in fact, I did. Rau ́l Salinas was brought to the bank

by Carlos Hank, who in fact brought him in, so it was not just a

personal reference, it was a personal reference that was given in

person. He came in and gave it to us, to me and my boss’s boss

at the time.

Senator COLLINS. According to your deposition, Citibank required

written bank references. Did you have two written bank references

before you opened the account?

Ms. ELLIOTT. I do not have the testimony in front of me, but I

believe we required, if it is a bank reference, that it be written,

versus just oral. If it is a bank reference, it must be written. In my

case, the overall reference was given by a client. He came in, and

it was not just given to me. I was in the presence of my boss’s boss.

Senator COLLINS. I want to make sure I understand your testimony. Are you testifying that in opening up the Salinas accounts

you followed all of Citibank’s internal procedures for doing so?

Ms. ELLIOTT. I am.

Senator COLLINS. Ms. Elliott, you have also indicated that you

were not concerned about the millions of dollars passing through

the Salinas account because you were under the impression that

Mr. Salinas’ source of wealth derived from several different

sources. You mentioned an incomplete business venture that was

the source of his initial deposit; the sale of a construction company;

his wife’s divorce settlement. Did you ever know the name of Mr.

Salinas’ construction company or see any financial documentation

of its sale?

24

Ms. ELLIOTT. No. At the time I was not required to do that, and

this was not—I was not dealing with the construction company as

a client. This relationship was—had now matured to a point where

the client could have brought in his construction company as a client as well, and it did not seem material at the time.

Today I would be required to ask for annual reports. I would be

required to go to the place. I would be required to visit it.

But Mr. Salinas mentioned it. Mr. Hank had told me about it before I ever met Mr. Salinas. He repeated it in the first meeting,

and I felt comfortable that that was sufficient.

Senator COLLINS. Were you aware of Mr. Salinas’ employment as

a government official and what his reported salary was?

Ms. ELLIOTT. I was not at the time.

Senator COLLINS. How could you know that the money going

through the account was legitimate, when in the Mexican press reports it was reported that Mr. Salinas had never earned more than

$190,000 per year?

Ms. ELLIOTT. I never read any of the Mexican press reports. Mr.

Salinas was a member of a very prominent, wealthy family in Mexico. The Mexican elite is finite. There are five, six hundred families

that are well known to be very wealthy, and the Salinas’ are one

of them. And quite frankly, had I known that he had a job and that

he was getting X dollars, it would not necessarily have been terribly consequential to my entire knowledge of what I knew the Salinas family to be, and I believed that that was the source of

wealth.

Senator COLLINS. Ms. Elliott, the GAO, in looking into the Salinas case, found that you waived bank references for Mr. Salinas

and did not prepare a financial profile on him or request a waiver

for the profile as then was required by Citibank’s Know-Your-Customer policy. Is your testimony still that you followed all of

Citibank’s policies in opening the Salinas’ accounts?

Ms. ELLIOTT. In the opening of the account, I did not. I should

have and did not complete the CAMS profile. The CAMS system at

the time was a system that was not a source of wealth system, but

rather a system that talked about business background. While it is

true that this is information that I had, it is also true that when

he was arrested and I went to look at the CAMS screens, they were

completely empty. I was mortified and dismayed, but it is absolutely true, they were completely empty.

Senator COLLINS. I am confused by your testimony, because I

asked you that same question just a moment ago, and you said you

did comply with all of Citibank’s procedures and policies. Are you

now conceding that you did not comply?

Ms. ELLIOTT. I apologize. I misunderstood. I thought that you

had—were referring to the references, and I had complied with all

the bank’s policies. The bank as well required, however, that we

complete the business background information we had into a system that was then called CAMS, and I failed to do that or failed

to get it done.

Senator COLLINS. If Mr. Salinas had not been the brother of the

President of Mexico, would you have been as willing to deviate

from the standard policy?

25

1See Exhibit No. 4 which appears in the Appendix on page 114.

Ms. ELLIOTT. His being the brother of the President of Mexico

had nothing to do with how I treated Mr. Salinas. Mr. Salinas was

not—was actually one of my smallest accounts. And I should have

caused the CAMS screens to be completed and did not. And it is,

and continues to be, my responsibility to get that done. Regarding

the references and how I acted with Mr. Salinas, it was totally

within policy and it had nothing to do with his being President Salinas’ brother.

Senator COLLINS. One of the services that you provided for Mr.

Salinas was locating a private investment company for him—or

creating a private investment company, and then locating it in a

secrecy jurisdiction; is that correct?

Ms. ELLIOTT. It is—Mr. Salinas had requested a structure that

I would say—I am not certain, but I would say that at least 70 percent of our Mexican clients and most of our Latin American clients

use. It was a standard structure within the International Private

Bank, and he wanted the exact structure that Carlos Hank had,

and Carlos Hank had a trust that held the shares of a corporation

that was managed by Confidas which is our fiduciary subsidiary in

Switzerland, and that is what I gave Mr. Salinas.

Senator COLLINS. Is there a tax benefit to using a PIC located

in a secrecy jurisdiction versus a non-secrecy jurisdiction?

Ms. ELLIOTT. I am not well versed. There is a tax benefit to having your assets under a corporation because the corporation does

not die, but I do not know——

Senator COLLINS. That is not my question. My question is: Is

there some tax reason that the PIC would be located in a country

that has very strict secrecy laws?

Ms. ELLIOTT. I cannot answer that question. I do not know.

Senator COLLINS. Is the primary purpose of using a private investment corporation to further insulate the beneficial or true

owner from disclosure, even within the bank and to banking regulators, locating the PIC in a secrecy jurisdiction? Why is that done?

Let us take as a premise that there is no tax advantage to doing

so. So why would you set up the PIC in a country that is beyond

the reach of bank regulators in the United States?

Ms. ELLIOTT. It is not set up so it is beyond the reach because

I do not believe it is beyond the reach of banking regulators in the

United States. It is a fact of life that some of these clients require

confidentiality. It is a fact of life that these clients are subject to

kidnapping and are subject to criminal acts, and it is a fact of life

that this is what they have to deal with. And so, yes, they do want

their information confidential.

Senator COLLINS. Senator Levin.

Senator LEVIN. If you could take the book of documents that appears in front of you, Ms. Elliott, you will see on page 11, the documentation policy. Do you see that? 1

Ms. ELLIOTT. Yes.

Senator LEVIN. That was issued on April 9, 1992, which was before the Salinas account was opened; is that correct?

Ms. ELLIOTT. I have never seen this document. If that is what

it says.

26

1See Exhibit No. 5 which appears in the Appendix on page 123.

Senator LEVIN. You have never seen this document?

Ms. ELLIOTT. No.

Senator LEVIN. The memo by Mr. Montero on page 13?

Ms. ELLIOTT. Yes.

Senator LEVIN. It says ‘‘Over the years the Western Hemisphere

has been successful in opening a growing number of very desirable

target market accounts and extending a diverse product mix to the

client base. However, the documentation requirements associated

with the above have not always been complied with in a timely

fashion. Given our commitment to strong compliance and our desire to enhance our control environment, as a rule, no new account

should be opened without complete documentation.’’

That is not familiar to you?

Ms. ELLIOTT. No, this is. The memo, yes. I was referring to that

page that you had.

Senator LEVIN. All right. Then let us talk about the memo. The

memo has the same date, does it not, on page 13, April 9, 1992?

Ms. ELLIOTT. Correct.

Senator LEVIN. And it says there at the bottom of that page 13,

that ‘‘I would like to reemphasize the importance of timely and

complete documentation at the inception of a new relationship or

account.’’ Do you see that?

Ms. ELLIOTT. Yes.

Senator LEVIN. Do you see on the next page where it says: ‘‘New

accounts should not be opened without complete documentation,’’ at

the top of page 14?

Ms. ELLIOTT. Correct.

Senator LEVIN. Now, if you look at the document at page 1,1 you

will see that this is the application of Mr. Salinas, and it is almost

totally blank. But if you will look at page 2, where it says ‘‘Source

of funds,’’ there is a specific section there on source of funds. It

says ‘‘Total amount of funds deposited to open these accounts,’’ and

‘‘Source of these funds,’’ and they are both blank; is that correct?

Ms. ELLIOTT. Source of funds, yes.

Senator LEVIN. Both blank?

Ms. ELLIOTT. Yes.

Senator LEVIN. You had just received the month before, had you

not, this memo from Mr. Montero saying the documentation must

be complete, and here you have got an application which is about

90 percent blank including the section on source; is that not correct?

Ms. ELLIOTT. Yes, Senator. If I may, there are two account applications. One begins in page 1 and one begins in page 3. The one

that begins in page 3 is the one that I was completing in Mexico

with Rau ́l Salinas. The one that begins in page 1 was being completed simultaneously in New York by my assistant. ‘‘Source of

funds’’ refers to where the initial deposit is coming from, and not

source of wealth. That is what it means.

And at this point I did not know where the funds were coming

from. He was going to—this was his personal account in New York.

He told me he was going to transfer $100,000 from a Mexican

bank, but he did not know which one, so I did not know.

27

1See Exhibit No. 6 which appears in the Appendix on page 127.

Senator LEVIN. You had just received from Mr. Montero a statement that it is absolutely essential that documents be complete,

and yet you want to look at the one that you are talking about on

pages 3 and 4, you still have almost nothing on page 4, and if you

want to look at the source of funds section and the one that you

say you worked on on page 4, that is blank, including the first line

which says, ‘‘Total amount of funds deposited to open these accounts,’’ and then it says, ‘‘Source of these funds.’’ Now, that was

left blank; is that not correct?

Ms. ELLIOTT. That is correct.

Senator LEVIN. And that was left blank within a month after you

got these strong instructions from the head of the—Mr. Montero,

what was his position? He was above you, in any event, right?

Ms. ELLIOTT. Absolutely. He was——

Senator LEVIN. And you had very clear instructions, which you

were familiar with, saying, ‘‘The documentation requirements have

not always been complied with in a timely fashion, and as a rule,

no new account should be opened without complete documentation.

I would like to reemphasize the importance of timely and complete

documentation at the inception of a new relationship.’’ Despite all

of that—and on the next page, which is I believe page 14, you will

see at the top, ‘‘New accounts should not be opened without complete documentation.’’ He said that three times in one document.

And yet, the form that you worked with is blank, almost entirely

in its second page, including on the source of funds; is that accurate?

Ms. ELLIOTT. Yes, sir.

Senator LEVIN. Now, is it not also accurate that there was another policy called Client Acceptance Policy, and this one, if you

would turn to page 20.1 There are some excerpts we are putting on

a board here, but this is dated September 27, 1991, which is almost

a year before this account was opened, or half a year. And this is

also Mr. Montero, and if you look on page 21, it says, ‘‘As all of

us know, the international private banking business has become increasingly complex over the past years. It is critical that we maintain the high standards that we have in place in regard to ‘knowing

our customer’ and use the utmost diligence to screen prospective

new clients.’’

And then it says, ‘‘The attached statement is a detailed description of divisional policies in respect to the opening of accounts. I

expect that each and every one of us will be familiar with the contents and to conduct ourselves accordingly.’’

Were you familiar with that document, the Client Acceptance

Policy?

Ms. ELLIOTT. Yes.

Senator LEVIN. If you look on the next page—and this is all before you opened the account. This is not something new that happened in the late 1990’s. These are all policies of the bank, at least

purported policies, that you were familiar with. If you look on page

22,1 you will see in the third paragraph, ‘‘We only accept clients

with integrity and good reputation.’’ And then it says in 2(a) that,

‘‘a clear-eyed assessment’’—and that is up on the board there for

28

you—‘‘a clear-eyed assessment of the integrity of the client, his

business activities and source of funds at the acceptance stage and

thereafter.’’

Now, did you know the source of his funds? Did you ask him the

source of his funds? Let us put it that way.

Ms. ELLIOTT. Source of funds is where the money is coming from,

and I knew two things. I knew that for his personal account the

funds were going to be approximately $100,000, and it was going

to come from one of the Mexican banks. And he told me it was

going to be either Bancomer or Banca Cremi. He did not know

which one.

Senator LEVIN. All right. Now, when he deposited the money

later on——

Ms. ELLIOTT. Excuse me?

Senator LEVIN. When he deposited the millions later on, because

it says here, ‘‘and thereafter,’’ did you know the source of those millions that he deposited later on?

Ms. ELLIOTT. I knew they were coming from Mexican Banks.

Senator LEVIN. But did you know the source of his funds, where

he got the funds from?

Ms. ELLIOTT. I believed at the time, Senator, that we were talking about monies that were a combination of things—that the

Mexican peso was believed to be devalued, and in fact it was; the

Mexican stock market was believed to suffer some sort of deficit,

and in fact it did; that clients were all doing the same thing at the

same time; that they had—the Salinas’ had investments in Telmex,

a company that had doubled in price in about a year and a half;

and he had just married Paulina Castan ̃on. So it was not just one

thing; in my mind were a number of different things, all of which

made sense at the time.

Senator LEVIN. Did you also believe that he had sold a construction company?

Ms. ELLIOTT. I did.

Senator LEVIN. And did you know the name of the construction

company?

Ms. ELLIOTT. I do not.

Senator LEVIN. Did you ask him?

Ms. ELLIOTT. I did not.

Senator LEVIN. Did you ask him how much he received from the

construction company?

Ms. ELLIOTT. I did not, sir.

Senator LEVIN. Did you ask him about any projects that that alleged construction company had ever undertaken?

Ms. ELLIOTT. Carlos Hank told me that they had worked on a

road together; the construction company was involved in infrastructure work.

Senator LEVIN. And did you ever ask your client what projects

his alleged, purported construction company had ever worked on?

Did you ever ask him, Mr. Salinas?

Ms. ELLIOTT. Well, Carlos Hank told me in front of him on that

original meeting, and it—this was—I first met him in January

1992. He opened the accounts in May 1992. And when I met him

in San Diego in April 1993—March or April 1993—he told me he

had sold it, so I really did not have time.

29

1See Exhibit No. 4 which appears in the Appendix on page 114.

Senator LEVIN. Did you ask him how much he sold it for?

Ms. ELLIOTT. I did not.

Senator LEVIN. Now, if you look on page 16, you have indicated

in your testimony why it was that you did not seek a written reference from Mr. Hank.1 And you indicated that that is only when

it is another bank that makes the reference that it is in writing,

but that Mr. Hank was telling you orally; is that correct?

Ms. ELLIOTT. In person.

Senator LEVIN. In person.

Ms. ELLIOTT. In person in front of my boss’s boss.

Senator LEVIN. Right. Now, if you look at paragraph 3 of this,

and this is still part of this documentation policy which you acknowledged receiving before you opened this account, and here is

what paragraph 3 says: ‘‘Generally, references should not be accepted from another client, however, should the situation warrant,

then a reference can be accepted provided the client had a relationship for over a year, we are satisfied with his business and potential and we have another positive reference on file.’’

Did you have another positive reference on file?

Ms. ELLIOTT. I did not. I felt that the reference I had was strong

enough.

Senator LEVIN. But you did not have another reference on file?

Ms. ELLIOTT. I did not.

Senator LEVIN. And when you answered the Chairman’s question

about whether you complied with the policies of the bank, you said

that you did relative to references, but in fact, you did not comply

with that policy then, did you?

Ms. ELLIOTT. The policy, sir, allowed for a waiving of one reference—in fact, of both—by a team leader, and I was a team leader.

Senator LEVIN. All right. That will speak for itself, but you acknowledge you did not have another positive reference on file; that

is correct?

Ms. ELLIOTT. That is correct.

Senator LEVIN. Finally—and this is, it seems to me, the key line

in this requirement—‘‘The reference’’—we are now talking about

Mr. Hank’s reference—‘‘must be in writing.’’ Do you see that in

front of you?

Ms. ELLIOTT. Yes.

Senator LEVIN. Was Hank’s reference in writing?

Ms. ELLIOTT. No, it was not.

Senator LEVIN. So you did not comply with that policy either, did

you?

Ms. ELLIOTT. Mr. Hank gave a personal reference. He came to

the bank.

Senator LEVIN. I understand, but this says that the ‘‘reference

must be in writing and approved by the Market Manager/Unit

Head before acceptance.’’ And my question is: You did not comply

with that policy either, did you?

Ms. ELLIOTT. I believe I did.

Senator LEVIN. Did you have a written reference?

30

Ms. ELLIOTT. No, I did not have a written reference, but the policy—in fact, I, as a team leader, could have waived them both. This

is the first time that I had a reference that was given in person

and in front of my boss’s boss. The reason to have a written reference——

Senator LEVIN. Is there any exception in here for a reference

orally in front of someone’s boss? Does it not say, ‘‘The reference

must be in writing and approved by the Market Manager/Unit

Head?’’ Does it not say it must be in writing, is my question?

Ms. ELLIOTT. It does say that.

Senator LEVIN. And it was not in writing; is that correct?

Ms. ELLIOTT. That is correct.

Senator LEVIN. You did not comply then with that particular policy, did you?

Ms. ELLIOTT. I believe I did.

Senator LEVIN. Thank you.

Senator COLLINS. Mr. Misan, it is my understanding that from

1987 to 1996, that one of your responsibilities was to manage the

Citibank Mexico office. Is that accurate?

Mr. MISAN. That is right. From 1988?

Senator COLLINS. From 1988 to 1996.

Mr. MISAN. Yes, ma’am.

Senator COLLINS. So this was during the period that the account

for Mr. Salinas was opened. Did you approve the opening of that

account?

Mr. MISAN. No, I did not, ma’am.

Senator COLLINS. Although you supervised Ms. Elliott, you did

not know about some of the major accounts that she managed in

a country for which you were ultimately the responsible manager;

is that correct?

Mr. MISAN. That is correct, Senator. There were a few accounts

who were managed out of New York, who chose to only communicate with New York, and for that reason, they were given that

privacy.

Senator COLLINS. Were you advised by any of your superiors that

certain of the clients in Mexico did not wish for Mexico-based bankers to have knowledge of their accounts, and that Mr. Salinas fell

in that category?

Mr. MISAN. I was advised that there were some accounts that I

would not be asked to oversee, and that they would be taken care

of by my supervisors in New York, and, yes, I believe Mr. Salinas

was one of them.

Senator COLLINS. Did that not make it difficult for you to carry

out your responsibilities as the person ultimately responsible for

the Mexican Citibank office?

Mr. MISAN. I believe that Mrs. Elliott was an experienced private

banker. She also benefited from having the supervision in New

York of my supervisor and his supervisor, so I believe that whenever necessary, those accounts were adequately covered.

Senator COLLINS. Were you required to authorize any transactions related to the Salinas account?

Mr. MISAN. At some point in the mid—or the second quarter of

1993, I believe, I signed on a couple of transfers that he made from

Mexico as a member of the credit committee, yes.

31

1See Exhibit No. 7 which appears in the Appendix on page 133.

Senator COLLINS. When you did so were you aware that the account was for Mr. Salinas or were you approving these transactions

without knowing who the beneficial owner of the account was?

Mr. MISAN. I was informed that Mr. Salinas had an account

around that time, and I believe I did know at the time the remittances were being made, yes.

Senator COLLINS. Mr. Misan, after Mr. Salinas was arrested, did

you comment to Ms. Elliott that she should, ‘‘Lose any documents

connected with the account?’’

Mr. MISAN. I said that in a kidding manner. It was at the early

stages of this. I did not mean it seriously.

Senator COLLINS. What direction did you give Ms. Elliott with regard to the account and the information related to it after Mr. Salinas was arrested?

Mr. MISAN. I told her that this account now should have the direct supervision of legal counsel, and that nothing should occur

until legal counsel authorized it.

Senator COLLINS. Senator Levin.

Senator LEVIN. One of the responsibilities I believe that you had,

Ms. Elliott, was to keep a client profile on a computer; is that correct?

Ms. ELLIOTT. That is correct.

Senator LEVIN. And in 1995, after Mr. Salinas was arrested, you

then went back and made some changes in that client profile, did

you not?

Ms. ELLIOTT. I, in fact, completed it after his arrest.

Senator LEVIN. You made some changes in the profile?

Ms. ELLIOTT. Correct.

Senator LEVIN. You added some things that were not there before the arrest; is that correct?

Ms. ELLIOTT. That is true.

Senator LEVIN. As a matter of fact, before he was arrested—if

you will look on page 51 of your document book—is it not true that

there was nothing in the client profile? 1

Ms. ELLIOTT. That is true.

Senator LEVIN. It was blank.

Ms. ELLIOTT. Yes, sir.

Senator LEVIN. Was that in keeping with your bank’s rules?

Ms. ELLIOTT. Absolutely not. I thought it had been completed. I

thought that we had gone back actually a year and a half before

that, and it was not. I thought that we had completed every one

of them. So when I went in and saw that it was blank, I do not

know what to say. I still do not know why it is blank.

Senator LEVIN. OK. Now, back in September 1992, you had received a e-mail, had you not, from Mr. Figueiredo? Am I pronouncing his name correctly?

Ms. ELLIOTT. More or less, Figueiredo.

Senator LEVIN. From Mr. Figueiredo, who was Mr. Montero’s assistant; is that correct?

Ms. ELLIOTT. He was the head of the marketing for all of Latin

America under Ed Montero, yes.

32

Senator LEVIN. And is it not true that you were then told that

this profile, which is called a CAM—is that right?

Ms. ELLIOTT. Yes.

Senator LEVIN. It is the management policy that that profile or

CAM be ‘‘used as the primary vehicle to store and document clients’ non-financial data,’’ and ‘‘Private Bankers be accountable for

reviewing, at least once a year, such information relevant to their

clients and ensure that it is as complete and updated as possible.’’

Now, that was September 1992. Had you gone back in any year between September 1992 and March 1, 1995 to look at that profile

and to update it or to fill it in?

Ms. ELLIOTT. I believed I had, Senator. CAMS was an evolving

system. It was first a system that basically was to record business

background information, to have information that was non-financial about our clients. It then became a system that we used as a

suitability vehicle. It was not a source of wealth system. And in

fact, it was not until much later. It should have been completed,

however, and I thought I had gone at least twice, and it was not

until March 1 that I realized it had not been completed.

Senator LEVIN. So despite the instruction that yearly you go and

look at that CAM, in fact, the CAM was left vacant or blank for

3 years; is that correct? From approximately September 1992 to

March 1995, so about 21⁄2 years, that was left blank, just the way

you see it; is that correct?

Ms. ELLIOTT. That seems to be the case, yes.

Senator LEVIN. Now, Mr. Figueiredo went on to state the following: ‘‘I am also asking each Country Manager and/or Investment

Center Manager to forward to my attention, no later than September 30, 1992, a consolidated plan covering their entire area of

responsibility and indicating the schedule of their reviews, i.e what

Private Banker will be reviewed by whom and when. This exercise

should take place once a year thereafter. I am taking this matter,’’

he said, ‘‘extremely seriously,’’—these are his quotes, September

1992—‘‘and I am asking you, in turn, to exercise your full managerial authority in getting this job done.’’

Now, Mr. Misan, you were the country manager, as I understand

it?

Mr. MISAN. Yes, sir.

Senator LEVIN. And, Ms. Elliott, you were the investment center

head for New York.

Mr. Misan, first, you were supposed to provide a consolidated

plan covering your entire area of responsibility and indicating a

schedule of reviews—which private banker will be reviewed by

whom and when. Did you provide that plan?

Mr. MISAN. Sir, I do not recall the specific plan referred to, so

I really could not comment on it.

Senator LEVIN. You do not have any recollection of being told to

file such a plan?

Mr. MISAN. No, I do not remember that.

Senator LEVIN. Well, then could you take—well, that is OK. The

deadline for all accounts to be completed was June 30, 1993 in that

e-mail. My question is: Did you do such a review, Mr. Misan?

Mr. MISAN. Sir, I recall at the time there was a lot of frustration

regarding the filling out of these CAMS forms. It was as I said in

33

1See Exhibit No. 9 which appears in the Appendix on page 136.

my opening statement, it was a very frustrating process because

there was—it was like trying to recreate history. There were many

clients who had been with the bank for many, many years, and

there was an attempt at putting financial information, personal information of clients that now a new private banker may have been

going to these long-established clients——

Senator LEVIN. I understand the complications. But despite that,

your boss, in December 1993, Mr. Montero, who is head of the

Western Division, sent another memo on the failure of bankers to

update these client screens, with new timetables to have all client

screens completed.1 All clients with accounts over $1 million had

to be completed by December 31, 1993.

Here is what he said: ‘‘I have decided to simplify the policy and

hold you, as the Manager, directly accountable for the adherence

to policy by your staff. Year-end bonuses for each of you will be

held for noncompletion of this assignment in the required time

frame. You must attest to the satisfactory completion of the above

[timetable] by December 31, [1993].’’

You were one of the people, Mr. Misan, that that memo was directed to. Did you lose any bonus?

Mr. MISAN. No, sir, I did not.

Senator LEVIN. Did you carry out his direction with all of its

complications? Did you do what he said you had to do, and did it

include Mr. Salinas?

Mr. MISAN. Sir, I believe at the time I did what was expected of

me to do. There were a number of private bankers who had filled

out the forms, and to their best efforts believed that they had completed the forms as needed to be. We were having a problem in establishing a standard, and when we failed, unfortunately, it was

because different private bankers had filled out the forms to what

they believed was an appropriate standard. It was over time that

the standard became clearer, and, therefore, we got, I think, the

levels that we needed and I believe are there now.

Senator LEVIN. Final question. Did you ever check to see whether

Amy Elliott had carried out the screen on Salinas?

Mr. MISAN. Sir, the only recollection I have of that is after, I believe, his arrest. I had been in New York, and at that time, I had

seen the CAMS screen, yes.

Senator LEVIN. Not before? Not during that 21⁄2-year period?

Mr. MISAN. I do not recall that, sir.

Senator LEVIN. Thank you.

Senator COLLINS. The hearing is now going to be recessed until

2:15 p.m.

I would ask Ms. Elliott and Mr. Misan to come back at that time.

We do have a few additional questions for you.

We are in recess until 2:15 p.m.

[Whereupon, at 12:17 p.m., a luncheon recess was taken.]

AFTERNOON SESSION [2:18 p.m.]

Senator COLLINS. The Subcommittee will come to order.

At this time, we will resume questioning from Senator Levin for

our witnesses.

34

1See Exhibit No. 10 which appears in the Appendix on page 138.

2See Exhibit No. 11a. and 11b. which appear in the Appendix on pages 141 and 142.

Senator LEVIN. Thank you, Madam Chairman.

Ms. Elliott, this morning, you noted that a strong factor in your

assessment of clients was your knowledge of and familiarity with

Mexican society, and from that, you knew all about the Salinas

family and their reputation.

You told investigators that you had never heard of any allegations of impropriety surrounding Mr. Salinas until 1995 when he

was alleged to have been involved in the murder of his former

brother-in-law. The California newspaper, the Sacramento Bee, in

August 1993, said the following relative to rumors of corruption besieging Mexico’s president.1 Part of the article reads as follows:

‘‘Rumors—all publicly unsubstantiated—are flying in government circles and among the national press that members of the Salinas family, and possibly even Salinas himself, are taking advantage of the president’s office to build

massive personal fortunes. . . . According to some of the

stories, Salinas’ siblings are involved in a wide variety of

unsavory business deals, peddling their influence, using

other people as . . . fronts and generally throwing their

weight around in their commercial dealings. Then there

are the whispers that Salinas himself has a secret share

in the country’s telephone monopoly, which was sold off

along with hundreds of government-owned businesses to

private investors.’’

Given your knowledge of Mexican society as the basis for your

approval of this account with Mr. Salinas and given the fact that

your boss, Mr. Reed, told our staff that he personally heard from

Mexican businessmen as early as 1993 about possible corruption

involving Rau ́l Salinas ‘‘inserting himself in local business deals inappropriately,’’ how do you explain, since you base your approval

of this account on your knowledge of the Mexican society and its

wealthy people, that you would have heard nothing? Despite all of

those rumors in 1993, and that even the CEO of your corporation

heard those rumors in 1993, and yet you heard nothing—how do

you explain that?

Ms. ELLIOTT. Senator, my knowledge of the Mexican society was

one of the things on which I based my acceptance of the Rau ́l Salinas account. I did travel to Mexico very frequently during the period, and I had never heard anything negative about Rau ́

l Salinas

or the Salinas family.

Senator LEVIN. Ms. Elliott, the bank has provided us transcripts

of phone conversations that took place the day after Mr. Salinas

was arrested on February 28, 1995, and three times in those conversations, you made references to having talked to God.

I want to make sure you have copies of these.2

Ms. ELLIOTT. I do.

Senator LEVIN. You have copies?

Ms. ELLIOTT. Yes.

Senator LEVIN. In the first conversation, talking now to Pedro

Homen and to Sarah Bevan, two other Citibank employees from

35

1See Exhibit No. 11a. which appears in the Appendix on page 141.

2See Exhibit No. 11b. which appears in the Appendix on page 142.

Europe, you said the following: ‘‘You know what I mean?’’ 1 Now,

this is the day after the arrest of Salinas. It is up on the board here

for you. ‘‘You know what I mean? Um, but after the day is over,

maybe I will feel different, I am sure I am going to be asked to

speak to God, Okay?’’ Pedro Homen says, ‘‘I’m sure.’’ Then, in that

same conversation, you say, ‘‘I expect that I will have to go up to

God and when I do I will let you guys know.’’

Later on that day, less than an hour later, you had another conversation in which you said the following: ‘‘Okay and we thank God

that the guy close to God is comfortable as well.’’ Then Sarah

Bevan said, ‘‘His right-hand man is comfortable,’’ and you said,

‘‘His right-hand man is comfortable? I love it.’’

Now, who was God in that conversation? Who are you referring

to?

Ms. ELLIOTT. This conversation took place almost 5 years ago. I

spoke to a ton of people that day, but if I can shed some light so

that I can try to explain to you, sitting where I am sitting here

today, I can say two things. When I feel like I have to speak to everyone in the world, today I would say I am going to have to speak

to God. I had never had—at the time I had been in the bank 27

years—it was the first time I had to deal with a client having been

arrested, for murder no less. And I knew that having to go and

walk around the floor, I was going to be asked by just about everyone if it was true.

So, to me, sitting here today, I can only believe that that is what

I meant then as well.

Senator LEVIN. Well, if God is the general public, as you say, the

conversation does not make any sense. [Laughter.] Part of that conversation—and this is Sarah Bevan speaking—‘‘Amy is OK. She

has been in since 6:30. Obviously, she is speaking to everybody,

God included, and she is speaking to the lawyer as well.’’ You are

saying you are not referring to a specific person?

Ms. ELLIOTT. I am saying I am not. I cannot speak to what Sarah

Bevan or Pedro Homen—I don’t know what they meant. I am saying that I am not.

Senator LEVIN. On another matter, the day after Mr. Salinas was

arrested, you said the following: ‘‘Everybody was on board on

this.’’ 2 Later in the same conversation, you said, ‘‘I mean, this goes

in the very, very top of the corporation this was known, Okay? On

the very top.’’ Then you said, ‘‘We are little pawns in this whole

thing, Okay?’’ Who were you referring to when you said ‘‘this goes

in the very top of the corporation this was known’’? Who are you

referring to at the very top of the corporation?

Ms. ELLIOTT. Bill Rhodes.

Senator LEVIN. When you said ‘‘We are little pawns in this whole

thing . . . ,’’ what did you mean by that?

Ms. ELLIOTT. I am sitting four or five down from the chairman,

and Bill Rhodes was and is the vice chairman of the bank. To me,

that’s pretty top.

Senator LEVIN. Thank you.

36

1The prepared statement of Mr. Ober appears in the Appendix on page 950.

Senator COLLINS. Thank you for your testimony. You are excused, and we will now ask for the next panel of witnesses to come

forward.

Our next witnesses are Alain Ober, who is the head of the African Unit for Citibank’s Private Bank Office in New York, and G.

Edward Montero, who serves as the Western Hemisphere Division

Head for the Private Bank.

First, we will hear from Mr. Ober who has been with Citibank’s

Private Bank for 8 years. He has served as the private banker for

President Bongo of Gabon and for Mohamed and Ibrahim Abacha,

the sons of General Abacha, the former head of the State of Nigeria. Mr. Ober will testify about his handling of those accounts.

Mr. Montero has been an employee of Citibank for 34 years and

has been with the Private Bank for 17 years. Pursuant to Rule 6,

all witnesses who testify before the Subcommittee are required to

be sworn.

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. OBER. Yes, I do.

Mr. MONTERO. I do.

Senator COLLINS. I would ask that you limit your oral testimony

to 10 minutes. Your written testimony will be printed in the record

in its entirety.

Mr. Ober, you may proceed first.

TESTIMONY OF ALAIN OBER,1 VICE PRESIDENT, CITIBANK

PRIVATE BANK, NEW YORK, NEW YORK

Mr. OBER. Thank you, Senator.

I am Alain Ober. I have prepared a statement that I understand

the Subcommittee has accepted as part of the record of this hearing, which I would like to briefly summarize.

I am originally from France, but I have lived in the United

States since 1972, and I enjoy joint citizenship in France and in the

United States.

I have worked for Citibank Private Bank as a relationship manager for African clients since 1991. I have been the Private Bank

relationship manager for President Omar Bongo of Gabon since

1994, 9 years after he opened his principal New York accounts.

I also handled the New York Private Bank accounts of Ibrahim

and Mohamed Sani Abacha, although I was not the relationship

manager for those clients.

Although procedures for obtaining information about a customer’s background and source of wealth have been in place since

I have been with the Private Bank and I have always conducted

myself in accordance with the prevailing standards, in the past few

years, the bank has significantly strengthened procedures. Today,

in addition to my supervisors who have always reviewed my customer profiles, my customer profiles are also independently reviewed by quality assurance personnel who are not part of the

business unit. This has resulted in a significant increase in the

37

1The prepared statement of Mr. Montero appears in the Appendix on page 953.

amount and quality of documentation I must provide in connection

with each of my clients.

In addition, the Private Bank has instituted a global system of

transaction monitoring. As part of this procedure, client transactions are independently analyzed by an automated system which

compares current transactions against historic trends and then

flags any unusual activity for review by an independent transaction

monitoring unit.

As the Subcommittee is aware, I have personally handled certain

accounts of public figures. Such accounts sometimes have been

hard to manage because of the difficulty in getting information

about account transactions directly from the clients.

In June 1998, the Private Bank significantly revised its public

figure policy, setting forth the bank’s standards for accepting and

maintaining accounts of politically prominent individuals and their

families. Pursuant to the public figure policy, we do not target public figures as clients, and a new public figure client may be accepted only with approval of the Public Figure Review Committee

which consists of the head of the Private Bank and other senior officials who do not have client-relations responsibilities.

Existing public figure accounts are reviewed annually by this

committee. As a result of this process, the Private Bank has refused or terminated accounts for certain public figures.

I am pleased to answer any of your questions.

Senator COLLINS. Mr. Montero.

TESTIMONY OF G. EDWARD MONTERO,1 SENIOR EXECUTIVE,

CITIBANK PRIVATE BANK, NEW YORK, NEW YORK

Mr. MONTERO. Thank you.

Good afternoon, Senator Collins, Senator Levin, and Members of

the Permanent Subcommittee on Investigations. My name is Ed

Montero, and I have spent my entire 34-year banking career at

Citibank. I must say that I have always been extremely proud to

be part of an organization with such strong leadership, integrity,

and values.

I would not and could not have devoted such an important part

of my life to Citibank if I had not believed this was so.

I began my career as a banker in the corporate bank and for the

last 17 years have headed the Western Hemisphere Division of the

Private Bank. This division focussed primarily on clients from

Latin America and Canada, but at different times had varying responsibilities concerning other regions of the world.

Most recently, I became the Senior Executive for Client Relationships in July of this year. Since 1996, one of my top priorities has

been to make anti-money-laundering policies and procedures in the

Western Hemisphere Division as strong as we could possibly make

them. I have also worked very hard to assist Mr. Aziz who, until

last month, was the head of the Private Bank in implementing a

state-of-the-art anti-money-laundering program for the entire private banking group, but before I comment on this new program

and how it came into being, I think it is very important for me to

emphasize my belief that it has always been Citibank’s policy to

38

avoid customers who might seek to use the bank for illicit or illegal

purposes. We want to do business with good people, and we want

to avoid bad people.

Now let me focus on the international side of private banking,

which I believe is your greatest area of interest today, and attempt

to explain some of the reasons why we have considered it appropriate in the past to provide confidential services to our clients.

Many of the clients in Latin America are individuals who fled the

wars in Europe and feel a heightened need to avoid unnecessary

dissemination of information concerning their wealth. In addition,

many countries in Latin America have been plagued in recent

years by acts of violence against wealthy and prominent citizens.

I have met a great number of our clients in their homes, and

many have a story to tell about a loved one, about a friend, a

neighbor, or a business associate who has been the victim of a kidnapping or extortion plot.

I had a wonderful client who was kidnapped and killed just last

year. Another story of a client who had recently visited me, he was

kept in a box with a broken leg for over 6 weeks and may never

walk again unaided. I could give you more examples, but the common thread is that a number of our clients have been driven by a

fear to a heightened desire for privacy, and these feelings have

been carried over into their banking relationships, which they wish

to be characterized by as much discretion and confidentiality as the

law permits. These are good law-abiding customers with very serious, legitimate privacy concerns.

Against that background, I want to emphasize that I am proud

of what we have done in the Western Hemisphere Division of the

private banking group. From the very beginning, we have been

quite vigorous in rejecting prospects that were questionable in any

way and in closing accounts when we learned that they were problematic, no matter how profitable.

In the Western Hemisphere Division, over the last 17 years we

have had over 50,000 accounts and only very few of which have

presented any problems. To achieve this, we have relied upon the

judgment and discretion of our individual bankers. However, what

we have learned over the past decade is that this is just plain not

good enough.

In order for our anti-money-laundering program to be as effective

as it needs to be to protect the bank, we need thorough documentation. We need strict account monitoring capabilities, and we need

careful independent reviews.

The lesson was a hard one for me. The crystallizing event occurred in 1996 when, for the first time, my unit failed an internal

Citibank audit. I was shocked and devastated by the audit results

at the time, but I realize now that it was ultimately positive.

I took the audit result very seriously and regarded it as a call

to arms. It led me and the management team in the Western

Hemisphere Division to focus on our anti-money-laundering program with a new intensity. As a result, I led a very vigorous corrective action plan to address the deficiencies identified by the audit,

and we have now regained our historically favorable ratings.

We created a full-time task force comprised of eight to ten senior

staff members to review and revise our procedures. We went over

39

each and every existing customer profile, a total of 19,000 profiles

in the Western Hemisphere Division. We investigated and corroborated missing information, and we assessed the desirability of each

customer relationship. By the way, all of these revised profiles were

reviewed by an independent Citibank quality assurance team.

Moreover, the Private Bank as a whole has made enormous

progress in recent years as regulatory standards and our own audit

standards have increased. I know that Mr. Reed has delivered to

your Subcommittee a statement by Mr. Aziz that details our institution’s progress in this area. As you will see, we now have, among

other things, a much more rigorous prescreening process for prospective clients, a more rigorous documentation and verification requirement for Know-Your-Customer information, as well as an

independent review of all such information.

We also have an automated funds-tracking system to monitor all

existing accounts and a requirement that multiple bankers interact

with all accounts.

We also give special scrutiny to accounts of public figures and

their families, and last, we have also clarified the supervisory

structure under our new system of global market management so

that there are now clearer lines of authority and supervision within

the Private Bank.

In conclusion, I am proud of the work my colleagues in the Western Hemisphere Division and indeed the entire Private Bank have

done over the last several years to address these important issues.

I thank you for the opportunity to address your Subcommittee.

I am now prepared to take questions. Thank you.

Senator COLLINS. Thank you, Mr. Montero.

Mr. Montero, you mentioned in your statement your concerns

over a negative audit that the bank received in 1996, and you described the corrective actions you took in response to that. Did you

discuss the results of this audit with any of your superiors at

Citibank?

Mr. MONTERO. Most certainly, we did.

Senator COLLINS. With whom did you discuss the audit?

Mr. MONTERO. We prepared the audit, correction action plan, in

the spring of 1996, shortly—immediately after the audit was received, and we presented it to my then-boss, Albert de Souza in the

middle of June of that year as a plan. We got his blessing, as well

as that of our audit organization, independent audit organization,

and once we had the clear signals, we proceeded to execute the

plan in the late summer and fall of 1996.

Senator COLLINS. Were there any other officials at Citibank who

outranked you with whom you discussed the audit report?

Mr. MONTERO. The officials, again, were Mr. de Souza who was

the EDP in charge of the group, my direct boss—we discussed it

with the most senior members of the audit team of the bank, as

well as our own internal audit team, and I believe knowledge of the

corrective action plan was shared with the top management of the

institution, certainly the top audit side of the institution.

Senator COLLINS. Were there other audits prior to the 1996 audit

which were critical or raised concerns about the risk of exposure

to money-laundering that applied to your group?

40

Mr. MONTERO. There were other audits that raised those topics,

but I think this was the most critical.

Senator COLLINS. The reason I ask the question is that it is my

understanding there was something like six internal audits of various parts of the Private Bank at Citicorp that were very critical

of the operations and the lack of adherence with policies and procedures. What was different about this 1996 report that caused you

to take the corrective action? Were the others less serious in your

mind, or did they pertain to activities that were not under your direct control?

Mr. MONTERO. I can’t comment on all the—I mean, I’m not sure

which ones you’re referring to, but there were audited—my organization that dealt with specific subunits, and they were not as critical in my opinion as the one that we are talking about here.

Senator COLLINS. I guess my concern is that there seems to have

been a pattern of negative internal audits that failed to trigger

much reaction, and that is what is of great concern to me. I think

that a lot of the problems that Citibank experienced would have

been avoided had the bank’s officials taken action earlier.

Mr. MONTERO. I may comment that this was a very comprehensive audit that covers all of the front-end sales organization of the

Western Hemisphere. So that is part of the reason we took it so

seriously, but beyond that, I think in the earlier part of the 1990’s,

the bankers and management all felt a commitment to get the job

done, but at the same time the business paradigm of the period

was for greater efficiency. All of industry was reengineering, reducing staff, and I think we misjudged. We misjudged the enormity of

the task and the amount of resources that were needed to get the

job done.

Senator COLLINS. Would it be fair to say, to use your phrase, that

the business paradigm of the period was to grow no matter what

to open these accounts, to make them profitable, to pump up the

financial results, even if it meant shortchanging some of the procedures and some of the safeguards that have been put in place?

Mr. MONTERO. No. Senator, I would not characterize it that we

were shortchanging the desire to have good clients for the desirability of having profits.

I mentioned in my prepared testimony that we have had in our

division a history of rejecting clients that were supposedly good and

turned out to be bad or rejecting prospects.

The problem was the enormity of tasks. There were several

things that were going on here. One of them was the basic chore

of the profiles, as has been previously discussed in prior testimony

by my colleagues. That was one.

Two, you had a new complexity in the business. The business

was moving from a banking-oriented business to a securities-based

business that had a lot more suitability requirements, a lot more

product complexities. So the job of the banker was becoming evermore complex, at the same time that we were saying, ‘‘Well, we

need to be more efficient and really watch carefully the addition of

staff,’’ and that’s where I really, sincerely, believe we should have

taken earlier action in staffing up. And once we did, once we put

the team together and said, ‘‘You guys, full time, we’re taking you

41

out of client services and we’re putting you in charge of getting this

job done’’—and then it got done, and we are there today.

The environment that we have today, I am convinced and I can

represent to you that some of the issues that have been raised here

would not happen today because we have an entirely different system and an entirely different support structure.

Senator COLLINS. Mr. Ober, did you ask President Bongo what the source of the $52 million that he used to open his private account was? This was back in 1985.

Mr. OBER. Senator, no, I did not, and the——

Senator COLLINS. Could you tell us why you did not? Don’t your

procedures require you to identify the source of funds?

Mr. OBER. At the time when I took over the account in 1994, I

pretty much took the account on a clean-slate basis. The account

had been open 9 years before my arrival at the Private Bank.

Senator COLLINS. I am sorry. I could not understand what you

said. That you took the account on a——

Mr. OBER. Clean-slate basis. There was not really information

available, and the bank may be criticized for lack of policies and

procedures at the time, but at the time I was not under the obligation to gather information of that type.

However, starting in 1994, one of my goals was to gather information about the sources of wealth of our client. Of course, as Mr.

Montero explained, today the situation will be different because

this will be an obligation of the KYC policies, and an account can

only be opened if we have a clear understanding of the source of

the initial funding of the account. And by that, I mean what it represented.

Senator COLLINS. Did you ever ask President Bongo directly

about the sources of the millions of dollars that he was depositing

in your accounts?

Mr. OBER. No, I did not.

Senator COLLINS. Why didn’t you pursue this?

Mr. OBER. Well, Senator, let me say that it was—it felt very

awkward to ask information, that kind of information to a head of

state, while at the same time I was able to gather the information

that I wished to obtain from reliable sources and I was able to develop information about sources of wealth of our client.

Senator COLLINS. Were you concerned that if you asked what you

viewed as intrusive questions about the source of President Bongo’s

wealth that you might lose the marketplace in Gabon?

Mr. OBER. Senator, I don’t think so. In today’s environment, I

would like to point out I would not have any choice today. In 1994,

maybe it was a question of choice. Today, there is no choice. I have

to ask the questions, and if the bank is not satisfied by the answers

that are given to me, then we will not accept the client.

Senator COLLINS. Were you concerned about the millions of dollars and that they might be from inappropriate sources? Were you

concerned at all about the millions of dollars that were being deposited in the account? Since you have said that you didn’t ask directly where is the money coming from because you felt somehow

it would be seen as inappropriate or a breach of protocol, were you

at all concerned that you might be handling money that did not belong to President Bongo?

42

Mr. OBER. If you allow me to put back your question in the context of the chronology. In 1994, when I took over the account, the

initial funding had taken place 9 years prior to that, and in that

period of time and during most of my role as a private banker for

President Bongo, there were very few times where there were

funds coming into the account. When I took over the account in

1994, for several years there were no major incoming funds into

the account.

Senator COLLINS. I want next to ask you about testimony from

the Subcommittee’s staff investigators. The staff investigators testified that for 3 years, you did not know that your clients, Ibrahim

and Mohamed Abacha, were the sons of the Nigerian dictator. Is

that accurate?

Mr. OBER. Yes, it is, and will you allow me? I see the light is orange. It will take a few minutes——

Senator COLLINS. Please go ahead.

Mr. OBER [continuing]. Because of the chronology of events.

Senator COLLINS. Let me tell you what I would like you to cover

in that chronology. What I need to understand is how you could

handle that account as someone who specialized in African accounts, as someone who has Know-Your-Customer regulations to

follow. How could you not have understood who these two individuals were? Please proceed, despite the red light.

Mr. OBER. I believe back in February 1992, my colleague from

London, Mr. Matthews, who was the relationship manager for the

Abacha brothers, told me that they would come—Ibrahim Sani

Abacha would come to New York to pick up some cash from our

tellers and—which is one of the things that happens between private bank branches.

I took advantage of Ibrahim Sani Abacha’s visit to chat with him,

and I found out that he was—he told me he was a businessman,

that he was in the process of establishing an airline company that

would run flights between Lagos and New York and decided that

there was a need for an account at the Private Bank.

At that time, there was no reference to the name Abacha.

Ibrahim Sani—the name that was referred to was Sani. Then I

asked the following—my colleague, Mr. Matthews, for a reference,

and the reference was the only time that I saw the name Abacha.

It referred to Mohamed and Ibrahim, if I remember, as the sons

of Zachary Abacha, a businessman from the northern part of Nigeria. At that time, the name Abacha didn’t ring any bell because

General Abacha at the time was a general in the army, but was

not president of Nigeria. So what I saw in these documents was

that the document was a very good reference. What mattered to me

was that they had been clients of the bank for 3 years. My colleague, Mr. Matthews, said they are good clients of the bank, they

are professional individuals. The account had been run properly.

So I put the reference into the file and forgot about that I saw

the name Abacha. That was not an important item. Then the next

time I heard about the name Abacha was a few weeks before the

death of Ibrahim Sani who died in an air crash. I had thought of

referring Ibrahim Sani and his airline company to my colleagues

at Citibank in Lagos as corporate prospects for the bank, and later

on, a few weeks later, my colleagues from Lagos called me and told

43

1See Exhibit No. 7 which appears in the Appendix on page 133.

2See Exhibit No. 12 which appears in the Appendix on page 143.

3See Exhibit No. 4 which appears in the Appendix on page 114.

me, ‘‘Do you know that Ibrahim Sani and Mohamed are the sons

of President Abacha?’’

I have to confess I was embarrassed. I was appalled, and that

was the second time I heard the name Abacha. And then we developed a strategy to close the account.

Senator COLLINS. Senator Levin.

Senator LEVIN. Thank you, Madam Chair.

I would like to ask you about some of the client profiles that we

have been talking about. First, on page 51 of the document book

that is in front of you is the profile 1995 of Rau ́l Salinas.1 It is a

blank.

Now, Mr. Montero, you had sent out very precise instructions 3

years earlier saying you wanted these profiles brought up to date.

You wanted them complete. You wanted documentation. You wanted the bank’s integrity to be protected, and yet, year after year, at

least 21⁄2 years, after the account was opened, Mr. Salinas’ account

was opened, that is what the profile looked like. Is that adequate?

Mr. MONTERO. No, that is not adequate, Senator.

Senator LEVIN. Now, the next profile I want you look at is President Bongo’s profile, which is page 77 in your book.2 This is President Bongo’s profile. ‘‘Nature of business: head of state for over 25

years.’’ Then it says, ‘‘Source of wealth: Self-Made as a result of position. Country is oil producer.’’ Would that comply with your current standards of knowing your customer and customer profiles?

Mr. MONTERO. No. Under our current standards, Senator, we

would require substantially more information and corroboration of

that information and approval of that form by an independent area

which we call our quality assurance unit. So the banker would

have to fill in. The banker would have to corroborate, and the independent unit would have to approve. So it would be entirely different today.

Senator LEVIN. Now, you had issued some pretty strong policy

statements back in 1991 and 1992, and let’s first take up your documentation policy in 1992. This is pages 11, 12, 13, and 14 in your

document book.3 This is directly from you. Page 12, you say ‘‘Profile, Source of Wealth.’’ Page 13, ‘‘documentation requirements . . .

have not always been complied with in a timely fashion. . . . [A]s

a rule, no new accounts should be opened without complete documentation.’’ Then you say at the end of page 13 here, ‘‘I would like

to reemphasize the importance of timely and complete documentation at the inception of a new relationship or account.’’ On the next

page, 14, ‘‘New accounts should not be opened without complete

documentation.’’ You said that about four times in that policy of

April 9, 1992.

Then, in the client acceptance document that you issued on September 27, 1991—that is page 21 in the documents, ‘‘It is critical

that we maintain the high standards that we have in place in regard to ‘knowing our customer’ and use the utmost diligence to

screen prospective new clients. . . . I expect each and every one of

44

1See Exhibit No. 6 which appears in the Appendix on page 127.

us to be familiar with the contents and to conduct ourselves accordingly.’’ 1 This is 1991 now, September.

Then, on the next page, ‘‘We only accept clients with integrity

and good reputation.’’ Then, down in Section 2(a), you say that ‘‘a

clear-eyed assessment of the integrity of the client, his business activities and source of funds at the acceptance stage and thereafter.’’

Would you say that that policy was not fully implemented in

cases that we have been discussing this morning, both Salinas and

Bongo, so far, and Abacha?

Mr. MONTERO. I think that the bankers involved did not record

adequately what they learned, and I regret that.

Senator LEVIN. Was this a lack of resources?

Mr. MONTERO. I believe it was—let me just back up and say that

the bankers in question are experienced. They have a high sense

of integrity, but they had an enormous job. As I tried to suggest

before, although private banking has been going on for years and

years, the way we have been practicing at the international phase

of it, it is a relatively new business, and we had not sized up

enough the amount of resources that we needed to get the job done.

We have done that now, and I believe we are there in terms of

what we need to protect the clients, the bank today on anti-moneylaundering issues.

Senator LEVIN. Is it fair to say that the policy really is not new

because you issued that client acceptance policy in September 1991

and it was pretty strong, pretty precise, pretty repeated—we want

documentation, we want it in the file, we want to know the source

of the revenue, of the source of the deposits, we want to know what

the business is? I mean, over and over again, you told your folks

in 1991 and in 1992 what the documentation policy was, and yet,

I think you would agree they fell short in many, many cases. Is it

not true, then, that the problem in those years after you issued the

policy was not that the policy was weak as that it was not implemented well by your people in the field in many instances? Is that

a fair statement?

Mr. MONTERO. Senator, I would say that we as a total business

system in the company had not figured out what we needed to get

the job done. The policies were largely there. We have tweaked

them. What we have done is we have given the bankers today some

aids, some prompts, and some real support, and the combination of

the tweaking of the policy and the added support and the rededication of actually very significant dollars, software—we have spent—

Mr. Aziz, I think, will testify—as much as $50 million in implementing some of these changes. It was that kind of an investment

that was needed to get the job done, and frankly, we hadn’t done

it back then.

Senator LEVIN. And because you had not done it, the policies

were not implemented in any full way in all cases. Is that a fair

statement?

Mr. MONTERO. They were not implemented in all cases. That’s

correct.

Senator LEVIN. What was the year you would say that that

change came about when the resources were finally put in there

45

1See Exhibit No. 13 which appears in the Appendix on page 144.

which could mean that the policies meant more than just paper

policies, but real policy? What year did that happen?

Mr. MONTERO. I can only speak for—well, I speak best for the

Western Hemisphere, and we really began to tackle that in 1996.

Senator LEVIN. All right. Now, in 1997, if you look at page 91,

we have got an account document, and this involves deficiencies in

Know Your Client and this relates to the Abacha sons.1

Know Your Client Deficiencies. Beneficial owner details is

checked. It is deficient. Source of wealth, deficient. Business backgrounds, deficient. Business affiliations, deficient. Source of knowledge, deficient. Public figure, investment centre head approval, not

present. That may mean not applicable. I am not sure. Use of account, deficient. I mean, every single deficiency is marked. That

looks like a zero batting average on that chart.

Mr. MONTERO. I have to say, Senator, I am not familiar at all

with the Abacha accounts. I had no involvement.

Senator LEVIN. All right. Let me ask Mr. Ober, then, about that.

Could you take a look at that?

Mr. OBER. Yes, Senator. I did——

Senator LEVIN. It is page 91. If this policy was finally—had some

funding behind it starting in 1996—this is a June 1997 document.

It looked like on the Abacha sons’ accounts, there was 100-percent

deficiencies.

Mr. OBER. Senator, I have never seen this document before. I believe this is a document that belongs to our branch in London, but

not to the account that I managed in New York because in——

Senator LEVIN. Does it surprise you to see these deficiencies

checked off this way?

Mr. OBER. Well, we—there is a similar—I mean, the document

looks different, but has the same substance that exists in New

York.

Senator LEVIN. Would you agree that these deficiencies existed

on the Abacha accounts in 1996—1997? Excuse me.

Mr. OBER. They did not when I handled the account in New

York, except for mentioning the true identity, which I corrected in

the profile when I found out.

Mr. MONTERO. I would say, Mr. Senator, if I could just comment

on one area, even though we began to check dollars and really finetuning of the policy in 1996, you must understand making all of

this happen involves—it’s an enormous amount of work, and it also

involves a culture change and that took place over 1997 and 1998.

It didn’t happen overnight.

Just in the Western Hemisphere alone, we completed by year end

1998, 19,000 profiles. If you divide that by, let’s say, 100 private

bankers that we had in the division, that was 190 per banker. That

is a huge task to get them up to snuff. So I think we need to understand that this took time. It couldn’t be done overnight.

Senator LEVIN. Starting with 1996, would you say?

Mr. MONTERO. Yes.

Senator LEVIN. Thank you.

Senator COLLINS. Mr. Ober, I have just one final question for you

about the Abacha accounts. You have testified that you did not reVerDate 11-SEP-98 10:07 Apr 05, 2000 Jkt 000000 PO 00000 Frm 00061 Fmt 6633 Sfmt 6601 61699.TXT SAFFAIRS PsN: SAFFAIRS
46

1See Exhibit No. 14 which appears in the Appendix on page 145.

alize who the Abachas were. Had you known of their close relationship, the fact that they were the sons of the Nigerian military dictator, would you have handled the account differently?

Mr. OBER. Yes, Senator, and as a matter of fact, when I heard

about their true identity, I discussed it with my supervisor of the

time, and we developed an exit strategy from that account.

Of course, today, with the public figure policy that is in place at

the bank, that could not happen because immediately these people

becoming public figures will have to be accepted by the public committee—Public Figure Committee of the bank.

Senator COLLINS. But if you do not identify them as public figures, they never get before the Public Figure Committee. Wouldn’t

normal due diligence identify these individuals as being closely related to a public figure?

Mr. OBER. Well, when I found out their true identity, then I

passed on the information to my supervisor at the bank, and it was

reflected in the profile of the clients at the bank.

Senator COLLINS. And you began to say that you then began to

develop an exit strategy?

Mr. OBER. That’s correct.

Senator COLLINS. Could you expand on that?

Mr. OBER. Yes. To go back, Ibrahim Sani had just died in an air

crash, and we had to remove his name from the account. So I developed the strategy with my supervisor that we would tell the surviving account holder on the account, Mohamed Sani and a gentleman called, I believe, Yaya Abubakar, that the account could not

continue under a special name account. It would have to show their

true name. The account will have to be under the name Mohamed

Sani Abacha, which we were convinced would trigger the answer

from Mohamed, then, ‘‘I don’t want a name in my—I don’t want an

account that shows my name.’’

Senator COLLINS. Because secrecy was an important requirement

for him?

Mr. OBER. That’s correct.

Senator COLLINS. And why is that?

Mr. OBER. Well, the people that are first originally, because they

were from Nigeria, which is a country, as we mentioned—where

corruption exists, but not where everybody is corrupted, and also

because, then, when they were—when we knew their true identity,

people that have a well-known name would want to have more secrecy about their banking transactions.

Senator COLLINS. Would there have been concerns by your clients that Citicorp might have asked more questions, that Citibank

might have asked more questions at that point about the source of

the millions of dollars of deposits?

Mr. OBER. I would answer this is possible, yes.

Senator COLLINS. Senator Levin.

Senator LEVIN. Could you take a look, Mr. Ober, at the document

on page 69.1 This is a memo to you from Christopher Rogers.

All right. Who is Mr. Rogers, first of all?

47

1See Exhibit No. 15 which appears in the Appendix on page 147.

Mr. OBER. Christopher Rogers is one of my supervisors. He is the

general market manager for Africa and is currently based in Johannesburg, South Africa.

Senator LEVIN. Now, he wrote you the memo in 1997, April,

about press allegations relative to Mr. Bongo, and it said here that

he is ‘‘unable to interpret the current press allegations’’—in the

fourth paragraph—‘‘insofar as they might touch upon the Bank but

would not be tempted to try because of the doubts it could raise

in people’s minds about our relationship with our customer. If this

is the case, we ought to be extremely careful about sharing such

information with regulatory authorities, because we can’t answer

for it.’’ He is advising you to basically make sure—do whatever we

can to make sure that this information does not get to the hands

of regulatory authorities. Then he says also, ‘‘we should stay as far

away as possible from this mess, unless and until any one of us has

firm or verifiable evidence which would lead us to suspect the

Bank’s interests are at risk.’’

Should you be staying away from allegations of a mess if you

want to know your client, or should you be following it very closely

if you are serious about knowing your client?

Mr. OBER. Well, Senator, in that particular case, I was troubled

by the allegation that I read in the French press where the name

of our client was indicated, and as a result of my concern, in spite

of what you may infer from Mr. Rogers’ memo, I contacted the legal

department of our bank to communicate the information that I had

for them to—for counsel to look at these allegations.

Senator LEVIN. So that you did not follow his advice?

Mr. OBER. I would agree with you.

Senator LEVIN. Pardon?

Mr. OBER. I agree with you.

Senator LEVIN. As far as you are concerned, was the advice of his

inappropriate advice—that you should stay as far away as possible

from the allegations?

Mr. OBER. Well, my conduct by—would indicate that we did not

agree entirely on that topic.

Senator LEVIN. There was another memo which Mr. Rogers

wrote, and this one is on page 75.1 This was in late 1998 when the

Private Bank began discussing closing the Bongo accounts, and in

response, the Private Bank’s top director here, Mr. Rogers, warned

against closing them because of the possible effect on Citibank’s

franchise in Africa.

Here are some of the statements he made, and I will ask you,

Mr. Montero, to react to this. This is some of the statements he

made in this e-mail. ‘‘Whatever internal considerations we satisfy,

the marketing fallout is likely to be serious.’’ Is that good reason

to keep an account open, because otherwise there would be marketing fallout, Mr. Montero?

Mr. MONTERO. No, it is not, Senator.

Senator LEVIN. Then he said that Tendin, which is the Bongo operation, had been ‘‘vitally instrumental in our franchise’s success

over the years. . . . Sam’’—and he is referring here to President

Bongo’s oil advisor, Samuel Dossou—‘‘helped the Branch considerVerDate 11-SEP-98 10:07 Apr 05, 2000 Jkt 000000 PO 00000 Frm 00063 Fmt 6633 Sfmt 6601 61699.TXT SAFFAIRS PsN: SAFFAIRS
48

ably over the last 2 years to obtain a more reasonable and rightful

share of public sector deposits,’’ with President Bongo’s ‘‘blessing.’’

Then he said this, ‘‘The probability of this support being reversed

indefinitely should be weighed seriously.’’ Is that a good reason for

keeping an account open, because the client is helping the bank get

deposits, Mr. Montero?

Mr. MONTERO. Well, I am uncomfortable, as I commented before.

I know very little about this account.

Senator LEVIN. Well, would that be good reason for keeping an

account open, because the client is helping the bank get deposits,

if otherwise it should not be kept open?

Mr. MONTERO. Well, if the account should not be kept open, as

a theoretical, that should not be the reason.

Senator LEVIN. If it violated your policies——

Mr. MONTERO. Yes.

Senator LEVIN [continuing]. It should not be kept open?

Mr. MONTERO. Should not be.

Senator LEVIN. All right. Would you think that the judgments expressed by Mr. Rogers is good advice from the Bank’s top manager

in Africa? The Private Bank’s top manager in Africa now is giving

you this advice: ‘‘Keep this stuff from regulatory agencies. Keep

them away from this mess.’’

Mr. MONTERO. Not acceptable.

Senator LEVIN. And we should be very careful before we close accounts because it could have a negative effect on deposits. That’s

not acceptable either?

Mr. MONTERO. I’m not familiar——

Senator LEVIN. Or is it? Is that acceptable?

Mr. MONTERO. No. It’s not acceptable. I’m not familiar with the

circumstances here, but keeping stuff away from regulators is not

what our policy is at all. I am sure of that.

Senator LEVIN. And the second one is if this client does not meet

the standards of your bank in terms of integrity, reliability, source

of revenue and so forth, then the fact that that person is either

making deposits or obtaining deposits for the bank would not be a

good reason to keep an account open which would otherwise be

closed. Would you agree with that?

Mr. MONTERO. I agree with that.

Senator LEVIN. All right.

Mr. MONTERO. Yes, Senator. Today, this would not happen. Let

me assure you, this would—we would not have that today.

Senator LEVIN. My time is up. Thank you.

Senator COLLINS. Senator Cochran.

Senator COCHRAN. No questions at this time.

Senator COLLINS. Do you have any further questions, Senator

Levin?

Senator LEVIN. A few more.

Senator COLLINS. Senator Levin, you may proceed.

Senator LEVIN. Thank you.

In September 1998, when the Nigerian government was seizing

funds from General Abacha’s relatives and associates, the London

Private Bank, Citibank’s Private Bank there, helped his sons transfer $39 million out of London to Swiss accounts and elsewhere.

Citibank not only performed the transfer, it approved a $39 million

49

1See Exhibit No. 16 which appears in the Appendix on page 148.

overdraft to the sons’ accounts so that they could transfer the

money immediately without having to pull funds from a time deposit that carried a penalty for early withdrawal.

So, despite now what we know about—or you knew about the

Abacha sons, the bank actually facilitated not just the transfer of

money, which was the subject, by the way, of a government investigation at the time, a Nigerian government investigation, but the

bank facilitated the transfer of that fund by in effect lending the

Abacha sons $39 million for a short period of time, allowing an

overdraft, and then repaying itself that loan when the time deposit

became due.

Was this appropriate conduct for your Private Bank in London,

in light of the Nigerian government investigation which was going

on and their seizure of funds from General Abacha’s relatives and

associates?

Mr. MONTERO. Senator Levin, I would rather not comment because I am not at all familiar—at all—with the Abacha account or

the transactions that you have suggested.

My sense would be to involve counsel and to really take a deep

read on this, but I just can’t comment. I can’t be helpful.

Senator LEVIN. Mr. Ober, under the current regulations of the

bank as you understand them, as they are now being hopefully implemented, would this $39 million loan to the Abacha sons to help

them transfer $39 million from your Private Bank in London to

Switzerland be facilitated by you while the Nigerian government is

investigating them for corruption and other crimes? Would that action still be taken?

Just to be very precise, take a look at the document on page 89,

September 15, 1998.1 Here, the purpose of this memo is to seek approval to overdraw the client’s call account by $39 million. Then it

says, ‘‘The client has requested the remittance of these funds urgently. The total amount of the fixed deposit is $42 million. The

breakage of this would prove too costly for the client.’’ In other

words, the client is going to have a cost here if he has to wait for

his CD to come due.

Would you under these circumstances, this year, current rules,

all the resources, all that new software, all that legal advice you

are now getting, all the care you are now taking hopefully relative

to clients and private banks—would you be lending them $39 million so that they could transfer money out of your Private Bank

while a Nigerian government investigation of corruption is going

on?

Mr. OBER. Senator, I cannot comment on the document that

comes from Citibank-London, and this is the first time I have seen

the document.

However, I can answer your question and say in theory, in the

course of the new KYC transaction trend monitoring, the transaction trend monitoring will pick up the—a debit for $39 million

leaving the account, and that will require a detailed explanation.

That will be reviewed by our colleagues from the transaction trend

monitoring—and if you allow me, there is a reality to the KYC polVerDate 11-SEP-98 10:07 Apr 05, 2000 Jkt 000000 PO 00000 Frm 00065 Fmt 6633 Sfmt 6601 61699.TXT SAFFAIRS PsN: SAFFAIRS
50

1The prepared statement of Mr. Reed appears in the Appendix on page 957.

icy and transaction trend monitoring that has been in place for 2

years.

As a private banker, my life has been made much more difficult,

much more paperwork, much longer hours as a result of complying

with that policy, which the bank takes very seriously. The idea is

to get it right the first time because otherwise our colleagues from

the KYC unit or the transaction trend monitoring are going to

come back at me time and time over until I get it right.

Senator LEVIN. Thank you.

Mr. MONTERO. And I may just add, Senator, in terms of the theoretical—not theoretical practice, but the practice would be, not

knowing this name—this name, however, pops up as a public figure

and it goes to the committee and the committee makes an assessment.

There is a scandal brewing in Nigeria. We want this name out.

So that would be the—so we wouldn’t get as far as what’s been

suggested here of the $39 million today.

Senator LEVIN. Thank you.

Senator COLLINS. Thank you, gentlemen.

I would now like to welcome our final witness for this afternoon,

John Reed, the chairman and co-chief executive officer of Citigroup.

Mr. Reed will be accompanied by Todd Thomson, the newly appointed chief executive officer of the Private Bank, and Mark Musi,

the chief compliance and control officer for the Private Bank.

Mr. Reed has been an employee of Citicorp since 1965 and has

been its chairman since 1984. Since Citicorp’s 1998 merger with

Travelers Group, Mr. Reed has been Co-CEO of Citigroup.

Pursuant to Rule 6, all witnesses are required to be sworn in. So

I would ask that you please stand and 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. REED. I do.

Mr. THOMSON. I do.

Mr. MUSI. I do.

Senator COLLINS. Thank you.

Mr. Reed, as you know, we have asked that you limit your oral

presentation to about 10 minutes. We will put your entire testimony in the record. You may proceed.

TESTIMONY OF JOHN REED,1 CHAIRMAN AND CO-CHIEF EXECUTIVE OFFICER, CITIGROUP, NEW YORK, NEW YORK, ACCOMPANIED BY TODD THOMSON, CHIEF EXECUTIVE OFFICER, CITIBANK PRIVATE BANK, NEW YORK, NEW YORK; AND

MARK MUSI, CHIEF COMPLIANCE AND CONTROL OFFICER,

CITIBANK PRIVATE BANK, NEW YORK, NEW YORK

Mr. REED. Thank you very much, Madam Chairman, Senators.

My name is John Reed, and as has been indicated, I am chairman and Co-CEO of Citigroup. I think for the purposes of this session, I also have been chairman and CEO of Citibank for the last

151⁄2 years.

51

I am accompanied, as was indicated, by Todd Thomson who is

now responsible for the Private Bank and by Mark Musi who is responsible for compliance and control within the Private Bank.

As you know, Shaukat Aziz, who had spoken with some of you

and who has submitted some comments, is no longer running our

Private Bank because he has been called back and is currently the

Minister of Finance in his home country of Pakistan and therefore

is not able to be with us, although he did send some comments.

What I would like to do, if I could, Madam Chairman, is make

a few comments that hopefully will help with the discussion that

will follow.

First, I would like to thank you for the opportunity for participating. Obviously, some of the transactions that we are going to

talk about today have their negative aspects, and some of the

things that we will be talking about won’t be fun, but I think we

should understand that this discussion about money-laundering,

the discussion about private banking is serious. And frankly, to

have a public discussion is useful and helpful because I believe that

it is going to be important for all of us to see an evolution of a set

of global standards with regard to the conduct of this kind of business, and I think discussions such as these, and hopefully others

that will come afterwards, will lead to an evolution of a set of

standards not only for Citibank and U.S. banks, but indeed a set

of standards that may characterize the business going forward.

So, to the extent that these hearings help to move that ball forward, I would say that it is a very positive thing and I appreciate

the opportunity to be a part of it.

If I could for a second talk about Citibank, we are somewhat of

a singular institution within the United States. We have for almost

100 years now, dating back to 1902, had operations in virtually all

of the emerging markets of the world acting not only as a crossborder banking organization, but in fact operating as a local bank

in each of these emerging markets around the world. So, as you

and your Subcommittee Members know, we today are in the situation where we operate in approximately 100 countries around the

world, and I think we are the only major financial institution in

the United States that does operate as a local bank in virtually the

entire world. This obviously means that we are really at the center

of much of the activity that we are talking about today, and it

raises particular burdens and particular problems for us. And it explains to some degree why it is that it is Citibank here and not the

First National Bank of Kenosha or some other U.S. institution because we really are in the center of these activities.

As has been well brought out, there are some real tensions in

this business. In the last 20 years, we have seen the growth of

criminal and illegal monies that are in the hands of terrorist organizations, that are in the hands of people dealing in drugs, that are

in the hands of people who are involved in corruption. This did not

used to be a problem.

Twenty years ago, there seemed to be less of this kind of money

around, and I think it is also true that we were living in a world

of capital controls at that time, most of which have been taken

away. And the result is we truly have a global economy on our

hands, one in which legitimate monies move around, but one in

52

which illegitimate monies move around in ways that were not true

20 years ago. So this raises problems to the business that are new

to us and raise difficulties that are the subject of your discussion

now.

There are also tensions with regard to what is secrecy and what

is privacy. I believe very strongly that customers of the bank have

every reason to expect that their personal financial life would be

respected and privacy would be a characteristic of our relationship,

and issues of privacy are very topical today in the banking industry

and that is something where we in the industry are held, I think

quite correctly, to a very high standard.

At the same time, you could go from privacy to secrecy, and you

could move into an arena where you are trying to obscure the

movements of money for reasons that don’t have legitimacy, and

there is a tension there. We are not able to erase the issues of

using secrecy to hide things in part because of privacy, and I think

Ed Montero in some of his testimony made an accurate assessment

about that from a customer’s point of view how important privacy

can be and to what extent it could be something that is significant

in their life and something that they expect the bank to maintain.

So there clearly are tensions in this business. There are tensions

that come from the world we live in, tensions involving secrecy and

privacy. There are tensions associated with what we consider to be

an appropriate source of wealth as contrasted to what these feelings might be in other kinds of societies. So it is a tough business.

We will be talking during today’s session about four or five

cases—a few cases that we have been involved in—in the Private

Bank at Citibank. These are by definition difficult cases. I think it

is very clear in the testimony you have heard to date that in some

instances our behavior is legitimately open to criticism, and we

have acknowledged that this is the case and we understand it.

At the same time, I believe that these cases are full of learning.

It is learning that we have taken very seriously, and I think it is

very fair to say that today much of the learning from these cases

and the discussion that we are having this afternoon is embedded

in the positioning of the private banking business as we run it

today and in the policies and the practices that we have within

that business.

So, while there is much here about which we are not necessarily

proud, I think it is fair to say that there is some learning here that

we have reacted to and is currently embedded in our business practice.

I would say in running a big company—and we are a big company. We have over 180,000 people around the world, as I indicated, operating in 100 countries around the world. You have to

rely on people and practices. In order to run a business, you must

rely on having the right people in the right jobs. These people have

to have certain skills, certain knowledge, certain attitude, and certain behavior which they bring to their job, and you have to surround those people with a set of practices that provides a matrix

within which they do their job.

So the mechanisms that we have for bringing about change have

to do with having the right people in the right job, the wrong person out, and having a set of policies and procedures that surrounds

53

the activities of government and individuals, and you have heard

a lot of testimony today about the necessity of having policies and

procedures and then the cultural difficulties of having those become the real framework within which business is conducted.

We also are going to be talking during this session about internal

audits. These are internal audits from our own audit staff. Starting

back in 1990, we made a concerted effort for reasons that were

compelling at least to me to upgrade the quality of our audit, to

toughen it, to toughen the standards, to change the standards, because we believed back at that time that we were facing a set of

operational problems that required a toughening of internal standards, and this started way back as far as 1990.

The audit reports that you will see have some harsh comments

in them, and I think they should. We are pleased that they do because these were comments from professional auditors who found

some of the things that we were doing not up to standard.

For the purposes of our discussion this afternoon, it would appear as if the principal thrust of these audits had to do with the

private banking and knowing your customer and the adequacy of

those kind of procedures. The fact of the matter is they had a much

broader context. They had to do with the problems of control and

compliance that we had not only in the Private Bank, but across

the company, where we were seeking tougher standards, and I

think it is fair to say that during this period of time that we are

talking about, there was an overall emphasis within the company

of tightening standards. And I think that some of the audit reports

that you will be talking about this afternoon did in fact have their

desired effect. They captured the attention of the management.

They captured my personal attention. They captured the attention

of the Audit Committee of the board, and they did result in corrective actions being taken.

And I can say to you—I believe you know this, Senator—that as

we speak today, the Private Bank has 100-percent good audits,

meaning four and five in our rating system, which was not the case

during the period of time that we are talking about, and this

change came about because of some of the pressures that resulted

from these bad audits.

In summary, I would say that there are some key questions that

we are really dealing with. The first question is can this business,

the private banking business—is it legitimate? Can it be legitimately part of an American bank’s business activities, and can we

all feel comfortable with that? My answer to that question is yes.

I have thought about it. I have discussed it. I have in some instances in my career been in business situations where I was not

comfortable with the business, and in those circumstances, we have

gone out of them, out of the business, and we have asked that

question about the Private Bank. I think it is a good business.

The second question is, can it be run properly. I think the answer to that question is yes, in spite of the difficult environment,

in spite of the tensions I made reference to. I believe it can be run

profitably, and the final question you have to ask is, hey, what

kind of company is Citi, what kind of values do we have, what kind

of people are we.

54

Let me tell you from a personal point of view. Let me tell you

also as the chairman of this company. We are honest people. We

do not want to do business with people with whom we are not comfortable. There is no need to even get close to any lines in order

to achieve our business purposes, and I, like some of the others

who have testified to you, am quite proud of my association with

this company, and I feel very comfortable about the moral quality

and the standards that we have throughout the company.

Thank you very much.

Senator COLLINS. Thank you, Mr. Reed.

Mr. Thomson or Mr. Musi, do you have any comments you would

like to make at this time?

Mr. MUSI. No. We are available for questions.

Senator COLLINS. Thank you.

Mr. Reed, I have read the Subcommittee investigator’s report. I

have listened carefully to the testimony today. I have reviewed

your internal audits. I have read the GAO report on the Salinas

case, and I have to tell you that it does not paint a pretty picture.

And it leaves the basic question in my mind, and that is how did

a financial institution with all the resources that Citibank has,

with all of your sophistication, with all of your expertise, become

vulnerable to money-laundering?

Mr. REED. Well, Senator, I think I made reference to this. We are

a human organization. We clearly have had a number of instances

where we have failed to follow policies and so forth.

I do think that we are talking about five or six cases out of a

large number. I have never felt that there was a pattern across the

company that seriously raised issues about our ability as a total

enterprise, but as I said to you in the beginning, we have here

some examples of some transactions about which legitimate criticism can be made and I think that we simply have to recognize

that in some of our activities and some of our behavior we have

had failures.

Senator COLLINS. I could understand the problem occurring if it

were an isolated case or two, but that is not the results of your internal audit. That is not the picture that is drawn when you go

through the audits.

Let me take you through some of the audits. In May 1995, the

internal audit of the Private Bank’s Trust and Estates Unit noted

that the rating for this audit is a ‘‘3’’. Now, I believe I am correct

that it is a ‘‘1 to 5’’ rating——

Mr. REED. Correct.

Senator COLLINS [continuing]. Where I believe one is the worst.

Is that correct?

Mr. REED. That’s correct. Yes, ma’am.

Senator COLLINS. So this was a ‘‘3’’. It noted that it was a decline

from the previous rating of ‘‘5’’.

The auditors went on to say, ‘‘the unit does not perform effective

Know-Your-Customer procedures before accepting account referrals

from private bankers. As a result, customers attempting to launder

money may not be identified. This exposes the bank to civil penalties and criminal charges. Administrators rely on private bankers

to obtain KYC documentation. However, our review of 15 accounts

shows that this process is ineffective.’’

55

Were you aware of this particular audit? This is the May 1995

audit of the Trust and Estates Unit.

Mr. REED. I doubt that I read that specific audit.

Senator COLLINS. Who would have been aware of this audit?

Mr. REED. The people who run the unit that is being audited, the

immediate supervisors above them, and obviously all of the control

staff within the Private Bank.

Senator COLLINS. What kind of rating would trigger your attention? What would cause an audit to be brought to your personal attention?

Mr. REED. Well, actually what happens is, first of all, I have a

personal relationship with the chief auditor on an informal basis.

If there was an element within an audit that that person became

concerned with, it probably would be informally brought to my attention quite independently of what rating might be associated

with the audit.

When you begin to have units whose audits are in the ‘‘2’’ category—we have one instance of a ‘‘1’’, but they are highly unusual—I would become aware of that.

If we get audits where the reply to the audit appears not to be

responsive, because we have had a problem of people not responding appropriately to audits, I would get involved. In fact, I believe

it was in early 1997. I started a process with two or three of my

senior colleagues to review. We had a meeting every 2 weeks, every

other week, and I went over the reply to audits where the reply

didn’t seem to us to be appropriate and for the purpose of tensing

up the system. So any sets of audits in the two category where the

replies didn’t look good, I would have seen. Anything that the chief

auditor thought I should be aware of, I traditionally was aware of.

I tend not to read audit reports per se, simply because of the

number of them.

Senator COLLINS. Let me ask you about another audit. In June

1995, Citicorp audited its European Private Bank, and it did assign

it a ‘‘2’’ in this case. The auditors specifically noted that ‘‘Senior

Private Bank management does not enforce the development and

implementation of compliance programs’’ and says ‘‘this issue requires immediate attention by Senior Management.’’ Is this an

audit that came to your attention?

Mr. REED. I don’t recall that specific one, but I would think the

answer would be yes, and I became aware, I would say, in—first

of all, if you go back in the history, I became quite concerned in

1990 that I was not comfortable with some of the operating environment of the company. So I made a change to our auditor in

1990, and I brought somebody in from Ford Motor actually, Dennis

Green, who would come in as an outsider with a new set of eyes

and tighten up the capabilities and professionalism of our audit department. I specifically was trying to tighten up our operational

competence.

So I started by strengthening the audit department, and it was

very clear to everybody in the company that I personally was putting a lot of time and effort and was maintaining very close communication with the auditor.

I then started making sure that the audit process at the most

senior level was taken seriously, but to your point, I would guess

56

that sometime in the 1994 or 1995 time frame, it became quite

clear to me that we had two pockets of problems. We had a set of

audit problems associated with trading activities, the back office

associated with trading, which, of course, is very dangerous because if you get out of control there you can get significant losses

quite quickly, and we had a concentration of problems in the Private Bank, which I think stemmed from managerial practices and

some of the points that have been raised by yourself and some of

your colleagues on this Subcommittee.

I started the process of bringing about change. It was clear when

Alvaro de Souza came into this business, but it was true also when

Rukavina ran the business before that I had a personal requirement. When I put people in jobs, I tend to sit them down and say

these are my concerns, this is what I am looking for you to do, and

I think back with Rukavina, which dates back to September 1994,

with Alvaro de Souza who came into the job in January 1996. I

made quite clear to them that I was concerned about the control

environment and I was concerned about the audit environment in

these areas, and that concern had stemmed from some of these reports that you make reference to.

Senator COLLINS. The next audit I want to mention must have

rung some alarm bells because, in this audit, which was December

1995, Citicorp audited the Swiss Private Bank front office and assigned it a ‘‘1’’. The auditors noted that the rating indicates that

the office is operating in a severe [sic] deficient manner, and it specifically cited that ‘‘due diligence and money-laundering regulations

were not being observed satisfactorily and that the use of pseudonyms to protect client confidentiality is not an acceptable corporate

practice.’’

I find this audit to be particularly troubling since the head of the

entire Private Bank was based in Switzerland and his office received an extremely poor score, the lowest possible rating. What

was your response to this audit? Was this one brought to your personal attention?

Mr. REED. Yes. I read that audit personally. As I said before, I

had already identified the problem before that. This confirmed it in

living technicolor, if you like, and it made very clear that we had

a significant set of audit problems, and they were not, by the way,

in any sense limited simply to Know-Your-Customer procedures.

They were far broader than that in terms of their scope, and the

problem was pervasive and spoke to an issue of management.

So, yes, I did read the audit, and as I say, I took it very seriously

and we started a process that has led to corrective action.

I would say this. Even though we had audits that showed that

policies and procedures were not being appropriately followed, I

had no indication that we were making a bunch of bad decisions

because of it. Now, that is not an excuse. You must operate with

policies and procedures, and they either are right and you follow

them or you change them, but the point is if I had reason to believe

that the operation of the business was putting the company at risk,

I would have closed it down quite independently of audits or anything else.

57

1See Exhibit No. 17 which appears in the Appendix on page 149.

So getting a bad audit says you are not following policies and

procedures. You obviously have to correct this. You have got to

check, correct the people and so forth and so on.

The real question is were we doing things that were going to result in severe damage to the company. I did not believe that that

was the circumstance.

Senator COLLINS. What concerns me, Mr. Reed, is this was not

the last of the bad audits, the bad news. In May 1996, there was

an internal audit of the Latin American Accounts Office. It got a

‘‘2’’, and, again, money-laundering was specifically noted. In June

1997, there was an audit of the Private Bank in Canada. The auditors assigned a score of ‘‘3’’ and specifically noted major risks related to money-laundering. And indeed, as late as September 1997,

when Citibank audited its Private Bank in Switzerland, the score

of a ‘‘3’’ was assigned.

Now, I will grant you, that is a good improvement over a ‘‘1’’, but

once again there are specific criticisms about the vulnerability to

money laundering. So my concern is that this is a 3-year period.

This is not an isolated audit of one small branch. It seems to me

to be that systematic pattern of deficiencies that allowed Citibank

to be vulnerable to money-laundering.

Mr. REED. I think you are correct. I just checked the records

here. There was a 3- to 4-year period of time. So that is during the

period which we had every reason to believe that we had a problem

in terms of controls and audits and so forth and so on.

Starting in 1993, my general assumption is audits are from 8 to

15 months, sort of lagging indicators. They describe conditions

about then. It really wasn’t until 1997 that we began to see

changes; 1998, we saw significant changes; and 1999, we have 100

percent in the four and five category in the Private Bank.

So, if you look backwards, you would have to say that in that period, 1994, 1995, into 1996, there was reason to believe that we did

not have an acceptable set of standards in place, and you and I

would agree that it is approximately a 3-year time frame.

Senator COLLINS. Senator Levin.

Senator LEVIN. I want to now start in 1997 when you just indicated that you began to see real changes, not just stated policy

changes, but actual changes in the way the Private Bank was operating.

Yet, in 1998, the Federal Reserve required the Private Bank to

report every 3 months to the Audit Committee and lifted that requirement only about 6 months ago. Were you aware of that?

Mr. REED. Yes, sir, I was.

Senator LEVIN. What is the need for secrecy in private banking?

And I do not here mean confidentiality, and I want to just spend

a minute with you on the difference.

Should our banks be setting up secret bank accounts in secrecy

jurisdictions which are not subject to legal process for regulatory

oversight and possibly civil process? In other words, just to give

you an example, you have got a brochure here which says, in its

table of contents, ‘‘The Bahamas, the Cayman Islands, Jersey and

Switzerland, the best of all worlds.’’1

58

I will ask you in a minute why they are the best of all worlds,

but why should our banks be setting up accounts in secrecy jurisdictions that are not subject to the same legal process for regulatory oversight or civil process which a bank account would be

subject to here in the United States, or should banks no longer be

doing that?

Mr. REED. Senator, my sense of it is this. We have to run a business. We have to run a business in the world the way we see it.

We would not do business in an environment where we didn’t

think there were appropriate mechanisms, safeguards, and so forth

to run a bank, and we do business every place in the world. There

are some places and some circumstances where you simply would

not be able to run a bank, and if we find ourselves in those circumstances, I think there is a record of our simply withdrawing or

shrinking down the business to the point where it doesn’t exist.

A number of these places characterized by secrecy are perfectly

respectable places. I think Switzerland would generally be described as a well-developed society with a rule of law. It happens

to have a set of secrecy laws surrounding banking that you might

find not to your taste.

I personally believe that if we are going to be in this business

that we have to operate in the parts of the world where business

is and where customers would expect you to be, and if there was

something about the legal structure that precluded us as a bank

from running our business, we wouldn’t be there. If there was

something about the legal structure that precluded our regulators

from doing an adequate job of regulating us, they wouldn’t let us

be there. We have to apply for permission to open a branch, and

if our regulators, the Fed or the OCC or whoever, felt that it was

a jurisdiction in which they couldn’t meet their responsibilities,

they simply would turn us down. So I don’t believe that it’s a fair

comment to suggest that because a Nation chooses to have a set

of secrecy laws that that means it is an environment in which a

bank should not operate.

Senator LEVIN. Would you object if the Federal Reserve or the

OCC decided that you or no other bank should be allowed to open

up accounts in any jurisdiction where its process would not be able

to reach? Would you have any problem with that if they then

changed their rule on that?

Mr. REED. As long as you had a broad description of what you

just said there.

If they couldn’t effectively do their job, I don’t think they’d let us

be there today. So I’d have no problem whatsoever. They obviously

have a legal mandate to do their job.

Senator LEVIN. I do not know how much of this morning’s testimony you heard, but I will tell you this, that I was deeply disturbed by this testimony in a number of ways. What struck me perhaps the most is that we had in April 1992 and in September 1991

very clear policies of your bank that went out to your people who

are running the Private Bank. And these policies had to do with

making sure that there was, in the words of the policy, ‘‘a cleareyed assessment of the integrity of the client, his business activities and the source of funds at the acceptance stage and thereafter,’’ and many other provisions about documenting things and

59

having records which were obviously ignored in the years after

these policies were adopted by the bank.

Did you hear this morning’s testimony, by the way?

Mr. REED. I heard that portion you are making reference to.

Senator LEVIN. Were you troubled by the fact that policies of the

bank were not implemented in these years until 1997?

Mr. REED. Let me be honest in my reply here. Let me say I felt

good that it was so clear that we had these policies. I have been

aware that we had these policies and their equivalent, frankly, for

the 30-some-odd years I have worked in the company. We have always wanted to know our customers, wanted to know why they

were dealing with us, so forth and so on. These were very clear,

as you point out yourself.

I was distressed that it would appear that there is no record of

people having followed these policies from a paperwork implementation point of view, and obviously, there was not due diligence and

so forth and so on.

I don’t believe that at this period of time across the business of

the company, there was ever any pattern of us being a ‘‘easy bank,’’

a bank where dirty money comes because they know that we won’t

keep track of it. I don’t think there are many examples of us taking

customers who are clearly on the other side of that line.

There have been errors, but I was not concerned that said, hey,

were we really running this company poorly at that time, and so

I had a mixed set of feelings as you were asking your questions.

Senator LEVIN. You told our staff investigators, Mr. Reed, that

you had heard from Mexican businessmen as early as 1993 about

possible corruption involving Rau ́l Salinas ‘‘inserting himself in

local business deals inappropriately.’’ How is it, then, that he became a client of a Private Bank? Apparently, what you had heard

was never transmitted to the folks who were considering him as a

client, or was it?

Mr. REED. First of all, I never repeated it to anybody until asked

as a part of this investigation, and so it wasn’t transmitted.

Second, I think if you look at the minutes of my talk with your

staff, I said 1993 or 1994, and frankly, I am trying to figure out

which it was.

The other thing is I think you would find in my communication

with your staff is I didn’t use the word ‘‘corruption.’’ I said I had

heard, and this is true. I had been in Monterrey, Mexico, calling

on some customers, played some golf. After golf, I was sitting

around the table and a couple of these people were talking to each

other, and they made the comment that led me to believe—first

time I had heard any sense of impropriety on the part of the Salinas family, and as you know, I knew the Mexican situation reasonably well—of any kind of misbehavior.

And what was implied in the conversation was that there was a

brother—I didn’t even know his name—of the president in

Monterrey who was getting himself involved in business deals because of the relationship with his brother, and that this could embarrass the president.

I don’t believe I used, nor would it have been proper to say that

there was any sense of corruption. There was a sense of possible

embarrassment to the president, and I didn’t repeat it because I

60

1See Exhibit No. 18 which appears in the Appendix on page 151.

don’t make generally a sort of policy of repeating this type of comment about which I know nothing.

Senator LEVIN. When Mr. Salinas was arrested, the head of your

Private Bank at the time, Mr. Rukavina, suggested that Citibank

move Mr. Salinas’ assets to Switzerland for secrecy purposes.1

Mr. REED. I am aware of that comment.

Senator LEVIN. Here is the conversation. Mr. Rukavina, ‘‘Now,

the thing is whether that—whether those accounts shouldn’t be

brought to Switzerland.’’ ‘‘The ones in London?’’ ‘‘Of course.’’ ‘‘They

are held under the trust, right?’’

And then this is what then happened. This is the 2:51 conversation. Mr. Salmon, ‘‘So, Rukavina’s question is really, from a secrecy

standpoint, should we move it out of London back to Switzerland?’’

Mr. Homen, ‘‘Yes. I mean, what’s the best structure to’’—it is unintelligible there. Mr. Salmon, ‘‘I don’t think if we move it from London to Switzerland, London will be able to destroy its records.’’ Ms.

Bevan, ‘‘No, that’s right. You’d see a transfer.’’ Mr. Salmon, ‘‘So, I

don’t know what would necessarily be gained by moving everything

to Switzerland.’’

Now, does that conversation bother you that the first reaction to

an arrest is effort made to preserve the secrecy of the account rather than what the heck is going on with our——

Mr. REED. Sure, it does. I mean, this is simply wrong.

Senator LEVIN. In your statement, I believe you said that

Citibank handled Salinas appropriately, and let me ask you a number of questions.

The private banker here, your private banker, used an alias

when introducing the client to Citibank in a branch bank; took Mr.

Salinas’ word about a construction company, never learned the

name of the company, never learned what the business was, what

his interest was, what the sale price was; took Mr. Salinas’ cashier’s checks by the millions to deposit with Citibank without knowing the source of the money, getting any references from the bank

involved, without knowing whether the cashier’s checks were obtained from cash deposits.

And then—I’ll just leave it right there. Do those facts trouble

you?

Mr. REED. Yes, the facts trouble me, but what troubles me more,

Senator, is where did you hear that I said that this was handled

appropriately.

Senator LEVIN. I thought in your statement, you indicated—and

I may have misread your written statement—that Citibank handled Mr. Salinas appropriately, and if I misread your written statement——

Mr. REED. I think——

Senator LEVIN [continuing]. I would withdraw that part of the

comment.

Mr. REED. I think that we are on record as saying that there

were a number of policies that were not followed. It would therefore be difficult to say that it was handled appropriately.

Senator LEVIN. Fine.

Senator COLLINS. We will have a second round of questions.

61

Senator Cochran.

Senator COCHRAN. Thank you, Madam Chairman.

When the Subcommittee began its hearing today, I made the

comment that our staff had done an enormous amount of work to

obtain information about the effectiveness of U.S. laws and regulations to combat money-laundering, and I wonder, since we have

now had the presentation of the full report of the staff and other

testimony as well, whether or not it has occurred to you or others

that we have passed a new law relating to financial services and

whether or not there is anything in that new law that strengthens

the effectiveness of U.S. laws regarding money-laundering or impacts the way financial institutions, not just banks, but insurance

companies and others, should adopt policies like Know Your Customer and other good banking practices. What is your reaction to

that?

Mr. REED. Senator, I am unaware of anything in the law that

has recently been passed that would specifically require that this

be extended.

In the case of Citigroup, as we have testified, we in fact—and

this is a question of simply taking banking practice and spreading

it throughout the entire corporate structure—we in fact have applied our rules with regard to money-laundering across the company, and I think you will find as other institutions begin to come

together, as ours has, that we will have in fact a cultural transfer

and it will have the effect that you are asking about, but to the

best of my knowledge—and I can’t in honesty say that I have read

every line of the proposed new law——

Senator COCHRAN. Well, we have not either.

Mr. REED. But to the best of my knowledge——

Senator COCHRAN. I hope somebody has.

Mr. REED [continuing]. There is no specific requirement on this

subject.

Senator COCHRAN. I wonder if the change in your policy about

targeting customers for your private banking business has already

had an effect. You talked about the fact that you are trying to seek

out entrepreneurs for your Private Bank, those who build wealth,

who build businesses, and create jobs. The question is whether this

strategy, rather than targeting public figures, per se, or people because they are famous, is going to limit the vulnerability of private

banking to money-laundering.

Mr. REED. Senator, I think it has already. I think this hearing,

as I said in the beginning, is going to have the effect of beginning

to create a de facto set of standards for at least the American industry, and I would hope we could propagate it beyond that. So I

think it has already, and I think it will have that effect.

Senator COCHRAN. Recently, we heard some talk and there has

been an administration report about money-laundering in Russia.

You seem to have avoided any problems in Russia. Do you attribute

this to the new policies or policies in combination with other factors, like the general instability there? Would you have any advice

for anyone doing business in Russia with regard to money-laundering problems?

62

Mr. REED. Senator, we have been fortunate. I have been very

careful not to say anything because we all live in glass houses. This

is a tough business.

I believe in the case of Russia and in the case of some other locations that it has been a part of our new policies, but more than

that, I think it has been an attitude on the part of the company.

I think that the management of the company fully understands

that we are serious about this, and there are clearly areas of the

world that are much more vulnerable from a customer point of

view.

It is very difficult to imagine how somebody could have legitimately made money in some of these locations until very recently,

and, therefore, there are large sums of money that have come from

Russia, from other countries, that while you don’t want to make

general statements, you could certainly be leery that this is an area

of the world where it is hard to imagine how people could be legitimately making money and being customers.

So we have been fortunate. I think it reflects policy. I think it

reflects standards, and I think it reflects a seriousness within the

company about the difficulties here and about the importance of

avoiding some of these problems.

Senator COCHRAN. Has our investigative staff inquired of you or

your officials about your experiences in avoiding problems in Russia or of any other banking institution to your knowledge?

Mr. MUSI. No, they have not.

Senator COCHRAN. What about being contacted by the administration in the preparation of the Summers-Reno money-laundering

report? Was anyone from the administration in contact with

Citigroup or any of your officials about your new procedures or how

you avoided past mistakes?

Mr. MUSI. Not to the best of my knowledge, Senator.

Senator COCHRAN. Let me ask you one other thing. We have got

a lot of laws that apply just to U.S. companies. We do not have jurisdiction over foreign companies. There is, of course, a problem in

international trade. We try to abide by rules ourselves, and then

when others do not abide by the rules, we end up bearing the brunt

of those transgressions either from economic disadvantage or corruption that we cannot do anything about that benefits foreign

companies and it puts us at a disadvantage.

You are talking about all these countries where you do business.

In this general area of international businesses, how do we get the

other banks based in other countries or other financial institutions

to abide by the same standards?

I think you have come up with some international suggestions or

international rules. In your statement, you talk about that. How do

we go about getting that implemented and getting others to recognize the legitimacy of applying these rules worldwide?

Mr. REED. I think, Senator—first of all, I think it is very important for all the reasons that you mentioned.

I think the mechanisms frankly are hearings of this sort which

raise to the public’s attention these kinds of issues, and bankers

will read this.

I think that there is a very good mechanism that ties the central

banks, the Federal Reserve in our case, with the central banks of

63

the more developed countries, at least the G7 that meets routinely

in Basel in Switzerland, and this quite legitimately can be a subject of a discussion amongst the governors of the central banks, all

of whom I think would subscribe to the same general set of values

that we have with regard to this issue.

Frankly, if you can capture the attention of the banks in the

major developed countries, you won’t have a problem with the others because the money that we are talking about ends up in Switzerland or in New York or in London or in Tokyo. So, if we can

get the European banks, the Japanese banks, the American banks

generally operating within a similar framework of values—and this

can be fostered by the cooperation of central bankers from those

countries and this mechanism that already exists in Basel, Switzerland, for talking about subjects of this sort, plus, very frankly, the

helpful comments that have come from the World Bank with regard to corruption generally—and as you know, the World Bank

has spoken out with regard to corruption and corruption issues—

this creates an environment where the industry can come together.

Today, there are, as you know, wildly different practices. There

are still major players in this industry who would not share any

of the values that are being discussed today in this session.

Mr. MUSI. If I may, Senator, can I add to that?

Senator COCHRAN. Yes, sir.

Mr. MUSI. One of the efforts we are trying to coordinate is spearheading, if you want to call it that, a private-sector initiative, but

in conjunction with the regulators, working with Transparency

International over the last 6 months. We have had meetings with

major financial institutions who are in the private banking business throughout the world trying to bring together a set of basic

practices that are best practices and can be adopted on a uniform

level across the world. We believe this can only be addressed

through a global initiative.

We have obviously tightened up our standards in the United

States and we can make sure that the banks follow those standards, but to ultimately achieve the goal that everybody is setting

out to achieve here, this really needs to be addressed on an international level, and we think that by spearheading this effort—and

we have shared what we believe are the best practices, taking into

consideration the guidelines that have been issued by the Fed, taking into consideration the industry practices as we talk to our peergroup banks, and we tried to put together a best practices paper

that we could share with all of the major financial institutions who

are willing to come to the meeting, day one.

We obviously have gotten more interest over time, and as we proceed in this effort, more banks come to the table as they recognize

that they have to deal with the same kinds of issues and are susceptible to the same types of vulnerabilities.

We have also shared the KYC policy that we have discussed that

the Private Bank issued in September 1997, and finally, the recently issued new anti-money-laundering policy for all of Citigroup.

It is our expectation that they will then share those policies with

us as well. We will go forward with the presentation of a uniform

best practices memo for all of the major international private banks

64

1See Exhibit No. 18 which appears in the Appendix on page 151.

and then bring the regulators into the process again and make sure

that everybody is in line with their expectations as well.

Senator COCHRAN. Did you find any particularly troubling challenges? You merged. For example, I think one of the companies

that are now part of the Citigroup is Travelers Insurance Company.

Mr. REED. Yes.

Senator COCHRAN. After that transaction, you point out in the

statement some changes that were made in regulations and policies

and standards and education and training programs that were then

extended to this new company. What can you tell us about the efficacy of that initiative?

Mr. REED. Well, I think what has happened, Senator, is that we

have applied these standards that we have talked to across the entirety of Citigroup.

Historically, most of the Travelers’ organizations were domestic

United States in their orientation, and to some of them, the notion

of money-laundering was in fact a new one, particularly in the context of the private banking and global flows, but, obviously, we are

vulnerable there, too, particularly through Smith Barney, a brokerage firm that has international customers and that maintains offices where there are many offshore banking customers and the insurance business.

So what we have done is we have sort of raised the awareness.

To most of the people involved, it has been new news. It has not

been a subject that they had been related to before, and I think

what it has done is it’s created a uniform set of policies and procedures across the company and it makes sure that our standards are

company-wide and not specific to one institution or not another.

Senator COCHRAN. Thank you.

Senator COLLINS. Thank you, Senator Cochran.

Mr. Reed, I want to go back to the conversation that Senator

Levin asked you about which occurred the day after Mr. Salinas

was arrested, and I want to direct your attention to part of the discussion about what to do with his accounts.1

Mr. Salmon says, ‘‘I don’t think that if we move it from London

to Switzerland, London will be able to destroy its records.’’ Sarah

Bevan responds, ‘‘No, that’s right. You’d see a transfer.’’ Mr. Salmon, ‘‘So I don’t know what would necessarily be gained by moving

everything to Switzerland.’’ Mr. Salmon, ‘‘OK, fine. Then my feeling

is this. I don’t think you’re going to be able to wipe out the history

of London. . . . I personally don’t see any benefit in moving it, in

moving it to Switzerland.’’

Your reaction was the same as mine. You said this is wrong.

Mr. REED. Correct.

Senator COLLINS. But the conclusion that I draw from this conversation is the Citibank officials involved were not discussing

whether it was right or wrong. They were discussing whether it

would work or not, whether it was feasible, and they only abandoned the idea of transferring the funds from London to Switzerland when they realized it would not erase the evidence of the

transfer. Do you think that is a fair conclusion for me to draw?

65

Mr. REED. That is a fair reading. I would like to be charitable

to think that had they found that it would work, that they would

have had second thoughts, but that’s supposition.

This is a level of immaturity and judgment that is simply not acceptable. I mean, this kind of thought—I mean, when you have a

problem, you have a problem, and this idea of how can you hide

the problem and obfuscate the facts is simply unacceptable, period.

There is no excuse for it.

Senator COLLINS. My final question for you is this. In retrospect,

when you look at the 3 or 4 years of audit reports that raised a

lot of red flags, some of them giving very poor audit reviews, very

poor scores, that repeatedly identified a risk of money-laundering

exposure for the bank, do you think that Citibank acted aggressively enough to address the problems that were being identified

over and over and over again by these audits?

Mr. REED. Senator, again, 20/20 hindsight, obviously I would prefer not to be here talking about this, and so you would say obviously I wish we had been more aggressive, cleaned it up more

quickly, but I have to be honest. As I said in my comments at the

beginning, the thrust of these bad audits, unfortunately, was not

limited simply to money-laundering problems and failure to follow

procedures. We had a more generalized set of control problems that

involved how we managed money and customer accounts and a

whole variety of things that really was at the core of our ability to

operate effectively.

I think that we can be legitimately criticized that it wasn’t done

maybe a year earlier, but for an organization of our size, I think

you were always talking about a couple of years. So I wouldn’t justify three, but given the nature of the problem, the number of people involved, the degree to which there are going to have to be cultural changes and the leadership required, I think it is fair to say

that I understood even as we got into this that it was going to be

a multi-year process.

Mr. MUSI. I think another point that needs to be made, Senator,

is that during that same time period, the regulatory guidelines and

expectations were evolving as well, as everybody tried to get their

arms around this issue and define best practices. It was during

that period, post-Salinas, that the Fed ultimately issued their

guidelines on private banking. It was during that period that the

Private Bank working with the regulators developed its KYC policy

and its overall anti-money-laundering program. So a lot was happening at that time, and I think the point that Mr. Reed made before about audits being a lagging indicator, the positive audit results that we achieved throughout 1998 are clearly the result of the

efforts that we took during the latter part of 1996 and throughout

1997.

Senator COLLINS. I do want to acknowledge that, clearly, there

has been significant improvements, and I think in the interests of

a complete record, it is important that that be noted.

Senator Levin.

Senator LEVIN. In 1995, that telephone conversation shows that

the first reaction of your people was how do we continue to hide

Salinas’ money, how do we move Salinas’ money, and you very

forthrightly just indicated that that is unacceptable behavior.

66

1See Exhibit No. 16 which appears in the Appendix on page 148.

Yet, in 1998, September, we have the Abacha situation. Now, you

have Nigeria seizing funds from General Abacha’s relatives and his

associates, and the Private Bank, your Private Bank, actually lent

his sons $39 million in order to transfer that money from London

to a Swiss account and elsewhere. That represents the approval of

that overdraft.1

It seems to me in principle you have got the same kind of reaction. You have got the Nigerian officials saying this money is corrupt and we are seizing it from General Abacha, who had, I believe, died in an airplane crash a couple years before. You have got

the Private Bank going out of its way to help those sons move $39

million. It is actually lending those sons money in order to accomplish that.

There was a time deposit. It was not yet due. So the bank lent

the sons the money until the deposit was due and then reimbursed

themselves. Is that appropriate conduct? Is that conduct you believe meets your current standards?

Mr. REED. Senator, I don’t know. Until I heard this today, this

afternoon, I had not heard of this particular transaction, and you

would have to understand the context. I mean, if you want to pose

it as a strictly theoretical question, taking only what you have said

as the fact situation, then the answer is self-evident. I don’t believe

that was the circumstances.

Mark, do you know anything about this?

Mr. MUSI. Yes. Actually——

Senator LEVIN. Let me just correct my factual predicate here. Apparently, it was not an airplane crash. He had died of a heart attack in June 1998, General Abacha, so just to correct that part of

the premise.

Mr. MUSI. Thank you, Senator.

Senator LEVIN. Not that it changes——

Mr. MUSI. That doesn’t change the answer I am about to give.

In terms of this situation, we found ourselves in effect between

the proverbial rock and a hard place. We had already made a decision to exit the relationship because of the nature of the client, and

we had been executing that exit strategy. And actually, this movement of funds was in support of that exit strategy. Clearly, we

wanted to segregate our ties with these clients as quickly as possible, and to facilitate that process, we allowed the loan to be set

up, the money to be removed from the bank. Then we had clear

ownership of the relationship, and it expedited our exit strategy.

We didn’t have a basis at the time from a legal point of view in

contacting our people to freeze the assets because we were not in

the position to do so. So, in carrying out the exit strategy, this was

the transfer of funds to facilitate that.

Senator LEVIN. They requested these funds; is that correct?

Mr. MUSI. As part of our exit strategy.

Senator LEVIN. Well, according to this, the client had requested

the remittance of the funds.

Mr. MUSI. Well, that’s what——

Senator LEVIN. Is that your exit strategy, or is it their strategy

to hide those funds?

67

Mr. MUSI. No. It’s their exit strategy to remove themselves. It’s

our exit strategy to move them out of the bank, and this is the

process that we used to move that process along.

Senator LEVIN. To move to a Swiss bank where it would be more

secret?

Mr. MUSI. That’s their choice as to where they want to take their

business, Senator.

Senator LEVIN. Let me just make sure I understand this. The initiative to do this was your initiative or their initiative?

Mr. MUSI. Working with the client, we contacted them and told

them that we wanted to sever our relationship. As part of that

process, we allowed this transfer to go through so that we could totally sever the relationship as quickly as possible.

Senator LEVIN. And whose initiative was it? Who initiated it? I

know you were working with them, but I mean who initiated this

transfer?

Mr. MUSI. I don’t know who actually spoke to the client.

Mr. REED. Senator, if I understood——

Senator LEVIN. No. I want to know did you initiate it or did the

client initiate it.

Mr. REED. It sounds—if what I understand—it sounds as if we

had made a decision that we wanted to exit these relationships. We

approached the customer telling them that. They said—and we had

a time deposit which as you point out didn’t mature, and apparently, in order to get them out of the bank, we chose to allow them

to break the time deposit. It sounds to me as if we initiated it.

Senator LEVIN. But the bank still had $17 million in deposits

after this; is that correct?

Mr. REED. I don’t know.

Senator LEVIN. Do you know, Mr. Musi?

Mr. MUSI. I am aware of that, yes.

Senator LEVIN. That is correct; is that right?

Mr. MUSI. Yes.

Senator LEVIN. So you were not terminating your relationship.

You were maintaining——

Mr. MUSI. No.

Senator LEVIN [continuing]. Seventeen million dollars.

Mr. REED. No. We had made a decision to exit. The process by

which you do that has to take—depending on the nature of the deposits and so forth and so on takes time, but there was no ambiguity about the decision.

Senator LEVIN. Did they know that, that you had reached——

Mr. REED. Obviously so or they wouldn’t have been willing to

make this move.

Senator LEVIN. It is not so obvious as to why they made the

move because Nigeria was grabbing their resources and their assets. So, when you say that they initiated or they knew of the

move, that you were motivating this move, that is very different

from what the facts were on the ground which was their assets in

Nigeria were being seized, and they, according to this document

here, initiated this request for the transfer of money and for the

overdraft. Now, that is what that indicates.

Mr. REED. Mark, did we ask them to move this money?

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1See Exhibit No. 15 which appears in the Appendix on page 147.

Mr. MUSI. We had already contacted the clients and informed

them of our exit strategy.

Senator LEVIN. All right. You have also received some advice

from Mr. Rogers who is in charge of the Bongo accounts. Your top

manager in Africa said the following, that you should be very careful about closing the Bongo accounts in 1998 because—now, this is

1998, so your 1997 initiative is supposed to have been underway—

but here is what he says in 1998 in an e-mail, November 6, ‘‘Whatever internal considerations we satisfy, the marketing fallout is

likely to be serious.’’ 1 That is what he says will happen if you close

the Bongo accounts. I do not think your new policy has taken hold

of Mr. Rogers in November 6, 1998, has it?

Mr. REED. Doesn’t sound like it, but, Senator, let me say something. I have been in the business 35 years. I have never ever encountered a circumstance where our dealings with a customer as

an individual account had repercussions in terms of our franchise.

Now, I am sure there are junior officers within Citi in the field

who worry that if you are dealing with a minister of finance or a

president or somebody in the central bank and that we make a decision about their personal account that there might be some danger that the banking business of the overall company can be impacted, and that is sort of the thrust of what is said here. Never

have I experienced that. I have dealt with ministers of finance,

heads of state, so forth and so on around the world. I have dealt

with franchises that were at risk. I have opened. I have closed. I

have never in my experience found any linkage.

So the concerns that people might represent as they have here

in terms of potential linkage between how you handle an individual

account and the bank’s business in the country may exist in the

minds of some junior people, but it has never in my experience

been a problem for us.

Senator LEVIN. Well, that is not the point of the question,

though. The point is he is saying do not close these accounts or be

very careful before you close them because this could have an effect

on—and these are his words——

Mr. REED. On our franchise in the country.

Senator LEVIN. And on your marketing.

Mr. REED. And I am simply saying I have never experienced

that.

Senator LEVIN. And on your marketing.

Mr. REED. Yes.

Senator LEVIN. And my question to you is, whatever the effect

is of closing an account which should not be open, shouldn’t it be

closed?

Mr. REED. Obviously so.

Senator LEVIN. So then he did not get the point of your 1997 policy.

Mr. REED. He didn’t get the point. That’s correct.

Senator LEVIN. I think I am out of time. I have just a couple

more questions. My red light is on.

I think what we have to face is whether or not our banks should

make money off deposits which are the result of dirty money, either

69

corruption, looting a treasury, bribes. Those are not specifically

identified in our current money-laundering laws, but I think you

would agree that that is dirty money.

Mr. REED. I sure would.

Senator LEVIN. And the question that I think we have to face is

whether or not our banks are going to profit off those kinds of deposits, even though other countries’ banks might.

You talked about international standards, and I think it is a fair

question because we would hope that everybody would in the world

would be bound by the same rules, but they are not. It is not true

when we sell weaponry either. There is a lot of things we will not

sell that other countries will sell, and my question——

Mr. REED. Senator, I don’t think there is any significant profit

in the American banking system from such funds.

Senator LEVIN. My question, though, is this. Would you agree

that we should treat corrupt money, which comes from bribes, or

looting a treasury, in the same way that we treat, for instance,

drug money?

Mr. REED. Surely. Obviously so.

Senator LEVIN. Good. Because that would require a change in the

law, and we are considering some changes in laws which I am

drafting and I have shared with the Majority. They have not had

an opportunity, because it is still very much in flux, obviously to

review what that draft is, but I would hope that you and your colleagues in the American banking industry will take that position

that money-laundering is a serious and growing problem, that we

cannot condemn corruption without being sure that our banks do

not profit from corruption abroad.

We thought we had made some progress in 1986. We have a long

way to go. You folks, I think, thought you had made some progress

when you issued your regs in 1991 and 1992, which were ignored

until 1997, and then you have tightened up your internal rules,

hopefully, now, despite the 1998 review of the Federal Reserve. You

are on track to making sure that you do not profit from accounts

which are the result of dirty money or money-laundering or corrupt

funds.

I really hope that you will read all of the testimony today, the

part that you did not see or witness, because I think that it will

reinforce hopefully some determination to end practices where your

bank or any bank will profit from dirty money. And we need to enlist the support of the American banking community in ending this

because it is intolerable that our banks that we put so much confidence in should profit in any way from money which is either illegal drug money or the product of looting a national treasury or the

product of corruption or bribery.

Mr. REED. Senator, I think as I indicated in my opening statement that we share your interest. I think the regulators do, too,

and they have been, as apparently you are, working on trying to

formulate how we can do this.

I would like to repeat, however, because I just feel I should, on

behalf of Citi, but on behalf of all the banks in the United States,

this is a problem. This is a problem that must be addressed. I do

not believe that either my bank or the American banks in general

have any significant amount of this money with them. That isn’t

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zero, but you would not notice it in the third decimal place of their

earnings. It simply is not a big factor in the banking practice to the

best of my knowledge of any American institution.

Senator LEVIN. I hope that message gets to your people because

you see in the response to the possible closing of accounts that your

people who are running your Private Bank are saying, ‘‘Whoops,

wait a minute. That could affect our deposits.’’ So I hope that last

message gets through to your folks.

Mr. REED. I share your view.

Senator COLLINS. Mr. Reed, I want to thank you and the other

members of Citibank who testified today not only for your testimony, but also for your cooperation with this probe. I realize that

the money-laundering problems that we have discussed are not

unique to Citibank, and I understand that this obviously was not

pleasant to have this kind of scrutiny on your operations. Nevertheless, I think that the Subcommittee has identified some very

troubling and serious concerns, and I hope that as with the Salinas

case, which you described as a learning experience, that the testimony before the Subcommittee will also further advance that

learning experience of all those at Citibank.

Mr. REED. Madam Chairman, thank you.

Senator COLLINS. At this point, the hearing is now recessed until

1 p.m. tomorrow afternoon.

[Whereupon, the hearing was recessed, to reconvene at 1 p.m.,

Wednesday, November 10, 1999.]

(71)

PRIVATE BANKING AND MONEY LAUNDERING: A CASE STUDY OF OPPORTUNITIES

AND VULNERABILITIES

WEDNESDAY, NOVEMBER 10, 1999

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

COMMITTEE ON GOVERNMENTAL AFFAIRS,

Washington, DC.

The Subcommittee met, pursuant to notice, at 1:05 p.m., in room

SD–628, Dirksen Senate Office Building, Hon. Susan M. Collins,

Chairman of the Subcommittee, presiding.

Present: Senators Collins and Levin.

Staff Present: K. Lee Blalack, II, Chief Counsel and Staff Director; Mary D. Robertson, Chief Clerk; Glynna Parde, Chief Investigator and Senior Counsel; Linda Gustitus, Minority Staff Director

and Chief Counsel; Elise J. Bean, Minority Deputy Chief Counsel;

Robert L. Roach, Counsel to the Minority; Claire Barnard, Detailee/

HHS; Carl Gold, Congressional Fellow; Robert Slama, Secret Service Detailee; Regina Keskes, Intern; Ryan Blalack, Intern; Frank

Brown (Senator Specter); Julie Vincent (Senator Voinovich); Anne

Bradford (Senator Thompson); Marianne Upton (Senator Durbin);

Jonathan Gill, GAO detailee (Senator Lieberman); and Shelly

O’Neill (Senator Akaka).

OPENING STATEMENT OF SENATOR COLLINS

Senator COLLINS. The Subcommittee will please come to order.

This afternoon the Subcommittee continues its investigation of

the complex and confidential world of private banking and its

vulnerabilities to money laundering. Yesterday we heard disturbing

testimony which indicated that private banks, because of their willingness to ensure secrecy, may be very attractive to criminals who

want to launder money. Our hearings described the nature of private banking and the degree to which private banks market secrecy

to their very wealthy clients, a service that, while beneficial for

many legitimate customers, is also appealing to criminals who

want to hide their dirty money.

Private banks frequently help their clients move enormous sums

of money in a fashion that obscures the client’s relationship to the

funds, even from the private bank’s own employees. The Subcommittee’s investigation found that private banks routinely use

code names for accounts, concentration accounts that disguise the

movement of client funds, and offshore private investment corporations located in countries with strict secrecy laws, so strict, in fact,

72

that there are criminal penalties in these jurisdictions for disclosing information about the client’s account to banking regulators

in the United States.

Yesterday we also received testimony from Citibank private

bankers, their supervisors, and the bank’s chairman about

Citibank’s handling of several private bank accounts. That testimony highlighted in striking detail the reputational and legal risks

that banks can encounter when they fail to collect and document

information about their client’s source of wealth and, just as important, when they fail to monitor those clients’ accounts for suspicious activity.

Today we turn our attention to some of the broader policy issues

related to how private bankers do business and the implications of

those business practices for our banking system and for Federal

regulators. We will also receive an insider’s perspective of how private banks operate from a former private banker who is now in

prison for money laundering. We will also hear from a noted scholar who will discuss the problems related to the movement and

flight of capital, both legal and illegal. Finally, we will discuss with

banking regulators their growing concerns about private banking’s

susceptibility to money laundering and the obstacles that they face

in conducting effective oversight.

I look forward to receiving the testimony of our witnesses today,

and at this time I would like to recognize Senator Levin, who initiated this investigation, for any opening comments that he might

have.

Senator Levin.

OPENING STATEMENT OF SENATOR LEVIN

Senator LEVIN. Thank you, Madam Chairman, and thank you

again for your very strong support and the very important assistance that your staff has given in this joint effort.

Yesterday, as you indicated, we looked at a case study of

Citibank private banking and saw the largest American bank with

the greatest resources at its disposal and pretty good policies in

theory find itself the bankers to a rogues’ gallery of clients.

Citibank had Raul Salinas of Mexico, about whom the bank had

absolutely no written documentation or verification on the source

of his wealth, despite Citibank policies to the contrary and for

whom the bank concocted an elaborate structure of secrecy.

Citibank had Asif Ali Zardari of Pakistan as a client, even

though John Reed, the CEO of the bank, had been advised by his

own Citibank staff to stay far away from him because of allegations

of corruption.

Citibank had Omar Bongo of Gabon as a client, with a private

banker who said he never once asked Mr. Bongo about the source

of his wealth, despite bank policies requiring him to do so.

And Citibank had the sons of Sani Abacha from Nigeria to whom

the bank, after the country of Nigeria began a public corruption investigation into General Abacha, lent $39 million so that the sons

could remove into a more secret place $39 million from a certificate

of deposit without penalty.

Those are the deeply troubling stories that we heard yesterday.

Citibank argues that was then and this is now, and the operation

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of the Private Bank has changed considerably in the last few years.

But the actions with respect to Mr. Bongo and the Abacha sons occurred in 1998, and it was just last year when the Federal Reserve

told Citibank board members that the Private Bank had ‘‘significant weaknesses in internal controls that exposed Citibank to excessive legal and reputational risk.’’ It also conveyed concern about

the ‘‘length of time,’’ in their words, that the Private Bank was taking to correct deficiencies and the ‘‘relative slowness of progress,’’

again, in the words of the Federal Reserve.

Because it was only 6 months ago that the Federal Reserve lifted

the requirement that the board’s Audit Committee review Private

Bank issues on a quarterly basis, the best that I am able to say

is that not only is the jury still out, it just went out on the changes

that have occurred at Citibank with respect to private banking.

I hope the changes take hold and become a model for all banks

worldwide. But given the track record, strong policies in 1991 and

1992 in Citibank which didn’t take hold, and no action taken to enforce those policies with resources and determination until 1997,

and given the sad state of affairs in case after case that we reviewed in this investigation, it will take a large and steady dose

of due diligence with respect to enforcing their own policies in all

corners of the Private Bank to change the actual conduct of

Citibank’s Private Bank.

Our investigation has taught us that through the private banking system U.S. banks are too often conduits for dirty money. That

is because due diligence has not been effective, and I believe that

is in part because there is no specific requirement for due diligence

in law; because predicate crimes for money laundering are insufficient since they don’t explicitly include foreign corruption or bribes;

and because private banks have secrecy tools made available to the

wealthy to operate secret accounts in secret corporations and secret

jurisdictions. I will be introducing legislation later today that addresses these and other issues raised during the course of the investigation.

Among some provisions of the legislation would be prohibiting

the opening or maintenance of an account by U.S. banks for a foreign entity unless the owner of the account is identified on a form

or record maintained in the United States. This will make sure

that there will be documentation in the United States of the beneficial owner of any account managed in the United States, just as

there is now for U.S. companies and entities. It will include a prohibition on the use of concentration accounts for individual accounts without earmarking the funds to the client. It would include

a statutory requirement for banks to conduct due diligence, and

add crimes of bribery, kickbacks, fraud, and corruption in foreign

countries as crimes for which money laundering applies. I was

pleased yesterday to hear that Mr. Reed will support a legislative

change to make foreign corruption and bribes criminal offenses for

which U.S. money-laundering laws would apply.

Today we will be hearing, as our Chairman indicated, from Antonio Giraldi, a former private banker to American Express, Bankers

Trust, and Citibank. Mr. Giraldi was the subject of a landmark

case in the private banking industry in which he was convicted of

money laundering or engaging in similar practices that we talked

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1See Exhibit No. 25 which appears in the Appendix on page 204.

2The prepared statement of Mr. Giraldi appears in the Appendix on page 1003.

about yesterday with respect to Citibank. Giraldi’s private bank client, however, turned out to be a drug trafficker, and a jury found

him guilty of willful blindness with respect to that fact. He is now

serving 10 years in Federal prison.

We will also hear from Raymond Baker, an economic scholar at

Brookings, who has traveled the globe talking to bankers, business

people, and financiers, learning about how dirty money moves

around the globe. And, finally, we have representatives from the

Federal Reserve and the Office of the Comptroller of the Currency,

the regulators of the private banks which are the subject of this investigation.

Again, I want to thank you, Madam Chairman, for your support

and your leadership.

Senator COLLINS. Thank you, Senator Levin.

Pursuant to Rule XIV of the Permanent Subcommittee on Investigations Rules of Procedure, the Citibank requested yesterday

through its counsel that a series of questions be directed by the

Chairman or other members to the Subcommittee’s investigative

staff. At my direction, the Subcommittee staff has answered these

questions in writing, and without objection, the questions and answers will be made available to the public as well as included in

the printed hearing record.1

At this point I would like to swear in our first witness today. He

is Antonio Giraldi. He was a private banker before he was convicted of money laundering in 1994. Mr. Giraldi joined Citibank as

a private banker in 1986 where he was supervised by Amy Elliott,

who testified before the Subcommittee yesterday. In 1988, he joined

Bankers Trust and later became senior vice president for American

Express Bank International.

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. GIRALDI. I do.

Senator COLLINS. Thank you. Mr. Giraldi, you may proceed.

TESTIMONY OF ANTONIO GIRALDI,2 FORMER PRIVATE BANKER, CURRENTLY IN FEDERAL PRISON FOR MONEY LAUNDERING

Mr. GIRALDI. Madam Chairman, Senator Levin, and Members of

the Subcommittee, good afternoon. My name is Tony Giraldi, and

I am here today to talk with you about the international private

banking culture and its vulnerabilities to money laundering. I

would like to share my personal experiences during my career as

a private banker at three financial institutions and the experiences

of my many colleagues and friends within the industry.

I was born in Japan and raised in Latin America, as my father

was a senior executive with Bank of America until his retirement

when he became the CEO of the Latin American Export Bank. As

Americans, my parents were very proud of their country and sent

me back here for my schooling at Culver Military Academy, Baylor

University, and Georgetown University Graduate School. I began

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my banking career in 1981. I became a private banker in 1986 with

Citibank and later worked as a private banker at Bankers Trust

and American Express.

For decades, U.S. financial institutions have catered to wealthy

non-residents following closely the patterns of their counterparts

abroad in this lucrative field. Forecasters estimate that wealthy individuals will have tens of trillions of dollars to invest by next year,

representing billions of dollars in potential revenues for financial

institutions worldwide. The forecasters also predict the amount of

funds laundered in the trillions of dollars and growing disproportionately to legitimate funds.

For generations, this highly competitive international private

banking industry has managed the assets of the world’s wealthiest

individuals, many of whom earned their wealth legitimately and

made legitimate use of the system. Unfortunately, with recent

growth of criminal enterprises, political corruption, and narcotics

trafficking over the past several years, the culture and services provided by financial institutions has become extremely vulnerable to

illegal activity. Unless these vulnerabilities are corrected, private

banking systems will become increasing targets of opportunity for

tainted funds.

I have personally experienced the culture which our financial institutions apply in recruiting international assets. I would characterize this culture as ‘‘don’t ask, don’t tell.’’ This has allowed money

launderers to significantly penetrate banks and brokerage firms.

Money launderers have become more sophisticated and have

learned to use private banking products to their advantage. They

no longer need to carry Samsonite suitcases of cash into our U.S.

banks here and abroad. Instead, they utilize financially savvy representatives who take advantage of the products and services that

private banks aggressively market. These products and services

can be used to legitimize them and their businesses and to often

gain respectability.

In my experience and the experience of many of my colleagues,

private bankers are encouraged by managers at many levels to promote lucrative products and services. There is little, if any, regard

for the evaluation of where the business is coming from or where

it has been.

There were many ways to pursue clients. At one organization, I

witnessed private bankers making cold calls on prospects whose

names were taken from a target list compiled by managers with little or no verification of source of funds. For many private bankers,

the fact that this list was supplied by upper management was understood to mean that these prospects had the approval of the organization and should be signed up.

Although it only happened infrequently and is even less likely

today, relationships were sometimes established through walk-ins.

This is a term that refers to foreign individuals not known to the

bank who appear or call at the private bank seeking its services.

At one institution, on two different occasions my superiors were

willing to accept walk-in prospects who proposed to fund new relationships with $50 million.

A referral was considered as validating the acceptability of a new

relationship, even though the integrity of the referral source was

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seldom questioned. The source of funds in most cases is taken at

face value as presented by the prospects and not verified.

The training and guidance by senior managers that I experienced

was minimal and focused primarily on cash transactions. Over the

years, wire transfers between financial institutions have become

the most commonly used vehicles to move tainted funds. Financial

institutions contribute to this process by transferring funds

through concentration accounts which contribute to the road blocks

presented in money-laundering investigations by separating funds

from a client’s identity.

The foundation and selling point of the international private

banking culture is secrecy. Overseas units of banks domiciled in

countries where bank secrecy laws prevail stress secrecy to local

and foreign clients in order to maintain a competitive position.

They offer products and employ practices that facilitate secrecy.

While legitimate clients utilize these services, they can also be

utilized by criminal elements. For example, two products which

promote secrecy are private investment companies and trusts.

These entities create layers that obscure the identity of the beneficial owner of the funds through the use of shell corporation and

secrecy laws. By layering, I mean the use of multiple offshore companies. The use of these products can be an impediment to law enforcement.

It has been common practice for private bankers to employ practices in their daily activities that promote secrecy. For example,

sometimes they talk to their clients in codes when discussing transactions. Most of the time private bankers travel as tourists so the

authorities will not know that they are visiting clients on business.

One reason offered for that practice is to protect the clients’ identities from criminals who might do them harm. However, another

possible result is that they do not want the authorities to discover

that their clients are participating in capital flight.

In addition to the fiduciary vehicles managed by bank trust companies, some of the more common products developed by private

banks, which vary from bank to bank, are portfolio management,

credit, and real estate. The courting and marketing of political figures, government officials, military leaders and their families, and

close associates has been common in the past with some financial

institutions. These types of clients are the most difficult in determining the source of funds.

In the past, relationship managers were far more concerned with

appearance than with substance when it came to issues of due diligence and what would later become the Know-Your-Client doctrine.

If an acceptable level of due diligence could be fashioned with the

guidance and encouragement of senior management, then the relationship managers would have done his or her job.

To the best of my knowledge, no relationship managers known

to me consciously attempted to legitimize what was known or believed to be proceeds of specified unlawful activity. However, no

one seriously attempted to determine the actual origin of a client’s

funds. Our world, the international private banking culture, was

all about playing the new deposits game the way that our senior

management insisted we play it, about being rewarded by them

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when we succeeded and about being too naive to realize how dangerous a game we were playing.

A money launderer can utilize the products and services described above to conceal his true identity and his funds. This fact,

coupled with the demise of the recently proposed Know-Your-Client

regulations, and the arrival of a whole new generation of cybersavvy money launderers has compounded the difficulties faced by

Federal law enforcement agencies and the Justice Department and

bodes ill for their efforts to combat to evils associated with money

launderers and their activities.

If the issue of money laundering is to be addressed effectively,

U.S. financial institutions at every level must interface with Federal law enforcement agencies. U.S. financial institutions must effect fundamental changes in their prevailing international private

banking culture and product base. Senior bank managers must implement supervisory procedures designed to identify rogue relationships and relationship managers who manipulate international financial resources and activities for their own personal gains.

Unless U.S. financial institutions move to make corrections in

their vulnerabilities, the managers of international criminal enterprises will continue to use a highly imaginative and flexible banking system along with its products to handle the proceeds of their

illicit operations and to legitimize themselves in the eyes of the

international business community.

U.S. financial institutions should no longer succumb to the established yardstick, ‘‘If we don’t accept this account, our competitors

will.’’ Thank you.

Senator COLLINS. Thank you very much.

We received comments from some banking officials, particularly

at Citibank, that suggested that private banking really wasn’t any

more vulnerable to money laundering than other kinds of banking,

than retail banking, than correspondent banking.

Based on your experience being involved in private banks in

three different institutions, do you believe that private banking is

particularly susceptible to money laundering?

Mr. GIRALDI. I think it is more vulnerable than other banking

services in that the main focus is one of secrecy and confidentiality,

and the primary establishment of the relationship is done offshore.

Although many of the investments can be done here in the United

States, the actual foundation for the relationship is kept offshore.

And the way that the marketing effort is done in many cases is one

of promoting secrecy. So I do believe it is more vulnerable because

those individuals who are looking for a secrecy element in their

banking relationship will go to a private banker versus going to

correspondent banking or regular banking services.

Senator COLLINS. One of the striking aspects of the Subcommittee’s investigation into this area is that Citibank had a lot of procedures, regulations, policies in place that should have prevented the

problems with the case studies that we highlighted yesterday. And

yet what seemed to be taking place was a culture that, in fact, encouraged non-compliance with all those regulations, with all those

policies.

And as you described the culture as a ‘‘don’t ask, don’t tell’’ culture in which there was little, if any, regard for the evaluation of

78

where the business was coming from, it seems to me that what we

have in too many situations is a policy of deliberate ignorance, of

not wanting to go behind where the money was coming from, of not

wanting to ask the hard questions because of concerns that the

business would be lost or would have to be turned down.

Is that an accurate impression?

Mr. GIRALDI. I believe they would—most private bankers are not

deliberately not trying to locate the source of funds, but following

a culture that is already in place. So I don’t think that their purpose is to go out and look for clients regardless if the funds are

tainted. I mean, I believe that most private bankers that work with

reputable institutions would not accept a client that they had signs

of bringing assets to the institutions that were from illegal sources.

But I do believe that they don’t go a step further because that

is the way that the culture has always been. It is not necessarily

because they are afraid that they will find something they don’t

want to look for, but that their practices have been to acquire deposits and to acquire investments and to maintain accounts and relationships for many, many years, and sometimes for generations.

And so they follow the culture, which is just ‘‘do as much as you

can so that on the surface it appears like you are asking the right

questions,’’ but don’t go a step further than that.

Senator COLLINS. In the three financial institutions for which

you worked, how much emphasis was placed on following KnowYour-Customer regulations and of finding out the source of funds?

Mr. GIRALDI. Well, there was very little training on Know-YourCustomer regulations. Most of the training that we had was based

on cash transactions and being aware and sensitive to individuals

who might deposit large amounts of cash in the bank. And in the

world of private banking, we have very little of that. Most of our

accounts and our business is conducted through wire transfers and

transfers from other institutions.

I believe that there was very little training at the institutions

where I worked, and especially when it came to money laundering.

The only training that we had was related to what is set by the

Bank Secrecy Act, which involved cash transactions, but no training on how to identify an individual that might be suspicious or to

go beyond asking the individual—if a prospective client gives information relating to their businesses, that was generally enough, and

nothing in the training to say, ‘‘go beyond that, do more investigations, go research where the businesses are.’’ I mean, it was just—

it stopped at the questioning level, which obviously is not sufficient?

Senator COLLINS. Did your supervisors at any of the three institutions ever emphasize to you or to your colleagues any concerns

that they might have about the bank being used to launder money?

Mr. GIRALDI. [Nodding head up and down.]

Senator COLLINS. The reason I ask this is part of the way you

influence the culture of a bank is when the high-level executives

make very clear that it’s a priority for the bank to avoid being exposed to the risk of money laundering. And if there isn’t training

going on and if there aren’t repeated directives, then the culture

doesn’t change.

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So I am curious, in your time as a private banker at the three

institutions for which you worked, whether there was a priority put

by your supervisors, by other executives in the bank, directed towards minimizing the bank’s risks in this area?

Mr. GIRALDI. I believe that the supervisors followed the culture

as much, if not more than, the relationship managers. Those individuals were the ones who gave the guidance and the encouragement to the more junior officers on how to establish relationships.

My experience has been that many senior managers would take

greater risks than the junior individuals on the team.

Senator COLLINS. You mentioned in your testimony that at times

private bankers posed as tourists in order to avoid saying that they

were going into a country for the purpose of meeting with wealthy

clients.

Were you ever instructed to pose as a tourist to undertake that

kind of deception?

Mr. GIRALDI. It was more than posing as a tourist. It was the

standard procedure or the standard understanding for private

bankers when traveling abroad in most countries, and in most

cases with at least my experience in the financial institutions

where I worked and friends and former colleagues that work at

other financial institutions, is that they traveled as tourists, and

when filling out the document at the customs area, they would

mark the tourist square instead of the business square.

And, as I mentioned, there are different reasons that could be

that we—the possibilities of why we were trained to do that and

why the culture called for that, and one was to protect the client

in a country where he or she may be exposed to criminal activity

or extortion or kidnapping because maybe our documents would get

lost or the client accounts would get lost.

And another possibility was that in some countries capital flight

is not viewed favorably, and private bankers go to foreign countries

to recruit capital flight and to meet with the clients who have

taken billions of dollars out of the countries many times without

the knowledge of their governments.

Senator COLLINS. Senator Levin has mentioned that in some of

the cases we have looked at, the proceeds that have been deposited

into these accounts appear to be the result of corruption by government officials. Did your supervisors ever express any concerns to

you about your obligation as a private banker to ensure that your

foreign clients were complying with the laws of their countries or

was it the opposite?

Mr. GIRALDI. When I asked about—when I initially began my career in private banking and asked the questions regarding the tax

issues and the laws in the foreign country, we were told that it is

best not to ask those questions of the client because it is not our

responsibility as to if the client is complying with the tax issues or

with any laws within their country. And this was standard at all

the private banks and goes on today from my understanding with

recent conversations with private bankers. Basically it is that we

don’t want to know, and the feeling that I got was that we really

didn’t want to know if the clients were complying with those issues.

Senator COLLINS. Thank you.

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Senator Levin, it is my understanding that we have about 8 minutes left on the first vote that is going to be followed by two more.

I don’t know whether you would like to start your questioning now

or—that sounds fine.

We will be in recess subject to the call of the Chair, but it will

probably be a half-hour. We unfortunately have three consecutive

roll call votes.

[Recess.]

Senator COLLINS. The Subcommittee will come to order.

At this time I would like to call on Senator Levin for his questions.

Senator LEVIN. Thank you, Madam Chairman, and welcome, Mr.

Giraldi.

Mr. GIRALDI. Thank you.

Senator LEVIN. Roughly how many clients would a private banker such as you handle at any one time, typically?

Mr. GIRALDI. Well, it depended on the size of the individual unit

in each institution. At one point I was part of a team that handled

thousands of clients with assets in the billions of dollars, and in another institution it was somewhat smaller, with maybe a thousand

clients and $500 million, and in another institution it was in a couple of hundred clients. So it varies from institution to institution.

Senator LEVIN. Private banks have had concerns about keeping

files or records in the United States of a client’s offshore accounts.

Is that true?

Mr. GIRALDI. Yes.

Senator LEVIN. Tell us about that. What was the basis of that

concern? And how strongly did they enforce that concern by trying

to avoid having that kind of a paper trail?

Mr. GIRALDI. It was primarily a concern with the fiduciary vehicle product, such as the private investment companies and the

trusts that were established offshore within each individual institution’s offshore companies or trust companies. And when an individual had established what we call a PIC, or a private investment

company, and a trust, the policy was not to have any linkage of the

beneficial owner’s name to the offshore company or the trust in the

United States.

If you had a file that belonged to an individual PIC, that file

would have only the PIC name and the transactions related to that

private investment company or that trust. And there were trust officers that were part of the trust company located in the United

States in the major cities, in New York and in Miami, where there

was a substantial amount of private banking business. And those

trust officers would from time to time go into the files and review

what they call compliance as to any linkage of beneficial owners.

And if there was something in there, if there was a memorandum

that somehow escaped a private banker or relationship manager

that slipped into the file that had the offshore structure name on

it, then they would get reprimanded.

Senator LEVIN. Are you telling us, then, that if there was any

evidence of what the reality was relative to beneficial ownership,

the people in the trust department of these private banks would

reprimand the person working in the bank who allowed that to

happen? Is that what you are saying?

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Mr. GIRALDI. Yes, Senator. If there was evidence of the true identity of the beneficial owner in that file that would link that individual to his or her offshore structure, that would call for a reprimand by the trust——

Senator LEVIN. And that was the reality.

Mr. GIRALDI. Yes.

Senator LEVIN. The reprimand, then, of the private bank’s employee would be for what was true. Is that right?

Mr. GIRALDI. Would be——

Senator LEVIN. In other words, what was in the file and what

someone would be reprimanded for was true.

Mr. GIRALDI. Yes.

Senator LEVIN. And it was accurate.

Mr. GIRALDI. Yes.

Senator LEVIN. But it wasn’t supposed to be there in order to

protect secrecy. Is that correct?

Mr. GIRALDI. Yes, Senator.

Senator LEVIN. And private banks tout their secrecy, do they

not?

Mr. GIRALDI. Yes.

Senator LEVIN. It is not just something they respond to due to

inquiries on the part of clients. They actually go out seeking clients

or advertising for clients claiming that they have got the ability to

keep secret the connection of that client to the account and thereby

defeat legal process for that information. Is that correct?

Mr. GIRALDI. Yes. Secrecy is the fundamental element in most

major private banking relationships with financial institutions.

Senator LEVIN. And private banks push the secrecy aspects of

their accounts, do they not?

Mr. GIRALDI. Many times a fiduciary vehicle is bank-driven rather than client-driven, and the establishment of the vehicle or of the

offshore structure is done after a conversation where a client—for

legitimate purposes, such as estate planning, their needs are determined, and then, therefore, the private banker or the trust officer,

if they are meeting with the client and the trust officer, structures

the offshore structure.

My experience has been that many clients are not familiar with

the highly sophisticated offshore capabilities that financial institutions have, and so that the bankers, in essence, educate the clients

on how to structure these vehicles.

Senator LEVIN. Tell us about collateralized loans. How are they

used? How are they vulnerable to money laundering?

Mr. GIRALDI. Well, credit facilities and the credit products are

important products at many financial institutions for their private

banking clients. One example, if a client comes to a relationship

manager and needs his or her funds out of the portfolio for whatever investment in their home country, rather than to liquidate the

assets, the bankers and senior management encourage relationships managers to do this, will set up financial—will set up credit

facilities where the client can receive whatever amount, up to a

certain percentage of their portfolio which is used as collateral and

pay a lesser interest rate on the loan than they are generating on

their portfolio. And it is a way that the bank benefits because it

is a revenue-generating product, and it is a way that the client

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benefits in that they are—rather than to use their funds, their

portfolio funds, they borrow funds from the bank.

Senator LEVIN. And how does that help a client launder money?

Is that cleaner money when you are using a loan from the bank

than if you are using your own funds?

Mr. GIRALDI. Well, one thing that I have learned in the last few

years is that—which I didn’t realize at the time that I was a private banker, is that potentially it can be very dangerous for a

banking institution when someone is taking advantage of the culture and of the products in that an individual who somehow gets

into the banking system and wants to take advantage of that system as a money launderer can develop these products for their own

benefit. And when it comes to credit, if a bank encourages a client

to establish credit facilities, the money launderer will have come to

the bank initially with one deposit, for example, let’s say, $10 million, and then they will borrow back—they will borrow $9 million,

so all of a sudden they have an additional $9 million from the

bank, which allows them to establish a business in their home

country and sometimes to gain credibility and respectability in

their communities. They may not have had that before the bank

had offered this product to them. So they borrowed several million

dollars. They buy a business in their home town, and then rather

than to repay the loan with proceeds that are legitimate—usually

the proceeds were not verified because it was 100 percent secured

credit. They could use additional laundered assets to repay the loan

back to the bank, and so this individual who came to the bank with

$10 million has just laundered $30 or $40 million and can say I

have a relationship with this bank, I have a credit facility, I have

established a business in my home country, I am known now within the community as a business person that owns a legitimate business that might even be doing business with U.S. companies. And

we as bankers have helped them in their metamorphosis of becoming more legitimate.

Senator LEVIN. Of turning dirty into clean.

Mr. GIRALDI. Yes.

Senator LEVIN. The way that happens, to summarize, the way

you just described it, is $10 million in your example comes in in

dirty money, is in the bank, the bank is making a fee off that. Is

that correct?

Mr. GIRALDI. Yes.

Senator LEVIN. Then they will lend money to that client, say $9

million. They are making interest off that. Is that correct?

Mr. GIRALDI. Yes.

Senator LEVIN. And the client then takes that $9 million and

says, hey, I got a loan from X bank, which is a reputable bank, and

the loan sounds clean because I have borrowed money from a bank,

and then establish a business or whatever in his or her own country with that loan, so that now they are established with clean

money.

Mr. GIRALDI. Yes.

Senator LEVIN. What you are saying is that a fully collateralized

loan advantages the private bank because now they are making

money both on the original asset as well as on the loan, and it is

used by money launderers to clean dirty money. Is that correct?

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Mr. GIRALDI. Yes.

Senator LEVIN. I think that this is one of the clearest examples

of where a tool of a private bank which can be used legitimately

can also be used illegitimately.

Mr. GIRALDI. Yes.

Senator LEVIN. It is a very good example of how that is done, and

it is something we are going to try to stop.

Experts at your trial in the American Express case testified that

everything you did with respect to the management of the Ricardo

Aguirre account, which was the account for which you have been

convicted of money laundering, was legal in the private banking

world. Every specific action that you took, the testimony was, was

legal.

The only issue was whether or not you knew the source of Mr.

Aguirre’s money was drug trafficking. Is that correct?

Mr. GIRALDI. Yes.

Senator LEVIN. The jury decided based on circumstantial evidence that you had willful blindness with respect to Mr. Aguirre

and the source of his funds, and as a result of that, you are now

serving a Federal prison sentence.

Now, Amy Elliott testified at your 1994 trial as an expert on private banking practices, and this is what she said: ‘‘The ‘Know Your

Client,’ at least in our bank, is part of the culture.’’

‘‘ ‘Know Your Client’ . . . is part of the culture,’’ she said. ‘‘It’s

part of . . . the way you do things. It’s part of the way you conduct

yourself.’’

When asked about Citibank’s private banking policy, she said in

that same trial, your trial, ‘‘I think the primary gist of this procedure—it wasn’t really a procedure, but more of the way that one

conducts themself, is that you must know your client.’’

That is what the testimony was at your trial, but at our hearing

yesterday, Ms. Elliott and her fellow private banker, Mr. Ober, testified about a host of Know Your Client failures or failure to obtain

Know Your Client information on Mr. Salinas, Mr. Ober’s failure

to obtain Know Your Client information on President Bongo and

the sons of General Abacha. And Mr. Reed, the co-chairman of

Citibank, testified about the Know Your Client failures of the

Citibank Private Bank as a whole. And here is what he said, first

in this exchange with Senator Collins. ‘‘So my concern is that this

is a 3-year period. This is not an isolated audit of one small

branch,’’ this is Senator Collins talking, ‘‘It seems to me to be that

systematic pattern of deficiencies that allowed Citibank to be vulnerable to money laundering.’’ And Mr. Reed responded, ‘‘I think

you are correct.’’

And later on, Mr. Reed said, ‘‘So, if you look backwards, you

would have to say that in that period, 1994, 1995, into 1996, there

was reason to believe that we did not have an acceptable set of

standards in place, and you and I would agree that it is approximately a 3-year time frame.’’

So I have got to say that this is a very, very disturbing picture

indeed, because what Ms. Elliott presented was a picture of due

diligence by private bankers as an expert at a criminal trial, and

that description simply does not match up to the reality, as she testified to here and as her CEO testified to yesterday as well. So I

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1The prepared statement of Mr. Baker appears in the Appendix on page 1053.

simply want to express that, because I find that to be very disturbing, indeed, and very disquieting.

I don’t have any further questions of Mr. Giraldi other than to

thank him for making a very significant contribution to this investigation, and his cooperation with this investigation advanced it a

great deal.

Senator COLLINS. Thank you, Mr. Giraldi. You are excused.

Mr. GIRALDI. Thank you.

Senator COLLINS. I would now like to welcome our second witness this afternoon, Raymond Baker. Mr. Baker is the guest scholar at the Brookings Institution here in Washington. He is a recognized authority on international private banking and has written

extensively on money laundering and capital flight.

Pursuant to Rule VI, all witnesses who testify before the Subcommittee must be sworn in. Do you swear that the testimony you

are about to give will be the truth, the whole truth, and nothing

but the truth, so help you, God?

Mr. BAKER. I do.

Senator COLLINS. Thank you. We would ask that you limit your

oral testimony to no more than 10 minutes, but your written testimony will be included in its entirety, and we are very pleased to

have you here with us today. You may proceed.

TESTIMONY OF RAYMOND W. BAKER,1 GUEST SCHOLAR IN

ECONOMIC STUDIES, THE BROOKINGS INSTITUTION, WASHINGTON, DC.

Mr. BAKER. Good afternoon, Madam Chairman and Senator

Levin. I am Raymond Baker, and after an international career in

the private sector, I am a guest scholar at the Brookings Institution. Thank you for the opportunity to appear before you to talk

about one of our larger but least visible problems.

I found some of yesterday’s revelations not surprising but, nevertheless, chilling. I noted particularly the role of private bankers in

providing their secretive services to Sani Abacha, the late dictator

of Nigeria, and the biggest single thief in the world in the decade

of the 1990’s helping him with his stolen wealth out of Nigeria.

And I contrasted this with the situation of my longest-term colleague and partner in business, who has been lying desperately ill

and hospitalized in Nigeria, a nation and its medical services having been brought near to collapse. Catering to the corrupt has severe consequences for others who live their lives with integrity.

I have been asked to frame the issues of money laundering and

flight capital and corruption in the context of our larger domestic

and foreign interest and to discuss the impact of private banking

on these concerns.

Corruption by foreign government officials is omitted, as you

know, from the 170 or so crimes and malpractices that establish a

predicate offense, that is, a basis for legal prosecution in U.S. antimoney-laundering legislation. What this means is that so long as

funds in the hands of a foreign official are not derived from drugs,

bank fraud, or violence, then, as the last speaker also said, a ‘‘don’t

ask, don’t tell’’ policy largely guides the banking community.

85

While not laundered, corrupt money is certainly a principal component of illegal flight capital. This is stolen or tax-evading money

that passes illegally out of developing and transitional economies,

but legally more often than not into the United States, Europe, and

tax havens around the world. Other components include the

mispricing of overseas trade to generate foreign kickbacks, illegal

shifts of real estate and securities titles abroad, and the growing

problem of wire fraud.

I have studied in particular the first two of these—corrupt money

and mispriced trade—because both are dependent on international

cooperation to facilitate their movement.

I estimate the flow of corrupt money out of developing and transitional economies into Western coffers at $20 to $40 billion a year

and the flow stemming from mispriced trade at $80 billion a year

or more. My lowest estimate is $100 billion per year by these two

means which we facilitate, a trillion dollars in the decade of the

1990’s, at least half to the United States. Including other elements

of illegal flight capital would produce much higher figures.

Let me focus just on this $100 billion a year from corruption and

trade mispricing that we, the United States and Europe, facilitate.

What are the benefits and costs of this? The benefit is that it

brings this sum of money, $100 billion a year, into our Western

economies, at least $50 billion a year to the United States. The cost

can be seen in both our domestic and foreign interests.

First, domestic. One hundred billion dollars a year in illegal

flight capital coming in provides cover for a far larger amount of

criminal money laundering, estimated at $500 billion to $1 trillion

a year—again, half to the United States. These are two rails on the

same tracks through the international financial system.

The Treasury Department estimated to me that 99.9 percent of

the criminal money that is presented for deposit in the United

States gets into secure accounts. Anti-money-laundering efforts are

a failure. The easiest thing for criminals to do is to make their

criminal money look like it is merely corrupt or tax-evading money,

and then it passes freely into our economies.

The domestic cost of illegal flight capital is that it removes antimoney laundering as an effective instrument in the fight against

drugs, crimes, and terrorism.

Senators when I read or hear stories about drug busts, drive-by

shootings, prison overcrowding, my reaction is, ‘‘there’s our flight

capital dollars at work for us.’’ There in part are the consequences

of the dirty money coming in that enables the criminal money to

flow alongside.

Now, let me turn briefly to the foreign cost. Illegal flight capital

has an equally severe impact on our overseas interests.

Russia, of strategic importance, has suffered the worst case of

disappearing resources out of any country in a short period of time,

$200 billion to $500 billion in a decade.

In Nigeria, corruption has devastated the economy, meaning that

70 million of its people are living on an average of 20 cents a day.

Pakistan, a nuclear state in a volatile subcontinent, reacted to

corruption, tax evasion, and a depressed economy with a coup

d’etat, upsetting democracy.

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From Mexico, the flow of drugs and aliens across borders presents a major foreign policy challenge. China, with semi-official estimates pegging flight capital at $10

billion a year, perhaps more, could potentially repeat the Russian

scenario.

The foreign cost of illegal flight capital is that it erodes U.S. strategic objectives in transitional economies and undermines progress

and stability in developing countries.

I have used the word ‘‘facilitate’’ several times. There are many

examples of ambiguities and contradictions in our policies and

practices that facilitate the flow of illegal flight capital. Let me

mention two that focus specifically on corruption and private banking.

The Foreign Corrupt Practices Act makes it illegal for Americans

to bribe foreign government officials. Yet it is not illegal for private

bankers to meet with foreign government officials, including those

perceived to be corrupt, and offer to assist them in moving, consolidating, and managing ill-gotten gains in foreign bank accounts.

What U.S. law conveys, in effect, to our business people and

bankers is: Don’t bribe, but if you encounter wealthy, even corrupt

foreign officials, then the United States wants their money.

Again, we often have officials from Treasury, Justice, and State

Departments, the FBI and DEA and USAID meeting with foreign

leaders and officials to address drugs, crime, corruption, and terrorism. But these efforts are undercut when private bankers initiate or respond to the desires of corrupt foreign officials to move

funds into the United States.

The perception is widespread abroad that the United States is

not serious about reducing corruption, instead preferring to profit

from the accumulation and management of its proceeds.

The United States has become the largest repository of ill-gotten

gains in the world. U.S. private bankers have honed their products

and services, taking advantage of porosities in regulations in this

and other nations. In this pursuit, more secrecy is often accorded

to corrupt foreign interests than is normally available to U.S. citizens.

The combination of criminal money laundering and illegal flight

capital constitutes the biggest loophole in the free market system.

Drug kingpins and global thugs thrive because money laundering

is easy, and money laundering is easy because illegal flight capital

is solicited and maintained.

The ‘‘N’’ word is appropriate here: Never. We will never effectively curtail criminal money laundering while at the same time

cultivating illegal flight capital.

Success in fighting dirty money will be achieved only when the

United States addresses all three parts of the problem: Criminal,

corrupt, and commercial.

We are now allowing banking, securities, and insurance functions

to be combined. This greatly magnifies the importance of upholding

high standards of fiduciary trust in our financial institutions. What

is required in these enlarged institutions is a sense of responsibility across the broad range of this Nation’s vital interests. In this

regard, I am very gratified that Robert Rubin, former Secretary of

the Treasury, is coming into the pinnacle of American banking, and

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I am optimistic that Mr. Rubin will add a level of fiduciary responsibility that has frequently been lacking.

At bedrock, it is the notion that we can have clean hands while

moving dirty money that needs to change. It needs to change immediately in the American banking system.

Senator COLLINS. Thank you very much, Mr. Baker.

You have made several very strong statements. You have said

that our anti-money-laundering efforts are a failure, that the

United States is facilitating the illegal flight of capital, that money

laundering is easy because illegal flight capital is cultivated and

maintained. That is a serious indictment of our banking system.

Let’s say we accept your premise. What specific recommendations

would you have for us? Do we need tougher laws? Do we need more

aggressive oversight by the bank regulators? Do we need a change

in culture in American banks? Do we need all of the above? Have

you looked at possible solutions?

Mr. BAKER. Madam Chairman, I am certainly hopeful that Congress will pass bills that have been presented which add corruption

to the list of predicate offenses that will constitute grounds for a

charge of money laundering in the United States. I think that is

extremely critical. And I am limiting my remarks to the question

of corruption at this point.

In addition to that, I would certainly hope that bankers would

either adopt or regulations would require two additional steps. One

is that at least two bank officers’ signatures have to be recorded

on documentation as to knowledge of the source of funds of their

foreign clients in private banking departments. I would like to see

two signatures of officers attesting that they have made the necessary inquiries to confirm that they are satisfied that the source

of funds is legal, has been legally earned and legally transferred.

Then the second thing that I would like to see is for the customer

to sign a declaration to the same purpose, a declaration that says

that his banking activity is money that has been legally earned and

legally transferred.

I was struck in reading Citibank’s money-laundering policies and

guidelines that nowhere in those guidelines was the customer

asked to confirm that he understands that legal money is what is

being sought here. That point is not required to be put forward to

the customer. It seems to me that a private bank that wanted to

eliminate corrupt money from its coffers would make that very

clear from the outset, that we want to deal with money that has

been legally earned and legally transferred, and we want to be certain that you understand that that is our purpose and we ask you

to sign your recognition of that and your own confirmation that

that will be the activity in the account.

Senator COLLINS. Thank you. Senator Levin.

Senator LEVIN. Your first suggestion in terms of strengthening

our laws would be to add corruption as one of the predicate crimes

for money laundering.

Mr. BAKER. Yes, sir.

Senator LEVIN. How would you define that—corruption? Give us

a shot at a definition. Or has it been defined in another law in a

way which you think would be adequate? Because I happen to fully

agree with you, by the way, that without adding these crimes of

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corruption, accepting bribes, looting the treasury—which is a shorthand example of corruption—without adding those, money-laundering laws are really full of loopholes. But we also have a definitional issue there, and I am wondering if you could give us a hint

as to how you define it.

Mr. BAKER. My own definition, Senator, is money that has been

derived illegally by a foreign government official. Of course, it could

be a domestic official, but we are talking here about foreign government officials. Money that has been either stolen from the treasury,

pilfered from a parastatal corporation, taken as a kickback on a

contract—that sort of money by a government official is what I

refer to as corrupt.

Senator LEVIN. Illegal under his own law?

Mr. BAKER. Yes.

Senator LEVIN. Yesterday Mr. Reed stated that he believed that

funds from corruption likely represent only an infinitesimal portion

of a private bank’s deposits. I have two questions. One, do you

agree with that characterization or estimate? And, two, is it just

the raw numbers in any event that count or the country’s deposits

which result when their leaders are given access to a private bank

and the good will which that engenders?

Mr. BAKER. If you take the three elements—criminal, corrupt,

and commercial—as being the principal components of dirty money,

I would agree with the assessment that the corrupt component out

of those three is the smallest. My estimate was $20 to $40 billion

a year.

However, that component has by far the largest multiplier effect

on the other two components because of its impact on corrupting

the society as a whole.

In those countries where corruption is most evident at the top of

a government, it is quite common to see also high levels of criminal

and commercial tax evasion, criminal money laundering and commercial tax evasion. The corrupt component has the largest multiplier effect on the other two.

Senator LEVIN. On the basis of your own experience and the hundreds of interviews that you have conducted on this topic, have you

heard from private bankers that they had concern about the impact

on their franchise if they go about strongly asking questions about

source of money, for instance?

Mr. BAKER. Senator, I am aware that that is a concern to a number of private bankers. I can’t be much more specific than my

knowledge that that is of concern to them. Whether that is a legitimate concern depends on what the private bank deems as being its

purpose, its underlying goals.

I would suggest that private banking can easily be conducted

with wealth creators who conduct their business honestly, without

having to take the step of catering to the corrupt and the tax-evading money.

Senator LEVIN. Along the same lines, some U.S. banks oppose

changes in our laws to prohibit the managing of dirty money or corrupt money, using the argument that this law will only hurt U.S.

competitiveness because the business will simply move to banks in

other countries. What is your response to that?

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Mr. BAKER. Senator, that is exactly what I would like to see happen. I would like to see that money driven from U.S. shores and

make it go elsewhere; then, after we have succeeded in purging

that kind of money from our own society, working to eliminate it

as well from other countries, from Europe or other tax havens that

may take it. But in exactly the same way that we addressed the

Foreign Corrupt Practices Act, which was to take a position years

before other countries came along in the same direction, I would

like to see us divert that money from U.S. shores in the first instance, work to clean it up internationally in the second instance.

Senator LEVIN. You have indicated a number of suggestions in

terms of tightening up our own law. You gave us two. What would

be your reaction to the following additional changes? One is to

make a requirement of due diligence part of our law and not just

something that is voluntary.

Mr. BAKER. I would support that, Senator. I think that if these

hearings demonstrate anything, it is that bank policies are not followed, much less regulations that have been laid down. So I would

certainly support strengthening the regulations and strengthening

the regulatory environment that insists on the following of those

regulations in private banks.

Senator LEVIN. What about adding a requirement that there be

a record of the beneficial owner? I am not sure if you mentioned

that. You may have and I may have missed it.

Mr. BAKER. I didn’t mention it. Of course, the beneficial owner

should be indicated. There should be no place for secret bank accounts in the U.S. banking industry.

Senator LEVIN. Or in operations if they went overseas?

Mr. BAKER. Precisely, Senator.

Senator LEVIN. We heard yesterday that the Citibank private

bankers who handled the accounts for General Abacha’s sons did

not know for 3 years, from 1993 to 1996, that their father was indeed General Abacha, who was the head of the country. What is

your reaction to that?

Mr. BAKER. If I had been in that position, I would have known.

I don’t see how it is possible not to know who you were dealing

with.

Senator LEVIN. Then we also heard yesterday that in September

1998—that is just last year—in the middle of a widely known,

widely publicized Nigerian effort to locate and to seize the funds

that General Abacha and his family and associates had taken from

the treasury in the country, in the middle of all that, Citibank approved a $39 million loan to the sons so that they could immediately transfer the funds from London to a more secret Swiss bank

account. Citibank issued the loan so that the sons would not have

to pull the $39 million out of a time deposit with hefty penalties

for early withdrawals.

What is your reaction to that?

Mr. BAKER. I suspect that they broke no laws in doing that. So

far as I am aware, they broke no laws in doing that. Nevertheless,

I find it appalling that such services would continue to be given in

a situation where a sovereign nation was doing all that it could to

trace the sources of Abacha’s ill-gotten gains.

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Senator LEVIN. Our staff report indicates how Citibank told U.S.

bank regulators in April 1997 in a memo that a primary source of

the funds in the personal bank accounts belonging to President

Bongo of Gabon was the Gabon budget. In particular, this memo

said that he had $111 million in that budget for his unrestricted

use.

The regulators then accepted the memo as an adequate explanation of the source of the funds in the accounts without checking

to see whether or not Gabon law or budget provisions had any such

authority.

What is your response to that or comment?

Mr. BAKER. It certainly suggests that both the banks—both the

private bankers and the regulators failed to examine this matter

with sufficient care. I know of perhaps two or three countries

where substantial budget allocations are made to the Office of the

President openly in the budget. I don’t know of any country that

allocates $111 million, if that was the figure as I recall.

I think that would have been fairly easy to determine the veracity of that statement had any reasonable level of effort been made

to do so.

Senator LEVIN. Now, in conducting your research, I understand

that you spoke with literally hundreds of business people, academics, regulators, and others. Did you hear any information about

private bankers soliciting government officials or others for deposits?

Mr. BAKER. I didn’t ask those questions in the work that I have

done at Brookings, Senator. I didn’t ask those specific questions.

But I have certainly been aware over the years of private bankers

making their services known to the Marcoses, the Mobutus, the

Abachas of this world.

Senator LEVIN. Thank you. Thank you, Madam Chair.

Senator COLLINS. Mr. Baker, I just have one more question for

you. Senator Levin has done an able job, as he always does, of

identifying possible loopholes in our current laws that need to be

plugged, such as the issue of covering corruption, money that results from corruption.

I must say, however, I am somewhat skeptical about whether or

not we can solve this problem through tougher laws. In 1986, we

passed the Money Laundering Control Act for the first time and

made money laundering a free-standing criminal offense. Just last

year, we passed the Money Laundering and Financial Crime Act of

1998 in which we called upon the Department of Treasury and Department of Justice to issue annual strategies for fighting money

laundering. That strategy has been issued. It doesn’t seem to have

been very effective based on your findings.

Are more laws going to solve this problem?

Mr. BAKER. Madam Chairman, I think they will certainly help.

The gaping loopholes in our laws in my opinion have been that we

have addressed only one part of the problem, the criminal part. We

have said that if you are a drug dealer, that is beyond the pale and

we will not accept that. If there is bank fraud involved, we will not

accept that.

We have not addressed the corrupt and the commercial tax evasion components. Adding the corrupt component to what conVerDate 11-SEP-98 10:07 Apr 05, 2000 Jkt 000000 PO 00000 Frm 00106 Fmt 6601 Sfmt 6601 61699.TXT SAFFAIRS PsN: SAFFAIRS
91

stitutes money laundering will certainly have a strong effect on

ameliorating this problem. But ultimately we will have to go the

third step and address the commercial tax evasion.

As long as avenues exist for criminals to mix their money with

other private or what seem to be innocuous flows, they will do so.

We can only address this problem by addressing all three components. It may take us time to get there. The corruption component

certainly should be put on the table. Eventually this Nation will

have to address the question of pulling tax-evading money out of

developing and transitional economies.

Senator COLLINS. The reason I raise the issue is we had testimony yesterday that suggested very strongly that some of the

money in the private account that Citibank had for the Salinas

family may well have been the proceeds from illegal drug activity.

So that is already covered by the current law, and yet it seemed

to have little or no impact on how Citibank acted in this particular

case.

That suggests to me that, in addition to strengthening our laws

to plug the loopholes that you have identified, we also need far

more aggressive enforcement of the laws that we have on the

books. And in that regard, I am troubled by a soon-to-be-released

report from the inspector general of the Department of Treasury

which indicates that the banking regulators’ efforts to identify and

curtail money laundering have been lax.

So I guess my question to you is: Again, if we toughen the laws,

is that really going to do it? I understand what you are saying

about adding corruption and tax evasion to the current laws, but

it is not working very well with preventing the laundering of drug

money, which is already illegal. So don’t we need a three-pronged

approach? Don’t we need—in addition perhaps to tougher laws, we

need better enforcement and we also need the banks to take it seriously. We need a change in culture in the banking system.

Mr. BAKER. We need a change of culture in the banking system.

We need also a change in our national consciousness about the flow

of dirty money into our society. For too long, we have thought—we

have done an implicit cost/benefit analysis that says this is good for

America, people investing in the United States. And I am all for

investment provided it is legal. I am not in favor of it if it represents illegal money.

But we haven’t made that distinction adequately in the past, and

we have to do so, and it does require improved oversight of the

laws that we do pass. You are entirely correct.

Senator COLLINS. I think there is also the concern that you alluded to that if our banks don’t take it, it is going to go elsewhere.

Mr. BAKER. As I answered to Senator Levin, that is precisely

what I want to occur, is for that money to go elsewhere in the first

instance; then we work to clean it up in the rest of the world as

well.

Senator COLLINS. Thank you very much, Mr. Baker.

I am now pleased to welcome our last panel of witnesses this

morning. Ralph E. Sharpe is the Deputy Comptroller for Community and Consumer Policy at the Office of the Comptroller of the

Currency. Richard A. Small is the Assistant Director for the DiviVerDate 11-SEP-98 10:07 Apr 05, 2000 Jkt 000000 PO 00000 Frm 00107 Fmt 6601 Sfmt 6601 61699.TXT SAFFAIRS PsN: SAFFAIRS
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1The prepared statement of Mr. Sharpe appears in the Appendix on page 1079.

sion of Banking Supervision and Regulation at the Federal Reserve.

If you gentlemen would remain standing so that I can swear you

in? If you would 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. SHARPE. I do.

Mr. SMALL. I do.

Senator COLLINS. Thank you.

Again, we would ask that you each limit your oral testimony to

no more than 10 minutes, and we will include your entire written

statements in the record.

Mr. Sharpe, why don’t we start with you?

TESTIMONY OF RALPH E. SHARPE,1 DEPUTY COMPTROLLER

FOR COMMUNITY AND CONSUMER POLICY, OFFICE OF THE

COMPTROLLER OF THE CURRENCY, DEPARTMENT OF THE

TREASURY, WASHINGTON, DC.

Mr. SHARPE. Thank you, Madam Chairman.

Madam Chairman, Senator Levin, and Members of the Subcommittee, I am Ralph Sharpe, the Deputy Comptroller for Community and Consumer Policy at the Office of the Comptroller of the

Currency, also known as the OCC. We appreciate this opportunity

to testify on private banking activities and the vulnerability of private banking to money laundering. Money laundering is a serious

domestic and international law enforcement problem. We commend

the Subcommittee for focusing attention on the problem it poses

and share the Subcommittee’s belief in the importance of preventing U.S. financial institutions from being used, wittingly or unwittingly, to aid in money laundering.

We have submitted a detailed written statement addressing the

issues identified in your invitation letter, and I will summarize

that statement this afternoon.

I will begin by briefly describing private banking’s vulnerability

to money laundering and what banks can and should do to protect

themselves from those vulnerabilities.

If a bank does not adequately maintain due diligence and compliance standards with associated internal controls, audit, and

management information systems, it may be exposed to money

laundering. Specific vulnerabilities associated with private banking

operations include:

First, the challenges inherent in determining the identity of high

net worth private banking customers. This can be especially challenging when the customer is a foreign national and the source of

funds comes from outside the country.

Next, the high-dollar volume of private banking and resulting

earnings for the bank and account officers. This combination often

creates pressure for increased income from new business. Compensation programs based solely on quantitative factors can cause

bank officers to ignore or short-cut established controls and procedures designed to protect banks from money laundering.

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Finally, limits on access to account information. Some accounts

are opened domestically, but supporting documentation relating to

ownership and background information may be maintained in one

or more foreign jurisdictions with stringent secrecy laws. Other accounts may be opened and maintained in such jurisdictions from

the outset. In either case, such accounts can present significant

barriers to access to information needed to fully determine the

source of funds flowing into the account or the identity of beneficial

owners.

Banks must be the first line of defense in protecting themselves

against these vulnerabilities, and there are a number of fundamental safeguards that they should employ. For example, effective

account-opening policies and procedures are fundamental risk controls for private banking relationships. Bank management should

have specific policies for employees who approve, accept, and document new private banking accounts, including those in jurisdictions

with strong secrecy regimes. Banks should also ensure that they

will have access to information during the life of an account so it

can be appropriately monitored.

Second, banks should monitor high-risk customer activity to detect and report suspicious activity in a timely manner. Banks

should also design compensation programs that balance quantitative and qualitative factors and that provide measurement tools

to assess employee performance in both areas. They should ensure

that account relationship managers are subject to the same or

higher degree of oversight and control as managers of other areas

of operation that may expose the bank to risk.

Banks must also have an independent testing or audit function

for BSA compliance, including suspicious activity reporting. Audit

programs should focus on high-risk accounts and should include

comprehensive transaction testing.

And, finally, banks must train all appropriate personnel with respect to their responsibility to comply with the requirements of the

BSA.

I will now turn briefly to the steps the OCC takes to address actions that national banks should take to protect themselves from

money laundering.

The OCC requires national banks to establish and maintain adequate internal controls and independent testing, to designate an individual or individuals to coordinate and to monitor day-to-day

compliance with the Bank Secrecy Act, and to train responsible

personnel. In addition, our regulations require banks to report suspicious transactions and violations of law or regulation. An adequate BSA program must also enable a bank to detect and report

suspicious activity, including any such activity in its private banking department.

The OCC conducts regular BSA exams of national banks,

branches and agencies of foreign banks in the United States, covering all aspects of each institution’s operations, including foreign

offices. Our examinations include reviews for compliance with the

BSA and reviews of anti-money-laundering efforts in various divisions of the banks, including private banking.

Specifically, OCC conducts exams to ensure that national banks

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tivity, comply with BSA requirements, establish account opening

and monitoring standards, understand the source of funds for customers opening accounts, verify the legal status of customers, and

identify beneficial owners of accounts.

The OCC recently developed and will soon test expanded-scope

BSA/anti-money-laundering exam procedures for private banking.

These procedures specifically address employee compensation programs, account-opening standards, risk management reports, and

suspicious activity monitoring of private banking activities. These

procedures also focus attention on high-risk accounts, such as import/export businesses, private investment companies, accounts of

foreign government officials from high-risk countries, high fee income accounts, concentration accounts, and nominee name accounts.

In your invitation letter, you also specifically asked that we address OCC’s supervision of Citibank.

The OCC’s examination of Citibank’s private banking operations

commenced with a 1994 Bank Secrecy Act examination that included a focus on the bank’s private banking program. The 1994

exam identified the need to improve the bank’s compliance program

in the Private Bank and also found weaknesses in the bank’s training program and the processes it employs to supervise its private

banking account officers and ensure that they were following the

bank’s Know-Your-Client standards. The OCC recommended that

the bank establish procedures to monitor the activities of relationship managers to ensure that the unique client/banker relationship

did not compromise the bank’s standards.

During an examination of Citibank’s private banking operation

conducted in 1996, OCC examiners noted Citibank’s progress in

correcting previously identified deficiencies. The bank had upgraded its training program and was in the process of implementing global policies regarding customer identification and

source of wealth information.

In early 1998, as part of an overall assessment of the bank’s

1997 performance, OCC included comments relating to the need to

improve the bank’s control environment in the private bank. While

progress in many areas was noted, we informed the bank that

there was still a need for increased attention to the control environment. We also pointed out that our examiners had identified a

number of audit and control failures in the Private Bank that required attention.

During several domestic and overseas examinations in 1998, the

OCC noted that the long process of documenting the bank’s existing private banking customers was nearing completion. The bank

had created a new quality control unit to ensure compliance with

the bank’s policies, and management was effectively responding to

issues identified by the unit and the OCC. During these examinations, we found improved internal controls and adequate documentation regarding client source of wealth. However, OCC also

recommended that management implement the bank’s global

Know-Your-Client policy within established time frames, improve

information regarding clients’ expected transaction volumes, and

formalize and implement a monitoring program for all private

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banking clients, in addition to the high-risk client monitoring program.

In early 1999, the OCC communicated to the board that the control environment in the Private Bank, which had led to adverse

publicity, had improved. The OCC acknowledged the attention this

had received from senior management and the board. In addition,

during several overseas examinations of Citibank offices in 1999,

examiners continued to note progress in the bank’s global compliance and anti-money-laundering program.

I will now turn to a brief description of OCC’s experiences in obtaining information from foreign jurisdictions.

In most instances, the OCC has not encountered problems in obtaining from the banks that we supervise routine supervisory information domiciled in foreign jurisdictions relating to the safety and

soundness of the bank’s operations in those jurisdictions. The OCC

often obtains such information directly from national banks

through requests, on-site inspections of their offices in a host foreign jurisdiction, or through a request to a foreign supervisory authority.

However, obtaining account-specific information from some foreign jurisdictions has been significantly more difficult. Most foreign

jurisdictions with stringent bank secrecy laws do not consider account-specific records to be routine supervisory information. As a

result, those jurisdictions typically prohibit foreign supervisory authorities from accessing customer records.

The OCC addresses problems raised by secrecy laws in foreign

jurisdictions in a number of ways. For example, the OCC expects

national banks to implement internal controls, monitoring systems,

and processes to reduce money-laundering risk on a company-wide

basis, including in its foreign offices. When on-site reviews are not

possible because of bank secrecy and financial privacy laws, the

OCC reviews the corporate policy and audit functions of the bank.

When we have concerns, we require the bank to address those concerns. This may also include requiring external audits or enhanced

reporting requirements.

These difficulties are also being addressed through the many initiatives on the international front that are focused on the concerns

surrounding the misuse of offshore accounts for financial crime

purposes. International groups such as the Financial Action Task

Force and the Caribbean Financial Action Task Force and the

Basel Committee on Banking Supervision have all developed guidance, and the OCC has been directly involved in that guidance.

My written statement also describes in detail a number of other

anti-money-laundering initiatives, and these include the work of

our internal Task Force on Money Laundering, the National AntiMoney Laundering Group, our work with the Financial Crimes Enforcement Network to further enhance our ability to identify banks

at risk for money laundering and targeted exams we have conducted on law enforcement leads.

As part of the administration’s recently issued National Money

Laundering Strategy for 1999, the OCC will also be participating

in a number of interagency projects, including a high-level working

group of regulators and law enforcement officials to develop ways

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1The prepared statement of Mr. Small appears in the Appendix on page 1101.

to better detect potential money laundering occurring through

banks both domestically and internationally.

In conclusion, the OCC is committed to preventing national

banks from being used to launder the proceeds of the drug trade

and other illegal activities. We recognize the potential vulnerability

of private banking to money laundering, and our supervisor efforts

are aimed at ensuring that banks employ control procedures to reduce that vulnerability. We stand ready to work with the Congress,

the other financial institution regulatory agencies, law enforcement

agencies, and the banking industry to continue to develop and implement a coordinated and comprehensive response to the threat

posed to the Nation’s financial system by money laundering.

Thank you, and I will be happy to answer any of your questions.

Senator COLLINS. Thank you, Mr. Sharpe.

Mr. Small.

TESTIMONY OF RICHARD A. SMALL,1 ASSISTANT DIRECTOR,

DIVISION OF BANKING SUPERVISION AND REGULATION,

FEDERAL RESERVE SYSTEM, WASHINGTON, DC.

Mr. SMALL. Thank you, Chairman Collins, Senator Levin, Members of the Subcommittee. I am pleased to appear before this Subcommittee to discuss the Federal Reserve’s role in the government’s

effort to detect and deter money laundering and other financial

crimes, particularly as these issues relate to the private banking

operations of financial institutions.

You have asked the Federal Reserve to address several matters,

which I intended to address. As well, you have asked us to comment on the operations of a specific banking organization. I regret

that I am not at liberty to discuss the activities of any one organization because of the importance we attach to maintaining the confidentiality of examination findings in order to protect the integrity

of the examination process.

In order to better understand the money-laundering issues related to private banking, it would be useful to first provide you

with some background information on what we consider to be private banking and the way in which private banks operate. But,

first, let me start by stating that as a bank supervisor, of primary

interest to the Federal Reserve is the need to assure that banking

organizations operate in a safe and sound manner and have proper

internal control and audit infrastructures to support effective compliance with necessary laws and regulations.

A key component of internal controls and procedures is effective

anti-money-laundering procedures. Moreover, as part of our examination process, we review the anti-money-laundering policies and

procedures adopted by financial institutions to ensure their continued adequacy.

The Federal Reserve places a high priority on participating in

the government’s efforts designed to attack the laundering of proceeds of illegal activities through our Nation’s financial institutions. Over the past several years, the Federal Reserve has been

actively engaged in these efforts by, among other things, redesigning the Bank Secrecy Act examination process, which became

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the standard of the industry at the time, developing anti-moneylaundering guidance, regularly examining the institutions we supervise for compliance with the Bank Secrecy Act and relevant regulations, conducting money-laundering investigations, providing expertise to the U.S. law enforcement community for investigation

and training initiatives, and providing training to various foreign

central banks and government agencies.

As more fully described in my written statement, private banking

offers the personal and discreet delivery of a wide variety of financial services and products to the affluent market, primarily high

net worth individuals or their corporate interests. Customers most

often seek out the services of a private bank for issues related to

privacy, such as security concerns related to public prominence or

family considerations or, in some instances, tax considerations.

Private banking services almost always involve a high level of

confidentiality regarding customer account information. Consequently, it is not unusual for private bankers to assist their customers in achieving their financial planning, estate planning, and

confidentiality goals through offshore vehicles such as personal investment corporations, trusts, or more exotic arrangements, such

as mutual funds. Through a financial organization’s global network

of affiliated entities, private banks often form the offshore vehicles

for their customers. These shell companies, which are incorporated

in offshore jurisdictions, are formed to hold the customer’s assets,

as well as offer confidentiality, because the company rather than

the beneficial owner of the assets becomes the account holder at

the private bank.

Historically, clients sought discretion, confidentiality, and asset

preservation. This emphasis has shifted as capital restraints have

been dismantled, and in some countries, autocratic regimes have

been replaced with free market economies. Today, while confidentiality is still important, investment performance has taken precedence.

The Federal Reserve has long recognized that private banking facilities, while providing necessary services for a specified group of

customers, can, without careful scrutiny, be susceptible to money

laundering. In our continuing effort to provide relevant information

and guidance in the area of effective anti-money-laundering policies

and procedures for private banking, in 1997 the Federal Reserve

published guidance on sound risk management practices for private

banking activities. Besides distributing the guidance to all banking

organizations supervised by the Federal Reserve, the guidance was

made publicly available through the Federal Reserve’s website.

More recently, the Federal Reserve developed enhanced examination procedures and guidelines specifically designed to assist examiners in understanding and reviewing private banking activities.

Since 1996, the Federal Reserve has undertaken two significant

reviews of private banking in an even greater effort to understand

risks associated with private banking. In the fall of 1996, the Federal Reserve Bank of New York began a year-long cycle of on-site

examinations of risk management practices of approximately 40

banking organizations engaged in private banking activities. Last

year, a Private Banking Coordinated Supervisory Exercise by several Reserve Banks and Board staff was undertaken to better unVerDate 11-SEP-98 10:07 Apr 05, 2000 Jkt 000000 PO 00000 Frm 00113 Fmt 6601 Sfmt 6601 61699.TXT SAFFAIRS PsN: SAFFAIRS
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derstand and assess the current state of risk management practices

at private banks throughout the Federal Reserve System.

The examinations by the Federal Reserve Bank of New York focused principally on assessing each organization’s ability to recognize and manage the potential risks, such as credit, market, legal,

reputational or operational, that may be associated with an inadequate knowledge and understanding of its customers’ personal

and business backgrounds, sources of wealth, and uses of private

banking accounts.

We recognized, for example, that some private banking operations may not have been conducting adequate due diligence with

regard to their international customers. While all organizations

had anti-money-laundering policies and procedures, the implementation and effectiveness of those policies and procedures ranged

from exceptional to those that were clearly in need of improvement.

As a result of these examinations, certain essential elements associated with sound private banking activities were identified.

These elements include the need for: Senior management oversight

of private banking activities and the creation of an appropriate corporate culture that embraces a sound risk management and control

environment; due diligence policies and procedures that require

banking organizations to obtain identification and basic information from their customers, understand sources of funds and lines of

business, and identify suspicious activity; management information

systems that provide timely information necessary to analyze and

effectively manage the private banking business and to monitor for

and report suspicious activity; and adequate segregation of duties

to deter and prevent insider misconduct.

During the course of the examinations, a number of banking organizations were reluctant to release information on the beneficial

ownership of personal investment corporations established in recognized secrecy jurisdictions that maintained accounts at the banks.

The banks raised concerns regarding the prohibition on disclosure

imposed by the laws of the countries in which the personal investment corporations were formed, as well as concerns that such disclosures would lead to customer backlash. However, as the result

of continued persistence by Federal Reserve examiners, all banks

eventually provided the requested information. Very few customers

closed their accounts even after being asked to waive any confidentiality protections that they may have had under foreign law so

that the beneficial ownership information could be made available

to examiners.

In last year’s Coordinated Supervisory Exercise, a sample consisting of the private banking activities of seven banking organizations was reviewed by a system-wide team, as I stated. As a result

of the examinations, we concluded that the strongest risk management practices existed at private banks with high-end domestic

customers.

We found that among private banks with primarily international

customers, stronger risk management practices were in place at

those organizations that had a prior history of problems in this

area but, as a result of regulatory pressure, had successfully corrected those problems.

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The weakest risk management practices were identified at organizations whose private banking activities were only marginally

profitable and who were attempting to build a customer base by

targeting customers in Latin America and the Caribbean.

Rest assured that the Federal Reserves is committed to attacking

money laundering in the financial sector. We believe that our longstanding programs and our assistance to the overall government efforts are unrivaled in both scope and depth. We have been at the

forefront of developing new tools to enhance our ability to ensure

that banking organizations establish adequate policies and procedures, and as you are aware, we have advocated for quite some

time the need for increased due diligence with regard to certain

banking transactions.

The Federal Reserve has addressed and continues to address perceived vulnerabilities to money laundering in private banking by

issuing the private banking sound practices guidance and developing targeted examination procedures specifically designed for private banking, as well as our regular on-site examination of private

banking operations, as I previously stated. There are some practices within private banking operations that we believe pose unique

vulnerabilities to money laundering and, therefore, require a commitment by the banking organizations to increased awareness and

due diligence.

Personal investment corporations that are incorporated primarily

in offshore secrecy or tax haven jurisdictions and are easily formed

and generally free of tax or government regulation are routinely

used to maintain the confidentiality of the beneficial owner of accounts at private banks. Moreover, and of primary interest to the

beneficial owners, are the apparent protections afforded the account holders by the secrecy laws of the incorporating jurisdictions.

Private banking organizations have at times interpreted the secrecy laws of the foreign jurisdictions in which the personal investment corporations are located as a complete prohibition to disclosing beneficial ownership information. The Federal Reserve,

however, has continually insisted that for those accounts that are

maintained within the United States, banking organizations must

be able to evidence that they have sufficient information regarding

the beneficial owners of the accounts to appropriately apply sound

risk management and due diligence procedures.

The use of omnibus or concentration accounts by private banking

customers that seek confidentiality for their transactions poses an

increased vulnerability to banking organizations that the transactions could be the movement of illicit proceeds. Omnibus or concentration accounts are a variety of suspense accounts and are legitimately used by banks, among other things, to hold funds temporarily until they can be credited to the proper account. However,

such accounts can be used to purposefully break or confuse an

audit trail by separating the source of funds from the intended destination of the funds. This practice effectively prevents the association of the customer’s name and account numbers with specific account activity and easily masks unusual transactions and flows

that would otherwise be identified for further review.

There has been much said about the use of correspondent accounts in facilitating money-laundering transactions. Admittedly,

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correspondent accounts may raise money-laundering concerns because the interbank flow of funds may mask the illicit activities of

customers of banks that use the correspondent services. However,

it is our belief that respondent banking relationships, if subject to

appropriate controls, play an integral role in the financial marketplace by allowing banks to hold deposits and perform banking services, such as check clearing, for other banks.

A primary obstacle to our supervision of offshore private banking

activities by U.S. banking organizations, not only with regard to

beneficial ownership information but with regard to safety and

soundness of the operations, is our inability to conduct on-site examinations in many offshore jurisdictions. While it appears that

nearly all institutions that we supervise have adequate antimoney-laundering policies and procedures, our examination process

is most effective when we have the ability to review and test an

organization’s policies and procedures. Secrecy laws in some jurisdictions limit or restrict our ability to conduct these on-site reviews

or to obtain pertinent information. In such instances, practically

our only alternative is to rely on a bank’s internal auditors.

The Federal Reserve has been contemplating, in cooperation with

the banking industry, developing guidance to assist banking organizations in implementing money-laundering risk assessments of

their customer base. These risk assessments would be used to determine the appropriate due diligence required to identify and,

when necessary, report suspicious activity.

For example, because of the increased concern that private banking accounts could be used for money laundering, we would expect

that guidance in this area would suggest that it may be necessary

to engage in a more in-depth analysis of the customer’s intended

use of the account coupled with a heightened ongoing review of

account activity to determine if, in fact, the customer has acted in

accordance with the expectations developed at the inception of the

relationship. We believe that such policies and procedures will be

an effective tool against potential money laundering.

The banking system has a significant interest in protecting itself

from being used by criminal elements. Individual banking organizations have committed substantial resources and achieved noticeable success in creating operational environments that are designed to protect their institutions from unknowingly doing business with unsavory characters and money launderers. Clearly,

these efforts need to continue and the momentum needs to be

maintained.

I want to emphasize that the Federal Reserve actively supports

these efforts. Consequently, we will continue our cooperative efforts

with other bank supervisors and the law enforcement community

to develop and implement effective anti-money-laundering programs addressing the ever-changing strategies of criminals who

attempt to launder their illicit funds through private banking operations, as well as through other components of the banking organizations here and abroad.

Thank you.

Senator COLLINS. Thank you, Mr. Small.

Mr. Small, yesterday I asked Citicorp’s Chairman, John Reed, a

series of questions involving the six or seven internal audits that

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Citibank had conducted of the Private Bank, all of which identified

severe deficiencies in Citibank’s procedures. It is my understanding

that in 1996 the Federal Reserve Bank of New York conducted an

examination of Citibank’s Private Bank.

Is it correct that the Federal Reserve Bank concluded that as

part of that examination Citicorp’s internal audits of the Private

Bank were not being taken seriously?

Mr. SMALL. Yes.

Senator COLLINS. In response to that finding, what did the Federal Reserve do?

Mr. SMALL. Well, as I stated, Madam Chairman, I am a little

concerned about talking about the specifics of our examination

process. As you are aware, we conducted these reviews as a part

of a global study that we conducted on private banking. The organization itself, the Private Bank, as well as the national bank, primarily fall under the responsibility of the Comptroller, but we coordinated our review because we wanted to get an understanding

of how private banking operations work in the industry as a whole.

As a result of the 1996 review, we made suggestions and recommendations for changes which we then looked at in 1997 and

again in 1998 in terms of whether or not those recommendations

that we had made had been dealt with, whether they were moving

forward. And as you are aware, in the most recent review that we

did we found that the bank had begun to put the policies and procedures in place.

Senator COLLINS. I would like to direct this question to both of

you. During this period of time, there weren’t just the six or seven

internal audits that criticized Citibank’s private banking operations, but also both of your regulatory examinations identified

problems.

Do you feel that in response to the examinations conducted by

your agencies that Citicorp’s senior management responded in a

timely and aggressive manner to the findings or the problems that

your examinations identified? Mr. Sharpe, I will start with you.

Mr. SHARPE. Well, Madam Chairman, as you know, we really

started our examination process into the private banking operation

in 1994, where we identified some deficiencies, and continued that

process through examinations in 1996, 1997, 1998, and 1999. And

throughout that process, as we looked at various aspects of the private banking operation, we raised a number of criticisms, and we

talked in our examination reports and we talked to the senior management and the board about our concerns with respect to correcting deficiencies that we had identified in terms of their program to identify high-risk clients and client profiling and to set up

appropriate monitoring systems.

These were continual issues that we tracked and talked with

them about, not only during our examination process but we also

kept track of in between examinations by looking at audit reports

and other information available to us.

Had we wished they had responded more quickly? Yes. These

were important considerations, and the profiling system that they

had designed and put in place struck us as a very good thing, as

something that would provide the bank with the kind of information it needed in order to better understand the source of wealth

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and other information regarding the clients in its private banking

operation.

We also recognized that Citibank is a far-flung organizations, operating in 100 countries and is a large operation. So we tried to be

mindful of that, but obviously, we would have preferred to have

seen quicker progress.

Senator COLLINS. Mr. Small, were you satisfied with the timeliness of the response by Citicorp?

Mr. SMALL. The easiest answer for me is that I agree with everything that Mr. Sharpe said. I will add that obviously we still had

criticisms in 1997 and 1998, and as Mr. Sharpe has said, we certainly wish that they would have moved along and implemented

the suggestions that we made and had taken corrective action at

a pace that would not result in continued criticism over the following years.

Senator COLLINS. And I think it is important to note that both

of you have found much better compliance more recently, so I do

want to be fair to Citibank and get that on the record.

But what troubles me is there seems to have been a period of

about 5 years when internal audit after internal audit, bank exam

after bank exam, identified over and over again serious deficiencies

that exposed the bank to risk of money laundering.

My question for you, Mr. Small, is that it is my understanding

that, in response to that pattern, the Federal Reserve was sufficiently concerned about the vulnerabilities of the Private Bank that

it required the Private Bank to report quarterly to the board of directors. Was that requirement imposed because of the concern that

Citibank’s executives were not aggressively handling the problem?

Mr. SMALL. It was imposed because we wanted to make sure that

the senior management of the bank was quite aware of the problems not only that we found but that their own internal auditors

had identified as deficiencies. And, yes, that is exactly why we imposed that requirement.

And as you know, we lifted that requirement recently because we

were satisfied that senior management had begun to address the

issue.

Senator COLLINS. Is that an unusual requirement or have you

found similar problems that warranted a quarterly report from the

private bank division of other multinational banks?

Mr. SMALL. We have in the past required banks to make reports

directly to the senior management and audit committee when we

felt that that information wasn’t getting addressed properly and

needed to be done.

Senator COLLINS. Finally, Mr. Small, in your testimony in particular, but also, Mr. Sharpe, in your statement, each of you identified a number of barriers or obstacles to your ability to effectively

conduct examinations. Mr. Small, I was concerned in your statement when you talked about the difficulty that your bank regulators had in getting beneficial ownership information, and you

said that, fortunately, as a result of continued persistence by Federal Reserve examiners, the banks provided the requested information.

Should it require that kind of extra effort and persistence? Isn’t

this something that banks should be required to have in their files,

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information on the beneficial owner? And should you have to go

through these obstacles?

Mr. SMALL. Well, our concern is clearly that we need to be able

to assure ourselves that the banks are conducting appropriate due

diligence on who their customers are and that they know who they

are doing business with. And our concern was that when we looked

at particular customer files to do a sampling, that beneficial ownership information was not available.

Now, the history has been that when the beneficial owner is an

offshore corporation or entity that has perceived privacy protections

in the offshore jurisdiction, that the banking organizations believe

that they will violate the laws of that foreign jurisdiction by allowing that information to be disclosed in the United States. We have

taken the position that there needs to be a way for the bank to figure out how to make sure that they know who the beneficial owner

is. They need to be able to tell us how they do that, and one of the

ways that we can do that is by the sampling of these accounts and

the information.

I think that while in the early 1990’s we began to push this idea,

we really had not been strongly or—I should say we had not been

strongly pushing it as hard as we did when we did this private

banking review in 1996. And I think that is when it really came

to light for the banks that we were really serious about this.

I think the environment has changed a lot since then and that

banks are providing the information. They are asking for waivers

from their customers in case there is a perceived problem in the

foreign jurisdiction with confidentiality laws.

So I think there has been a change, and I would agree with you

that we shouldn’t have to push that. But as everything we do,

when we first raise it as an issue, we have to bring it to the forefront and make sure that it is understood what our concerns are,

and then make the industry understand it and get cooperation

from the industry. And I think that is where we are now.

Senator COLLINS. It just seems to me that the tangled web that

you have described of having to deal with anonymous accounts, fictitious names, concentration accounts, offshore accounts, and secrecy jurisdiction makes it virtually impossible for you to conduct

a thorough examination. Mr. Sharpe.

Mr. SHARPE. Well, I would certainly agree with Mr. Small that

it presents issues and barriers and it makes it difficult. And I

guess the only thing I would add to what he has already said is

that in many respects this is an international problem which will

likely require some kind of international solution. Just as banks

that operate in the United States are subject to U.S. laws, banks

that operate overseas are subject to the host country laws, and

sometimes those laws are quite restrictive. And we do have to find

creative ways and we do have to put some burden on our banks to

make sure that they are doing everything they can under the circumstances to know their customer and to know the beneficial

owners and to provide whatever protections are needed to do the

kind of due diligence that needs to be done.

But it is an international issue, and we eagerly look forward to

working with others, other regulators here in the United States

and internationally, to address that problem.

104

Senator COLLINS. Are there efforts underway to come up with an

international approach or some sort of standards that would make

this global problem easier?

Mr. SHARPE. There are a number of initiatives underway. We

have referred to those in our testimony, through the Financial Action Task Force and the Basel Committee and other organizations

that are all working vigorously. And I think also there are aspects

of the National Money Laundering Strategy that will very likely

end up addressing that issue from the domestic perspective but

also through participation with those international groups.

Senator COLLINS. Thank you. Senator Levin.

Senator LEVIN. Thank you, Madam Chairman.

I am not satisfied with that answer, frankly, because yesterday

Mr. Reed told us that if their operation in a secrecy jurisdiction

were a problem for our regulators, the regulators would have told

us.

Now, they are a problem for you. You both testified to that today.

Your testimony, Mr. Small: ‘‘Secrecy laws in some jurisdictions

limit or restrict our ability to conduct these on-site reviews or obtain pertinent information. In such instances, practically our only

alternative is to rely on a bank’s internal auditors.’’

Your testimony is the same. You have got problems. You rely on

voluntary waivers and this kind of activity. You are looking for an

international solution. I think we all want to have an international

solution, but I think if we wait for it, we are going to continue to

see that our banks are making profit off dirty money. We should

not tolerate it, and you should not tolerate it as the people who

regulate our banks.

Now, Citibank says these restrictions in these offshore jurisdictions don’t seem to be a problem for our regulators or for us in Congress or you wouldn’t allow us to operate in a secrecy jurisdiction,

he tells us.

So my question is: Why do we? Why do you? Why don’t we simply tell our banks you can’t operate in a secrecy jurisdiction unless

we have the same access to those records—and here I am talking

about legal process access to those records—as we do to your

records here in the United States? Why don’t we just simply decide

that?

That is what Citibank told us yesterday. You guys don’t want us

to do it? Tell us. Why don’t we tell them? Why don’t we just simply

cut that knot and say we either have to have access through legal

process to records in secrecy jurisdictions or we are not going to

permit you to operate in those secrecy jurisdictions?

Mr. Small.

Mr. SMALL. Well, Senator Levin, we actually attempted to do

that in a proposal that we had last year in terms——

Senator LEVIN. But that wasn’t a private bank proposal, was it?

Mr. SMALL. That was all bank proposals. That would have certainly covered private banking as well as anything else.

Senator LEVIN. No, but I want to just focus on private banks, because these are the banks that are used by folks that have great

wealth, that are able to do things that regular folks can’t do and

don’t do. So I just want to talk about private banks. Why do we

not then tell them at a minimum—because we know there is a conVerDate 11-SEP-98 10:07 Apr 05, 2000 Jkt 000000 PO 00000 Frm 00120 Fmt 6601 Sfmt 6601 61699.TXT SAFFAIRS PsN: SAFFAIRS
105

fidentiality issue that will obviously disturb regular small depositors, and we don’t have the answer to that question. But until we

do have the answer to that question, why not tell the private

banks, which are handling huge amounts of money and which are

the recipients of dirty money—that is not the case with small depositors. I am talking about private banks which are used to launder money and receive either illegal money here or illegal money

in those countries.

Why not start by telling those banks you cannot use secrecy jurisdictions unless we are going to have the same access through

legal process to those records as we would in this country using

legal process to those records?

Mr. SMALL. I understand that, and I just want to come back to

say that the proposal would have certainly covered private banks.

As a matter of fact, it specifically discussed private banking operations.

Senator LEVIN. But it went way beyond that, correct?

Mr. SMALL. Oh, absolutely.

Senator LEVIN. I just want to talk about private banks.

Mr. SMALL. I understand that. I just want to say, when you are

asking what we should do about it, there was a proposal that dealt

with that issue.

I also think that we have been very diligent and vigilant in looking at private banking operations as a result of the study we did

in 1996 and going forward and that we don’t see—while we still see

some problems, we don’t see the problems that we saw in the past.

And so we are getting access to information. The banks are bringing the information onshore when requested, and I would make the

assumption that there would be an uproar from the banking community that we would be shutting down competition, we would be

putting our banks at a competitive disadvantage if we completely

shut off all offshore access because it has legitimate purposes.

Now, I assume if Congress would like to regulate that, then that

would be the law of the day.

Senator LEVIN. Yes. But I want to now ask you for what your

recommendation is. These restrictions that exist on your access to

accounts in offshore banks or offshore countries, which you have

here but you don’t have offshore, is there any reason why you

should not give us a recommendation, straightforward, that says

we want access? We don’t want to rely on internal audits, we want

the same access to those accounts, at least in private banks that

run these offshore operations, as we do to those operations here domestically? Is there any reason why you shouldn’t give us just a

flat-out recommendation? Because that is what they tell us.

Mr. Reed told us yesterday, if we have a problem with that, let

us know; apparently you guys don’t have a problem, or else you

would let us know. That is a very fair comment on his part, as far

as I am concerned. Now, why not do it? Why not give us that recommendation?

Mr. SMALL. I don’t know. We would obviously have to evaluate

it and come back to you.

Senator LEVIN. I would appreciate your doing that.

In February 1997, the Federal Reserve asked, and the OCC

agreed, to review accounts at the Citibank Private Bank associated

106

1See Exhibit No. 19 which appears in the Appendix on page 154.

with President Bongo of Gabon. Now, one of the concerns was the

lack of file information about the source of the funds in the account.

Mr. Ober testified under oath yesterday that in the 7 years that

he handled the Bongo accounts, he never asked President Bongo

about the source of the funds. Never once.

What is your reaction to that? Let’s start with you, Mr. Sharpe.

Mr. SHARPE. Well, when the Federal Reserve brought that matter to our attention, we assigned one of our most senior examiners

who has experience in bank secrecy matters and anti-money laundering to look into that matter, and he did. He spent, off and on

over a 4-month period, a great deal of time looking at bank files,

bank records. He looked at cash in, cash out. He looked not only

at Mr. Bongo’s accounts, but the accounts of relatives and associates. He also talked with the bank about their reasons for concluding on source of funds issues and did not accept the initial answer that he got but, in fact, told the bank that he needed more.

The bank went to its Paris operation where an analysis was done

of the source of wealth and provided back to our examiner. That,

together with the information that he had assembled, suggested to

him that this was, in fact—this was a situation that did not rise

to a level that justified the filing of an SAR.

I would note that the particular customer here had an account

relationship with the bank dating back to 1970, and the private

banking account relationship dated back to 1985. And it was not

common, I think, certainly not in the 1970s and probably not even

in the 1980s, to have that kind of information in the file. So it was

an appropriate inquiry, and we are satisfied that our examiner did

what he could to look behind the bank’s explanation and to draw

the conclusion that he did.

Senator LEVIN. Now, was it your understanding that this memo

meant that President Bongo received $111 million each year in government funds which he could use in an unrestricted way, including putting the money in his personal bank deposits? 1 Is that what

your understanding was?

Mr. SHARPE. That was the information that was provided by the

bank.

Senator LEVIN. And did you check with the IMF or the World

Bank or anybody else to see whether that was true?

Mr. SHARPE. No. We accepted the analysis that was done by their

Paris office.

Senator LEVIN. Looking back, wouldn’t it have been better to

check with the IMF or the World Bank or any other entity that

would have knowledge of the budget of Gabon to see whether or

not, in fact, that president was given under Gabon law the unrestricted use of $111 million a year?

Mr. SHARPE. There are always additional steps, I think, that people could identify, that you could go back knowing today what we

didn’t know then, to suggest that additional or further inquiry

might have been appropriate. We are satisfied that the examiner

presented with the facts that he was presented with made an apVerDate 11-SEP-98 10:07 Apr 05, 2000 Jkt 000000 PO 00000 Frm 00122 Fmt 6601 Sfmt 6601 61699.TXT SAFFAIRS PsN: SAFFAIRS
107

1See Exhibit No. 20 which appears in the Appendix on page 155.

propriate inquiry, looked into the matter, spent a great deal of time

on it, and had to draw a conclusion.

The only other point I would make on that, Senator, is that his

conclusion was not a conclusion that the account was absolutely

okay. He didn’t approve anything. It simply was a conclusion that

there wasn’t sufficient evidence to justify the filing of a suspicious

activity report.1

One of the things he clearly communicated to the bank was that

it was their responsibility to continue to monitor the account, and

if they gathered additional information that suggested that something more needed to be done, it was the bank’s responsibility to

act on that.

Senator LEVIN. Well, it seems to me if that is the level of the

oversight we are going to be providing, it is just inadequate, because it is such a glaring statement in an explanation that it just

cries out for an in-depth inquiry. Is the president of a country

handed $111 million in a budget for his own personal use? Any inquiry with any of the world banking operations, World Bank, any

of the world banks, would have indicated, no, there is no such provision in Gabon law which gives the president $111 million.

So I would hope that this would be, frankly, a lesson to our regulators that we just have got to look beneath the most superficial

kind of an explanation. That is not knowing your customer. That

is the opposite, it seems to me. That is just accepting any explanation.

It is a little bit like Salinas. The explanation is he sold a construction company. No one asked what construction company, what

did he get for it. There were rumors floating around Mexico at the

time about source of corrupt money, and there is not even a question? What do you mean he was in the construction business and

he sold his company? What was the name of it? Never asked. What

was it sold for? Never asked. What kind of construction projects?

Never asked.

And so it seems to me we have got to be a lot tougher on the

regulatory side here with whatever authority you have.

Now, I don’t think, frankly, you’ve got enough authority. That is

what I pressed you on before, Mr. Small. You are stymied in terms

of getting information about who the beneficial owners are and

what the source of wealth is, because of secrecy laws in other countries that our banks are allowed to bank in offshore. And yet we

are kind of silent about that and, therefore, complicit, I believe.

We cannot complain about corruption in foreign countries and

then allow our own banks to profit from that corruption without

doing our best to eliminate that inconsistency, because I think it

is just wrong. But we need your help, not just in regulating with

the powers you have, but giving us recommendations, looking at

these bills that are pending and will be introduced to tighten up

these laws on money laundering, and we welcome very much your

response to those.

I have a number of other questions, but my time is up.

Senator COLLINS. Go ahead.

Senator LEVIN. Thank you very much, Madam Chairman.

108

I want to go back to Mr. Sharpe. Is it fair to say, given the 1994

review of the Citibank operations and your dissatisfaction with

their Know Your Customer policies, that from your perspective, at

least, know your client was not an effective part of the culture of

that bank in that year?

Mr. SHARPE. Well, that process had not yet really taken root in

the bank in that year, and that is what was being developed, and

that is one of the things that we tracked the progress of over the

subsequent exams.

As I said before, we were interested in seeing that particular

process come to fruition because we felt it was a process that was

worth following through. It had a lot of very attractive features to

it.

Senator LEVIN. My question is, though, at least from your review

of it in that year, the Know Your Client culture had not taken at

that bank. Is that a fair statement?

Mr. SHARPE. I think that is a fair statement. I would point out

that this was really our first hard look at private banking in 1994.

In fact, I would venture to say in 1994 that a lot of folks weren’t

looking at private banking, period. It was considered a sleepy backwater, and our examiner looked at it in terms of the potential risk

that it might present and thought an examination was appropriate.

Senator LEVIN. I think it was, too. But I am saying, when you

did examine in that year, it is fair to say that the Know Your Client Culture had not taken hold at Citibank at that time yet. Is that

fair or not?

Mr. SHARPE. I think that is a fair statement.

Senator LEVIN. All right. Let me just close, and I very much appreciate the additional minutes that the Chairman has squeezed in

here for me. I know, for instance, Mr. Small, that you have been

taking the lead in your agency on trying to correct some of these

problems, and we very much appreciate both you and Mr. Sharpe

in terms of the work that you have done. And while we are pressing your agencies to take stronger action and to help us close loopholes, in your cases, I know that as individuals you have been in

a leadership role trying to do exactly that. And I just want to end

by thanking you. I know I have been pressing you pretty hard here

today, but I wouldn’t want the hearing to end without a thank you

for your cooperation with this investigation and for your work at

the agencies. You have been in the advance part of your agency on

these areas. Thank you both.

Mr. SMALL. Thank you.

Mr. SHARPE. Thank you.

Senator COLLINS. I am sure that our witnesses are delighted to

learn that we have another series of votes so that we are going to

end the hearing.

We may have some additional questions which we will submit for

the record from both Senator Levin and from myself.

Because the vote has begun, I am going to submit my closing

statement for the record.

CLOSING REMARKS OF SENATOR COLLINS

I want to thank all of the witnesses for their testimony today. The peculiarities

of private banking and its vulnerabilities to money laundering must remain a focus

109

of our banking system and, particularly, our banking regulators. These hearings

have demonstrated—I think conclusively—that private banking is by its very design

vulnerable to criminals who wish to launder dirty money. As a consequence, we

must depend on our banks to implement internal procedures and controls that will

allow the detection and reporting of suspicious activity.

And, it’s not enough that our banks have written policies and procedures in place.

They must create a corporate culture that places a priority on fulfilling a bank’s

legal obligation to report money laundering. That means banks must ensure that

their employees understand that, while servicing the client is always important,

such service cannot include turning a blind-eye to activities that may be related to

money laundering. Setting such a tone and culture starts at the top and, as I noted

yesterday, I am glad to hear that Citibank’s CEO, Mr. Reed, is taking steps to make

that culture a reality at Citibank’s Private Bank.

Today’s testimony also makes clear that our banking regulators have a big job

ahead of them to make sure that American banks take seriously their legal obligations to detect and report suspicious activity. All in all, I believe the OCC and the

FED have done a good job, and I am glad to see that private banking has been given

greater scrutiny in recent years. There is much to do, however, and I hope that the

regulators remain vigilant and take the steps necessary to keep our banks clean of

the dirty money that is circulating in the international banking system.

Again, I want to thank the witnesses for their testimony over the last 2 days, and

I want to thank my staff for their work on this investigation and preparing for this

hearing, Claire Barnhard, Leo Wisneski, Ryan Blalack, and Justin Tatham. As I

noted yesterday, this investigation was commenced at the request of Senator Levin

and I want to commend him and, particularly, his staff for their hard work in preparing these hearings. This hearing is now adjourned.

Senator COLLINS. I did want to again commend Senator Levin

and his staff for outstanding work in this area, and I also want to

thank my own staff, which also has worked extremely hard on

these hearings. I think they have been very interesting and very

valuable, and I look forward to continuing to work with Senator

Levin on this issue.

Senator Levin, if you would like to make any final comments, I

would give you 1 minute.

Senator LEVIN. Yes, thank you very much, Madam Chairman,

again, for these hearings, for you and your staff’s strong support

and the great work. Your staff has worked very closely with our

staff here.

We are hoping, frankly, to tighten up these laws. There is too

much dirty money that is moving through American banks. It is

not healthy for us. It is not healthy for the world. And we are going

to do what we can to change it. As the Chairman says it, we need

to do it on the regulatory side. Surely we have got to enforce what

laws we have on the books. But there are some pretty gaping holes

in those laws. With your help we will be able to close those holes.

Again, thank you for your work in your agencies and for your appearance and cooperation with our staffs.

Senator COLLINS. I want to thank all of our witnesses both from

yesterday and today, and the hearings are now adjourned.

[Whereupon, at 4:14 p.m., the Subcommittee was adjourned.]

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Æ