MINORITY STAFF REPORT
FOR
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
HEARING ON
PRIVATE BANKING AND MONEY LAUNDERING:
A CASE STUDY OF OPPORTUNITIES AND VULNERABILITIES
November 9, 1999

 

 

Because of their central role in drug trafficking and organized crime, money laundering activities have been the subject of eight prior investigations of the Permanent Subcommittee on Investigations. Despite increasing international attention and stronger anti-money laundering controls, some current estimates are that $500 billion to $1 trillion in criminal proceeds are laundered through banks worldwide each year, with about half of that amount moved through United States banks.
This report summarizes the Minority Subcommittee staff investigation to date into U.S. private banks and their vulnerability to money laundering. The investigation has found that the products, services and culture of the private banking industry present opportunities for money launderers, and that without sound controls and active enforcement, private banking services have been and will continue to be used by those intent on laundering money.

Subcommittee Investigation

To date in this investigation, the Subcommittee staff has conducted almost one hundred interviews and reviewed tens of thousands of pages of documents. The interviews have included meetings with almost 50 private bank personnel, including private bankers, their supervisors, compliance personnel, auditors, senior bank management and board members. The staff has interviewed and obtained information from more than two dozen government agencies and organizations, including the United States Departments of State, Treasury and Justice, the Federal Reserve, Securities and Exchange Commission, International Monetary Fund, World Bank, and law enforcement personnel in Mexico, France and other countries. The Subcommittee staff has also spoken with private bank clients, and with banking and anti-money laundering experts in academic, regulatory and law enforcement circles.
The documents reviewed by the Subcommittee staff include a wide range of materials, from reports on the private banking industry, to reports on money laundering trends, to SEC filings, legal pleadings, private bank audits, bank examination materials, and numerous documents related to specific private bank accounts and transactions. The Subcommittee has issued subpoenas to over half a dozen financial institutions and entities.
The information gathered by the Subcommittee's investigation falls into three categories: (1) the anti-money laundering obligations of all banks, including private banks; (2) the elements of private banking that make it vulnerable to money laundering; and (3) four case histories at the Citibank private bank illustrating a range of issues related to money laundering.

Anti-Money Laundering Obligations

Two laws lay out the basic anti-money laundering obligations of all United States banks. First is the Bank Secrecy Act which, in section 5318(h) of Title 31 in the U.S. Code, requires all banks to have anti-money laundering programs. This law states the following.

"In order to guard against money laundering through financial institutions, the Secretary [of the Treasury] may require financial institutions to carry out anti-money laundering programs, including at a minimum -- (A) the development of internal policies, procedures, and controls, (B) the designation of a compliance officer, (C) an ongoing employee training program, and (D) an independent audit function to test programs."
The Bank Secrecy Act also authorizes the Treasury Department to require financial institutions and other businesses to file reports on currency transactions and suspicious activities, again as part of U.S. efforts to combat money laundering.
The second key law is the Money Laundering Control Act of 1986, which was enacted partly in response to hearings held by this Subcommittee in 1985. This law was the first in the world to make money laundering a crime. It prohibits any person from knowingly engaging in a financial transaction which involves the proceeds of a "specified unlawful activity." The law provides a list of specified unlawful activities, including drug trafficking, fraud, theft and bribery. Most are crimes under U.S. law; only a few foreign crimes, such as drug trafficking, kidnapping, and foreign bank fraud, are currently listed as predicate offenses for a money laundering prosecution in the United States.
The aim of these two statutes is to enlist U.S. banks in the fight against money laundering. Together they require banks to refuse to engage in financial transactions involving criminal proceeds, to monitor transactions and report suspicious activity, and to operate active anti-money laundering programs. Both statutes have been upheld by the Supreme Court.

Private Banking Industry

Private banks are banks, or operational units within banks, which specialize in providing financial services to wealthy individuals. Often portrayed as a specialty of the Swiss whose private banks are the largest in the world, the private banking industry actually has a long history in many countries, including the United States. For example, private banks have long been in operation at Bank of America, Bank of New York, Bankers Trust, Chase Manhattan, Citibank, J.P. Morgan and many other U.S. financial institutions. Today, the largest U.S. private bank handles as many as 100,000 clients; and a single U.S. private bank may have assets exceeding $100 billion. The worldwide total for assets currently under management by private banks has been estimated at $15.5 trillion.
Today, private banks are a growth area at many U.S. financial institutions. Banks report increasing clientele, assets under management, and revenues. A report prepared by the General Accounting Office for the Subcommittee states:

"Domestic and foreign banks operating in the United States have been increasing their private banking activities and their reliance on income from private banking. The target market for private banking -- individuals with high net worth -- is also growing and becoming more sophisticated with regard to their product preferences and risk appetites."
One key reason for the growth in private banking in the United States is an increasing number of individuals with great personal wealth, providing an expanding client base for private bank operations. Another key reason is profits. Federal Reserve officials told the Subcommittee staff that private banking has become a "profit driver" for many banks, offering returns twice as high as many other banking areas. Private banks interviewed by the Subcommittee staff have confirmed rates of return in excess of 20 percent.
In general, private banking seeks to provide financial and related services to wealthy individuals, primarily by acting as a financial advisor, estate planner, credit source, and investment manager. As one senior bank official put it during a Subcommittee interview, the very wealthy have "peculiar" financial needs, and private banks are intended to address those needs. Consumer banking, in contrast, provides financial services to individuals regardless of wealth. Corporate banking provides financial services to businesses.
To open an account in a private bank, prospective clients usually must deposit a substantial sum, often $1 million or more. In return for this deposit, the private bank assigns a "private banker" or "relationship manager" to act as a liaison between the client and the bank, and to facilitate the client's use of a wide range of financial services and products. These products and services often span the globe, enabling a client to make use of a variety of corporate, investment and trust vehicles, estate and tax planning, and other financial services. In essence, private banks seek to provide global wealth management for the wealthy. Private banks typically charge fees based upon the amount of client "assets under management," and the particular products and services used by the client. These fees can exceed $1 million per client each year.
While many of the products and services offered by a private bank are also available through retail banking operations, there are at least two key differences. First, private banks offer an inside advocate the private banker whose mission is to help his or her clients make easy use of the bank's products and services. For example, many retail banks provide wire transfer services, but a private banker will routinely arrange complex wire transfers for a client who simply calls in by phone to request them. Retail banks may offer offshore services, but a private banker is an expert in facilitating the creation of offshore trusts and corporations, opening accounts for them, and arranging transactions on their behalf. Retail banks will allow clients to open multiple accounts, but a private banker will not only create these accounts for a client, but also keep track of the assets in each account and arrange transactions among them.
A second key difference is that a private bank provides its clients with a team of specialists under the coordinated direction of the private banker. These specialists include investment managers, trust officers, estate planners, and other financial experts, all prepared to act in concert. The private banker orchestrates their services with a degree of coordination that is often difficult or impossible to achieve in retail banking.

Why Private Banking is Vulnerable to Money Laundering

For some time now, evidence has been accumulating that private banks are vulnerable to money laundering. The 1994 conviction of a private banker from American Express was an early wake-up call. The 1995 Salinas scandal raised a second set of troubling questions. The 1998 Casablanca undercover money laundering operation resulted in the indictment of several private bankers in Mexico.
Bank regulators have shown a growing concern. Three years ago, the Federal Reserve Bank of New York reviewed private banking activities at 40 U.S. and foreign financial institutions operating in the New York area. In 1997, it conducted followup reviews at four financial institutions which it had identified had deficiencies needing correction, and issued a publication entitled, "Sound Risk Management Practices Governing Private Banking Activities" to provide private banks "with guidance regarding the basic controls necessary to minimize reputational and legal risk and to deter illicit activities, such as money laundering."
In 1998, the Federal Reserve reviewed an additional six financial institutions, as well as conducting a third review of the Citibank private bank. The General Accounting Office reports that this 1998 study found that "internal controls and oversight practices over private banking activities were generally strong at banks with high-end domestic clients," but "seriously weak at banks with higher risk Latin American and Caribbean clients." Also in 1998 two new examination manuals were issued, a Federal Reserve manual designed solely to evaluate private banks' controls, and a revised bank examination manual on money laundering used by all U.S. bank regulators which includes a section identifying private banking as an area meriting special attention. The 1998 International Narcotics Control Strategy Report, issued by the State Department, observes that "[p]rivate banking facilities continue to be vulnerable to money laundering."
Five Factors Creating Money Laundering Vulnerabilities
Five factors in private banking increase its vulnerability to money laundering: the role of private bankers as client advocates, a powerful clientele which discourages tough questions, a corporate culture of secrecy, a corporate culture of lax controls, and the competitive nature of the industry.
Private Bankers As Client Advocates. Private bankers are the linchpin of the private bank system. They are trained to service their clients' needs and to set up accounts and move money around the world using sophisticated financial systems and secrecy tools. Private banks encourage their bankers to develop personal relationships with their clients, visiting the clients' homes, attending weddings and graduations, and arranging their financial affairs. The result is that private bankers may feel loyalty to their clients for both professional and personal reasons, leading them to miss or minimize warning signs. In addition, private bankers may use their expertise in bank systems to evade what they may perceive as unnecessary "red tape" hampering the services their clients want, thereby evading controls designed to detect or prevent money laundering.
Powerful Clients. Private bank clients are, by definition, wealthy. Many also exert political or economic influence which may make banks anxious to satisfy their requests and reluctant to ask hard questions. If a client is a government official with influence over the bank's in-country operations, the bank has added reason to avoid offense. As we will see in the case histories that follow, government officials and other powerful clients can minimize bank inquiries simply by virtue of their stature. For example, when asked why he never questioned a client about certain funds, one private banker told the Subcommittee staff that, because the client was a head of state, he felt constrained by "issues of etiquette and protocol."
Moreover, verifying information about a foreign client's assets, business dealings, and community standing can be difficult for U.S. banks. The Federal Reserve found in its private banking review that foreign clients were particularly difficult for private bankers to assess due to a lack of independent databases of information, such as credit reports. One senior bank official told the Subcommittee staff that a key problem is developing tools to detect when clients may be misrepresenting their personal assets or business dealings, or supplying inaccurate documenta- tion. While private banks routinely claim that their private bankers gain intimate knowledge of their clients, the case histories demonstrate that too often isn't true. For example, in one case, a private banker was unaware for more than three years that he was handling the accounts of the sons of an African head of state.
Culture of Secrecy. A culture of secrecy pervades the private banking industry. Numbered accounts at Swiss banks are but one example. There are other layers of secrecy that private banks and clients routinely use to mask accounts and transactions. For example, private banks routinely create shell companies and trusts to shield the identity of the beneficial owner of a bank account. Private banks also open accounts under code names and will, when asked, refer to clients by code names or encode account transactions.
For example, in the case of Raul Salinas, Citibank's private bank created a trust that was known only by a number and a shell company called Trocca, Ltd. to serve as the owner of record for accounts benefitting Mr. Salinas and his family. The private bank hid Mr. Salinas' ownership of Trocca by omitting his name from the Trocca incorporation papers and naming still other shell companies as the shareholders, directors, and officers. Citibank consistently referred to Mr. Salinas in internal bank communications by the code name "Confidential Client Number 2" or "CC-2." The private bank's Swiss office opened a special name account for him under the name of "Bonaparte." These are just some of the steps that the private bank took to meet Mr. Salinas' requests for extreme secrecy in the handling of his accounts.
Secrecy Jurisdictions. In addition to shell corporations and codes, a number of private banks also conduct business in secrecy jurisdictions such as Switzerland and the Cayman Islands, which impose criminal sanctions on the disclosure of bank information related to clients and restrict U.S. bank oversight. The secrecy laws are so tight, they even restrict internal bank oversight. For example, if a bank's own employee uncovers a problem in an office located in a secrecy jurisdiction, that employee is barred from conveying any client-specific information to colleagues in the United States, even though they are part of the same banking operation. The bank's auditors and compliance officers operate under the same restrictions; any audit or compliance report sent out of the country must first be cleansed of client-specific information.
If a bank employee in the United States wants more information about a problem in a secrecy jurisdiction involving specific clients, he or she has to fly to the secrecy jurisdiction to discuss the matter in detail or review documentation. Even then, the restrictions continue. For example, before allowing an employee to travel to Switzerland, private banks such as J.P. Morgan and Citibank require their employees to sign a non-disclosure statement, reminding them that Swiss law bars disclosing client information acquired in Switzerland to anyone, even their fellow bankers in the United States.
If a U.S. private bank were to tell its Swiss office that an individual is suspected of money laundering and to close any accounts related to that individual, Swiss law bars the Swiss office from disclosing the existence of any such accounts. Then, if U.S. bank personnel wanted to confirm the closure of any accounts, someone from the private bank would have to fly to Switzerland to do so. Upon returning, the private bank official could not, without breaking Swiss law, communicate any specific account information to senior bank management in the United States or to U.S. bank regulators. The bottom line, then, is that private bank personnel cannot have a frank discussion in the United States about what the private bank is doing in Switzerland without breaking Swiss law.
Secrecy Restrictions on U.S. Bank Regulators. U.S. bank regulators operate under similar restrictions. The General Accounting Office report to the Subcommttee provides comparative information about the bank secrecy laws in 20 jurisdictions, identifying those that prohibit the disclosure of client-specific bank information to U.S. bank regulators or bar U.S. regulators from conducting on-site examinations of U.S. bank operations. GAO concludes:

"[T] he key barriers to U.S. regulators' oversight of offshore banking activities are secrecy laws that restrict access to banking information or that prohibit on- site examinations of U.S. bank branches in offshore jurisdictions. An important challenge that confronts efforts to combat money laundering is the extent to which such secrecy laws will continue to be barriers to U.S. and foreign regulators."
Once a matter becomes the subject of a criminal investigation, many secrecy jurisdictions provide a disclosure exception for law enforcement inquiries. But that exception may be invoked only by law enforcement personnel, acting in an official capacity through designated channels; it cannot be used by bank regulators.
Private banks not only choose to conduct business in these secrecy jurisdictions, some also build secrecy into their U.S. operations by restricting the client information that can be kept in the United States. For example, one former private banker told the Subcommittee staff that he was prohibited by his bank from keeping any records in the United States linking shell corporations to their owners. He said that he had 30 - 40 clients, each of which had up to fifteen shell corporations and, to keep track, he and other colleagues in the private bank used to create private lists of their clients' shell companies. He said that he and his colleagues had to hide these "cheat sheets" from bank compliance personnel who, on occasion, conducted surprise inspections to eliminate this information from bank files. When asked why the bank would destroy information he needed to do his job effectively, the former private banker simply said that it was bank policy not to keep this information in the United States.
During its review of the private banking industry, one of the issues addressed by the Federal Reserve was to determine whether U.S. private banks holding accounts in the name of shell companies were aware of the companies' owners and had conducted sufficient due diligence to determine whether their funds were of suspicious origin. However, many of the private banks resisted providing information on their shell company accounts.
For example, in an exchange of letters in 1998, Bankers Trust initially declined providing any information to Federal Reserve examiners. After several discussions, the bank agreed to set up a database linking shell companies with information about their beneficial owners, and promised to consult this database in the event of a U.S. regulatory inquiry or subpoena. But the catch was that Bankers Trust located the database on the Isle of Jersey. When the Federal Reserve asked if Bankers Trust would use the database to provide regulators with information about the owner of a shell company with a U.S. bank account, Bankers Trust responded that it would have to check with Jersey courts on a case-by-case basis. The point here is that no one forced Bankers Trust to establish its database on the Isle of Jersey the bank could have used the state of New Jersey. The fact that Bankers Trust instead chose a foreign jurisdiction which routinely restricts access to information is another example of how a culture of secrecy raises money laundering concerns by impeding regulatory review of client accounts.
Money laundering, of course, thrives on secrecy. Shell companies, code names and offices in secrecy jurisdictions are one more set of factors that make private banks attractive to money launderers.
Culture of Lax Anti-Money Laundering Controls. In addition to a culture of secrecy, private banking operates in a corporate culture that is at times indifferent or resistant to anti-money laundering controls, such as due diligence requirements and account monitoring.
The problem begins with the private banker who, in most private banks, is responsible for the initial enforcement of anti-money laundering controls. It is the private banker who is charged with researching the background of prospective clients, and it is the private banker who is asked in the first instance to monitor existing accounts for suspicious activity. But it is also the job of the private banker to open accounts and expand client deposits. John Reed, co-chairman of Citigroup with 30 years of banking experience, told the Subcommittee staff that, over time, private bankers tend to become advocates for their clients and lose the detachment needed to monitor their transactions. He also observed that private bankers often don't have the temperament or discipline needed to ask clients detailed questions about their funds and transactions and to record the information provided on the proper forms.
The fundamental problem is that private bankers are being asked to fill contradictory roles -- to develop a personal relationship with a client and increase their deposits with the bank, while also monitoring their accounts for suspicious activity and questioning specific transactions. Human nature makes these contradictory roles difficult to perform, and anti-money laundering duties often suffer.
Private banks have dealt with this problem by setting up systems to ensure that private banker activities are reviewed by third parties, such as supervisors, compliance personnel or auditors. The Subcommittee staff investigation has found, however, that while strong oversight procedures exist on paper, in practice private bank oversight is often absent, weak or ignored.
Two examples of lax oversight came to light last year, when private bankers at two different banks were discovered to have evaded bank controls to commit years-long, multi-million dollar frauds. In one case, the head of the New York office of the BankBoston private bank, Ricardo Carrasco, apparently embezzled $60 million, by setting up multiple accounts which the private bank did not realize were related, allowing them to accumulate loans and overdrafts for 4 years, and then absconding with the funds. Carrasco is currently a fugitive. The second case involves a Citibank private banker with 10 years of experience, Carlos Gomez, who pleaded guilty in 1998 and is now serving a 4-year prison term, for defrauding the private bank of more than $23 million. He committed his fraud by issuing multi-million dollar loans to fictitious private bank clients secured by funds from existing accounts whose owners were not informed of the security arrangements. Gomez invested the loan proceeds, kept the earnings, and repaid the loans. He successfully evaded bank controls for a number of years, including loan limits, overdraft limits, signature requirements, account reviews, and audits.
In both instances, the private bankers were able to exploit vulnerabilities in their banks' internal controls to commit frauds. A 40-page Federal Reserve report dated April 6, 1998, details the lack of controls at BankBoston which, in response, replaced the head of its private bank, removed a number of other officers, and revamped its procedures. The Gomez fraud was followed by a five-month compliance review and an action plan with multiple recommendations for tighter controls. These two cases show just how weak the internal controls were at these private banks, even in 1998.
All of the private banks interviewed by the Subcommittee staff described a renewed effort, following the Federal Reserve's 1996 review of the private banking industry, to improve their due diligence documentation for clients. The key documents, variously called "client profiles," "know-your-customer files," or "due diligence reports," describe a client's financial background, source of funds, and expected transactions. The evidence shows, however, that in many instances, the private bankers either delayed or resisted improving the documentation. One private bank supervisor, asked why it was taking years to upgrade the documents, explained that private bankers viewed the documents as "time consuming" to complete and worried that listing a client's sources of wealth raised "confidentiality concerns." He said it was like "pulling teeth" to get them to complete the required forms. Another supervisor told the Subcommittee staff that the bank's auditors did not understand how complicated and difficult it was to obtain the level of information they wanted. A private banker told the Subcommittee staff he viewed the effort to upgrade his client profiles as a paperwork exercise, akin to having "a teacher grade his homework." Another told us that no one took the directives seriously until bonuses were threatened. Audits, compliance reviews, repeated deadlines and bonus threats are just some of the tools private banks have used over the past two years to coax their private bankers to improve the due diligence information in client files. The level of effort expended is itself proof of a culture of lax compliance with anti-money laundering controls.
Competition and Profitability. A final factor creating money laundering concerns is the ongoing competition among private banks for clients, due to the profitability of the business. A 1997 Federal Reserve report on private banking states: "As the target market for private banking is growing, so is the level of competition among institutions that provide private banking services." Private banks interviewed by the Subcommittee staff confirm that the market remains highly competitive; most also reported plans to expand operations. The dual pressures of competition and expansion are disincentives for private banks to impose tough anti-money laundering controls that may discourage new business or cause existing clients to move to other institutions.
Private Banking Products And Services
In addition to the general factors cited above, the actual products and services offered by the private bank also create opportunities for money laundering.
Multiple Accounts. A striking feature of the private bank accounts examined is their complexity. Private bank clients often have many accounts in many locations. Some are personal checking, money market or credit card accounts. Others are in the name of one or more shell companies. Multiple investment accounts are common, including mutual funds, stocks, bonds and time deposits. One private banker said it was common for his clients to have multiple shell companies, each with one or more accounts.
In addition, no private bank currently has a database which automatically aggregates all of the information related to a single client. A few banks are in the process of installing systems that will attempt to centralize client information and identify related accounts using different names, but even these systems will be heavily dependent upon private banker updates. In addition, information on accounts in secrecy jurisdictions may be excluded or not fully integrated into the database due to those jurisdictions' secrecy laws.
The reality right now is that private banks allow clients to have multiple accounts in multiple locations under multiple names and do not aggregate the information. This approach creates vulnerabilities to money laundering by making it difficult for banks to have a comprehensive understanding of their own client's accounts. In addition, it complicates regulatory oversight and law enforcement, by making it nearly impossible for an outside reviewer to be sure that all private bank accounts belonging to an individual have been identified.
Secrecy Products. Most private banks offer a number of products and services that shield a client's ownership of funds. They include offshore trusts and shell corporations, special name accounts, and codes used to refer to clients or fund transfers.
All of the private banks interviewed by the Subcommittee staff made routine use of shell corporations for their clients. These shell corporations are often referred to as "private investment corporations" or PICs. They are usually incorporated in jurisdictions such as the Cayman Islands or Channel Islands which restrict disclosure of a PIC's beneficial owner. Private banks then open bank accounts in the name of the PIC, allowing the PIC's owner to avoid identification as the accountholder.
It is not unusual for private bank clients to have multiple PICs and use these PICs to hold accounts and conduct transactions. Some private banks will open accounts only for PICs they incorporate and manage, while others will do so for PICs incorporated and managed by someone else, such as the client. These so-called "client-managed PICs" create additional money- laundering risks, because the private banks do not control and may not even know the activities, assets and complete ownership of the PIC holding the account at the private bank. Some private banks go a step further and open accounts for client-managed PICs whose ownership is determined by whomever has physical possession of the PIC's shares. These so-called "bearer- share PICs" pose still greater money-laundering risks because, unless a bank maintains physical possession of the shares, it is impossible to know with certainty who, at any given moment, is the PIC's true owner. While most private banks interviewed by the Subcommittee staff did not have any accounts held by bearer-share PICs, the Chase Manhattan private bank indicated it had accounts for about 1500 bearer-share PICs. As part of its industry-wide review, the Federal Reserve identified bearer-share PICs as an area of concern and asked private banks to develop a list of these accountholders, to review the due diligence on record for them and their beneficial owners, and to consider closing the accounts in favor of PICs with documented ownership.
The case histories to be examined today include many examples of shell corporations functioning as accountholders for clients, including Trocca, M.S. Capricorn Trading, Tendin Investments, and Morgan Procurement. The case histories also include special name accounts such as "Bonaparte," "OS," and "Gelsobella." Three of the four case histories also had code names or systems for encoding fund transfers.
Movement of Funds. Client account transactions at private banks routinely involve large sums of money. The size of client transactions increases the bank's vulnerability to money laundering by providing an attractive venue for money launderers who want to move large sums without attracting notice. In addition, most private banks provide products and services that facilitate the quick, confidential and hard-to-trace movement of money across jurisdictional lines. For example, private banks routinely facilitate large wire transfers into, out of and among client accounts, in multiple countries. Several private bankers told us that many of these transfers take place with minimal or no notice from the client and sometimes involve parties and accounts with which the private banker is unfamiliar. It is a situation that invites money laundering.
Some private banks move funds for clients through concentration or suspense accounts, which are accounts established by private banks for administrative purposes to hold funds from various destinations prior to depositing them into the proper accounts. Client funds which come into a private bank may pass through a concentration account on the way to the client's own account. The problem arises when a private bank allows clients to move funds through the bank's concentration account and onto another destination, without ever passing through an account belonging to the client. When that happens, the funds are never associated in bank records with a particular client. The Federal Reserve has warned against this practice, stating:

"[I]t is inadvisable from a risk management and control perspective for institutions to allow their clients to direct transactions through the organization's suspense accounts(s). Such practices effectively prevent association of the clients' names and account numbers with specific account activity, could easily mask unusual transactions and flows, the monitoring of which is essential to sound risk management in private banking, and could easily be abused."

The Citibank private bank used a concentration account to move over $80 million for Raul Salinas. Citibank has since prohibited its private bank from using its concentration account for client transactions, but other private banks continue to do so.

Credit. Another common private bank service involves the extension of credit to clients. Several private bankers told the Subcommittee staff that private banks urge their private bankers to convince clients to leave their deposits in the bank and use them as collateral for large loans. This practice enables the bank to earn a fee not only on the deposits under their management, but also on the loan. This practice also, however, creates vulnerabilities for money laundering, by allowing a client to deposit questionable funds and replace them with "clean" money from a loan. In addition, because the client loans are fully collateralized by assets on deposit with the bank, the bank may not scrutinize the loan purpose and repayment prospects as carefully as for a conventional loan, and may unwittingly further a money launderer's efforts to hide illicit proceeds behind seemingly legitimate transactions. The Federal Reserve has warned private banks about this practice from a risk management perspective:

"If credit is extended based on collateral, even if the collateral is cash, repayment is not assured. For example, collateral derived from illicit activities may be subject to government forfeiture. Accordingly, when extending secured private banking loans, institutions should be satisfied as to the source and legitimacy of the client's collateral, the borrower's intended use of the proceeds and the source of repayment."

Citibank Private Bank Case Histories

Four case histories illustrate the vulnerability of private banks to money laundering. The case histories are drawn from Citibank, the largest bank in the United States with over $700 billion in assets. Citibank operates one of the country's largest private banks. It has over $100 billion in client assets in private bank offices in over 30 countries, which is the largest global presence of any U.S. private bank. It is continuing to expand. Citibank's private bank is also no stranger to controversy. From the Salinas scandal in 1995, to the Zardari scandal in 1997, to the Carlos Gomez fraud in 1998, if any private bank has had reason to review its anti-money laundering controls, Citibank has. Of the 40 private banks reviewed by the Federal Reserve during its industry wide examination of private banking, only one -- Citibank -- was reviewed in detail by Federal Reserve examiners three years in a row. It is a private bank that has struggled with a wide range of anti-money laundering issues.
Citibank private bank has implemented policies, internal systems, and employee training programs to combat money laundering. But its record during the 1990s is marked by years of poor audits, three consecutive years of regulatory criticism, and repeated difficulties related to troubled accounts. Citibank's experience underscores the fact that even private banks with ample resources may have inadequate anti-money laundering controls.
Citibank Private Bank During the 1990s
The Citibank private bank has been in existence for many years in various forms. During the 1990s, it has experienced steady growth, and today has thousands of employees and hundreds of private bankers in over 30 locations throughout the world. The Citibank private bank has also changed leadership four times in ten years, with the newest chief executive having taken office last month.
During the 1990s, the private bank has operated with four divisions: the Western Hemisphere Division which includes the United States, Canada and Latin America; the EMEA Division which includes Europe, the Middle East and Africa; the Japan Division; and the Asia/Pacific Division which includes Hong Kong and Singapore. The private bank has also operated in tandem with four affiliated trust companies, called "Cititrust" in the Bahamas, Cayman Islands, and the Isle of Jersey; and "Confidas" in Switzerland. These trust companies help establish and administer trusts and shell corporations for Citibank private bank clients.
During the first half of the 1990s, the private bank's headquarters were located in Switzerland, and the four divisions operated fairly independently. After the Salinas scandal in 1995, the headquarters moved from Switzerland to New York, and the private bank began an effort to centralize management of its divisions under a single set of policies.
Anti-Money Laundering Program. During the 1990s, the primary elements of the private bank's anti-money laundering program have remained the same, although particular policies, procedures and systems have been clarified or strengthened over time. The primary elements include: (1) obtaining due diligence information on a client prior to opening an account, recording that information on a "client profile," and updating the client profile annually based upon contacts during the year; (2) establishing a client transaction profile with anticipated levels of activity, and monitoring the account for unusual activity; and (3) reporting any suspicious activity internally and, if appropriate, to the U.S. government through a Suspicious Activity Report.
The private banker with primary responsibility for a client is charged with meeting the due diligence requirements. These requirements include ascertaining the true identity of the client, obtaining references, and determining the client's background and source of funds. The private bank has also specified several categories of "high risk accounts" requiring added due diligence and monitoring. These categories include clients in high risk geographic areas, such as countries identified by the U.S. State Department as at high risk of drug trafficking; clients engaged in high risk businesses, such as casinos or currency exchanges; clients who are "public figures"; and clients who become the subject of adverse rumors or media stories. In addition, the private bank has engaged in training, and has implemented internal audit procedures designed to test compliance with its anti-money laundering controls.
Audit Results. During the 1990s, the private bank was subjected to repeated criticisms in internal audits and regulatory reviews. Citibank's own auditors provide audit ratings on a scale of 1 to 5, with 1 being the worst score and 5 the best. In 1995 and 1996, these internal audits gave a number of private bank units in the United States, Europe and Asia ratings of "2" and "3," which private bank personnel told the Subcommittee staff are failing scores. Many of the audits identified anti-money laundering deficiencies, including noncompliance with bank anti- money laundering policies, inadequate client information, and inadequate monitoring of client transactions.
For example, a 1995 audit of nine European offices found that the office managers had "not enforced the development and implementation of compliance programs" required by the private bank. A 1995 audit of a U.S. unit responsible for establishing and administering client trusts did "not perform effective [know-your-customer] procedures before accepting account referrals from Private Bankers. As a result, customers attempting to launder money may not be identified." A 1995 audit of the Singapore private bank office found major control and documentation problems, including a lack of training and oversight and inadequate compliance with know-your-customer policies. A 1995 audit of the Monaco private bank office found that "80% of the Unit's client base [is classified] 'high risk' using the Legal Affairs Office criteria for money laundering. Although the unit has established 'Know Your Customer' policies, there is no effective transaction profile monitoring for high risk clients."
A 1996 audit of private bank offices handling Latin American clients found four "major deficiencies" which "increase[d] the exposure to money laundering schemes and internal fraud." The audit stated that it "seems the Unit's priority was to focus on customer service, even when it meant that internal controls would be compromised." A 1996 audit criticized the Bahamas and Cayman Islands trust companies for failing to obtain "adequate Know Your Customer (KYC) information from Private Bankers to enable them to assess money laundering risk and suitability." The audit report stated: "This concern is heightened by the confidential nature of the off-shore business and exposes [the trust companies] ... to civil penalties, criminal charges, and negative publicity. ... [A]lmost all (92%) existing, Private Banker-linked accounts tested were missing one or more key elements of KYC documentation."
The bank auditors were particularly critical of the private bank's headquarters in Switzerland, giving it failing "2" audit ratings in several audits. In December 1995, due to continued deficiencies, the auditors assigned the office a rating of "1," the only 1 audit rating given to any private bank unit in recent years. A cover memorandum stated, "Such a rating indicates this office is operating in a severe[ly] deficient manner, with a lack of policy and procedure implement[ation] as well as ... less than acceptable internal controls."
Regulatory Reviews. The private bank's poor audit ratings caught the attention of the Federal Reserve during its review of the private bank in 1996. The result was that the Federal Reserve conducted three consecutive audits of the private bank, the only one of 40 banks which received that level of attention. In 1996, a Federal Reserve examiner noted in an internal review document that the private bank's Swiss headquarters had received the "worst possible audit rating" in December 1995, and wrote that it appeared poor audit scores were "not taken seriously" within the private bank, although the bank was trying to change.
In 1997, Federal Reserve examiners stated in internal documents that the Citibank private bank lagged behind other private banks they had reviewed. One examiner wrote that, compared to its peers in the second district, Citibank private bank's policy "meets standards [and] it is more detailed ... [but] practice lags behind the pack." The examiner wrote that the private bank is "getting started later, [its] control environment is weaker, and [its] risk tolerance is greater." The examiner noted that, within Citibank itself, "the private bank ... significantly lags behind the rest of corporation in achieving acceptable audit ratings." The examiner wrote:

"The auditors are a key asset of [the private bank]. The problem is that for years audit has been identifying problems and nothing ahs been done about it. In 1992 [the private bank had] 66% favorable audits in 1997 the percentage of favorable audits was 62%. ... It appears that there are no consequences for bad audits as long as [the private bank] meets their financial goals."
With respect to anti-money laundering issues, the examiner wrote in 1997 that, "In spite of the progress made since the prior inspection, significant KYC deficiencies have not yet been addressed. Management must ensure that appropriate measures are taken to complete the client profiles, document sources of wealth, monitor transactions and identify suspicious account activity."
The Federal Reserve examiners also commented unfavorably in 1997, on the private bank's Swiss headquarters. One examiner wrote:

"Historically [the private bank] was very decentralized with the marketing heads having a lot of autonomy, and [the] head office was located in Switzerland. Under this structure the corporate culture of the [private bank] did not foster 'a climate of integrity, ethical conduct and prudent risk taking' by U.S. standards."

The examiner stated that, with respect to Switzerland, "historical control problems remain unresolved, resulting in unacceptable audit ratings. The internal audit ratings for the Swiss Front Office and Swiss Investment Services have been unacceptable since 1992 and 1994, respectively." In another 1997 document, an examiner reported being told that Citibank's "Swiss bankers think that the US KYC effort is an attempt to undermine Swiss banking," and that the Swiss office "thinks they do not need to comply with the control policies because they only deal with the very rich and their clients are above reproach." After the Swiss office received two additional "2" audit ratings for certain operations in 1997, the Federal Reserve examiner attributed the continuing "bad audits" in the Swiss office "in part to the fact that senior management responsible for these problems are still in charge." The examiner said that, when asked about the continued presence of these managers, private bank personnel responded, "'ask the Chairman why they still work there.'"

During the same period, 1996-1997, Citibank's primary regulator, the Office of the Comptroller of Currency (OCC) also reviewed the private bank and expressed many of the same concerns as the Federal Reserve and Citibank's own auditors. The multi-million dollar fraud committed by the private banker Carlos Gomez, which came to light in early 1998, raised additional regulatory concerns about weak controls and inadequate management oversight in the private bank.

February 1998, during their regular annual meeting with Citibank board members, the Federal Reserve and OCC discussed their concerns about the private bank. According to talking points prepared for the meeting, the Federal Reserve indicated that the private bank had "significant weaknesses in internal controls that expose Citibank to excessive legal and reputational risk." It also conveyed concern about the "length of time" the private bank was taking to correct deficiencies and the "relative slowness of progress [which is] out of keeping with management's decisive reaction to other control weaknesses." The Federal Reserve recommended that Citibank conduct a "fundamental review" of the private bank by mid-1998, and that the Board's Audit Committee review private bank issues on a quarterly basis.

Senior Bank Management Oversight. Poor audit results, ongoing regulatory reviews, and the Salinas and Zardari scandals elevated the private bank's problems to the attention of Citibank's senior management. The Chairman of the Audit Committee of Citibank's Board of Directors, Robert Shapiro, an outside director who is also chief executive officer of Monsanto, told the Subcommittee staff that, during his tenure as committee chairman from 1996 until 1998, the private bank became one of a handful of issues he focused on. He said that he was troubled not only by the repeated low audit scores, but also by the private bank's repeated failure to meet deadlines for corrective action. He said that he personally talked to Citicorp's CEO John Reed about the need to take action. He said that Mr. Reed responded by taking a personal interest in addressing the private bank problems.
Among other actions, in May 1997, Mr. Reed replaced the head of the private bank. He selected Shaukat Aziz, a longtime Citibank executive not previously associated with the private bank. He told the Subcommittee staff that he charged Mr. Aziz with improving what Mr. Reed called the private bank's "lousy audits." He indicated that he also asked Mr. Aziz to review the private bank's handling of public figures accounts, and to initiate the "fundamental review" of the private bank requested by bank regulators. In a November 1997 letter to the Board of Directors, Mr. Reed wrote the following:

"I spent a day being interviewed by the Department of Justice on the Salinas affair. As a legal issue, I continue to think that we are on very solid ground. However, I am more than ever convinced that we have to rethink and reposition the Private Banking business. ... Much of our practice that used to make good sense is now a liability. We live in a world where we have to worry about 'how someone made his/her money' which did not used to be an issue. Much that we had done to keep Private Banking private becomes 'wrong' in the current environment. The business itself is very highly attractive and there is no reason why we cannot pursue it in a sound way but it will take an adjustment." [CS7463]

That adjustment apparently has not been a smooth one and is still underway. In July 1998, Mr. Aziz presented a new private bank strategy to the Citibank Audit Committee, recommending among other measures that the bank move away from "secrecy" and instead emphasize producing good investment returns for its clients. He also recommended taking steps to change the private bank's culture of lax internal controls. These controls were a sensitive matter throughout 1998, not only because of the Carlos Gomez fraud in January, but also because, in May 1998, ten days after Citibank had agreed to purchase Banca Confia in Mexico, that Mexican bank was indicted by the United States Justice Department for engaging in money laundering.

After receiving approval of the Audit Committee and senior bank management of the proposed 1998 strategy, Mr. Aziz began making personnel changes at the private bank, including firing a longtime senior manager in Switzerland, Phillipe Holderbeke, and altering the private bank's leadership team. On the issue of public figure accounts, in late 1998 and early 1999, over the objection of some longterm private bank employees, he ordered a number of longstanding public figure accounts to be closed.
In October 1999, after accepting an appointment as finance minister of Pakistan, his home country, Mr. Aziz left the private bank. He was replaced by Todd Thomson, a former Travelers Group executive.
Four Case Histories
It is against this backdrop of growth, leadership and organizational change, poor audits and increasing regulatory and management oversight, that the four case histories involving accounts at the Citibank private bank should be analyzed. These case histories span the years 1992 to the present. They involve private bank clients in Latin America, Asia, and Africa.
Each case history involves either a head of state or a close relative clients who fall into a category which the private bank calls "public figures." Public figure accounts, by longstanding policy, are subject to the private bank's highest levels of scrutiny, including requirements for senior management approval prior to opening an account, heightened monitoring, and annual reviews of account developments by the private bank head. The private bank's policy does not specify the criteria to be used in evaluating prospective or existing public figure clients, but instead requires each account to be handled on a case-by-case basis. These four case histories will help convey a sense of the private bank's practices over time and how issues of due diligence, secrecy and anti-money laundering controls were actually handled. The case histories convey issues related not only to Citibank's policy and practice, but also to inherent problems in the private banking industry -- the difficulty of evaluating clients, monitoring their transactions, and creating a private banking culture sufficiently sensitive to money laundering.
(1) Raul Salinas Case History
The Facts
The first case history involves Raul Salinas, brother of the former president of Mexico, Carlos Salinas. Raul Salinas was trained as a civil engineer. For five years during the late 1980s, he was director of planning for Conasupo, a state-run agency that regulated certain agricultural markets, with an annual salary of up to $190,000. From 1990 until mid-1992, Salinas was a consultant at an government antipoverty agency, called Sedesol.
In January 1992, Carlos Hank Rhon, a prominent Mexican businessman and longtime client of Citibank private bank, telephoned his private banker, Amy Elliott, and asked her to meet with him and Raul Salinas that same day. Ms. Elliott was Citibank's most senior private banker in New York handling Mexican clients. She handled only seven or eight accounts personally, while supervising other private bankers in the New York office handling Mexican clients.
At the meeting in New York, which was attended by Ms. Elliott and a more senior private bank manager Reynaldo Figueiredo, Mr. Hank provided the bank with a strong personal reference for allowing Mr. Salinas to open an account. In May 1992, Ms. Elliott flew to Mexico and obtained Mr. Salinas' signature on account opening documentation. She proposed accepting him as a client without investigating his employment background, financial background or assets, and waiving all references other than the one provided by Mr. Hank. The head of the Western Hemisphere Division in the private bank, Edward Montero, approved opening the account. The private bank's country head in Mexico, Albert Misan, was not consulted, and apparently did not learn of the account until 1993. In June 1992, Ms. Elliott wrote in a monthly business report that Salinas accounts had "[p]otential in the $15-$20MM range."
Structure of the Relationship. After accepting him as a client, the private bank opened multiple accounts for Mr. Salinas and his family. The New York office opened 5 accounts for Mr. Salinas and his family members. The private bank's trust company in Switzerland, Confidas, talked to Mr. Salinas about opening additional accounts in the name of a shell corporation. A Confidas employee wrote in June of 1992:

"[T]he client requires a high level of confidentiality in view of his family's political background. ... This relationship will be operated along the lines as Amy's 'other' relationship; ie she will only be aware of the 'Confidential accounts' and not even be aware of the names of the underlying companies. ... [P]lease note for the record that the client is extremely sensitive about the use of his name and does not want it circulated within the bank. I believe Amy's 'other' client has a similar arrangement. In view of this client's background, I think we'll need a detailed reference from Amy with Rukavina's sign-off for our files."
The detailed reference was never provided, nor was Mr. Rukavina's sign-off obtained, but Cititrust in the Cayman Islands activated a Cayman Islands shell corporation called Trocca Ltd. to serve as the owner of record for private bank accounts benefitting Mr. Salinas and his family. Cititrust used three additional shell companies, sometimes called "nominee companies," to function as Trocca's board of directors Madeline Investments SA, Donat Investments SA, and Hitchcock Investments SA. Cititrust used three more nominee companies to serve as Trocca's officers and principal shareholders Brennan Ltd., Buchanan Ltd. and Tyler Ltd. Cititrust controls all six of these nominee companies, and routinely uses them to function as directors and officers of shell companies owned by private bank clients. Approximately one year later, Cititrust also established a trust, identified only by a number (PT-5242), to serve as the owner of Trocca.
The result of this elaborate structure was that the Mr. Salinas' name did not appear anywhere on Trocca's incorporation papers. Separate documentation establishing his ownership of Trocca was maintained by Cititrust in the Cayman Islands, under secrecy laws restricting its disclosure.
The private bank did not disclose the name of the Salinas shell company to any private bank personnel other than Cititrust and Confidas personnel who administered the company, and Swiss bank personnel required by Swiss law to know the beneficial owner of a Swiss account. Even Ms. Elliott did not know the name of the shell corporation. In addition, the private bank did not use Mr. Salinas' name in bank communications about his accounts, but instead referred to him as "Confidential Client Number 2" or "CC-2." "CC-1" was the code used to refer to Carlos Hank Rhon.
After Trocca was established, the private bank opened investment accounts in London and Switzerland in the name of Trocca. The private bank personnel managing the investment accounts in London were not told who owned Trocca. Later, in 1994, the private bank opened a special name account in Switzerland for Mr. Salinas and his wife under the name of "Bonaparte." During the meeting with Mr. Salinas to establish the Bonaparte account, Confidas personnel again noted Mr. Salinas' extreme concern about secrecy. A memo written about the meeting included the following:

"During the meeting the client made several remarks addressing his concern for 'confidentiality', so we offered him comfort by reminding him of our procedures and the nature of our business."

The private bank did not open any accounts for Mr. Salinas in Mexico.

Movement of Funds. After his accounts were first opened, Mr. Salinas made an initial 1992 deposit of $2 million. The funds were deposited through two wire transfers from an account belonging to Mr. Hank, who told Ms. Elliott the funds had been given to him by Mr. Salinas for a business deal which did not go forward. The funds were divided between the Salinas accounts in New York and the Trocca investment accounts in London and Switzerland.
In May 1993, Ms. Elliott met with Mr. Salinas and his fianc‚, Paulina Castanon, at Mr. Salinas' home in Mexico. She told the Subcommittee that Mr. Salinas said he had decided to move funds out of Mexico to his London and Swiss accounts to avoid the financial volatility that traditionally accompanied Mexican elections, then scheduled in 1994. She said that he also told her he did not want anyone to know he was moving funds out of the country, because the information might negatively impact his brother and the Salinas administration. She said that Mr. Salinas informed her that he wanted to use cashiers checks and asked if Citibank could accommodate that request. Ms. Elliot informed the Subcommittee that for greater confidentiality it was decided that Ms. Castanon would present the checks to the Mexico City office of Citibank using her middle names, Patricia Rios.
Ms. Elliott told the Subcommittee that she agreed to talk to Citibank's personnel in Mexico about these arrangements, since she had not had other clients use cashiers checks to move funds to New York. The type of cashiers check at issue was a check written by a bank on its own account, so that the bank itself served as the payor of the amount. Ms. Elliott said she checked with the private bank's Mexico country head, Albert Misan, who worked in the Mexico City office, about using the cashiers checks, and he approved the arrangements. Mr. Misan later told the Subcommittee that Ms. Elliott did not clear the arrangements with him beforehand, but he learned of them later and allowed them to continue.
Ms. Elliott then arranged a meeting between a service officer in the Mexico City office and Ms. Castanon, whom Ms. Elliott introduced as Patricia Rios. Ms. Elliott directed the service officer to accept cashier checks from Ms. Rios, convert them from pesos into U.S. dollars, and then wire transfer the funds to Ms. Elliott's attention using the New York concentration account. The concentration account is an account which the New York private bank uses for administrative purposes, commingling funds from various sources prior to transferring them to other accounts. This account was not designed to be used by clients.
Although Ms. Elliott indicated that these arrangements were established in May 1993, six months earlier two cashier checks totaling about $1 million had been converted from pesos to dollars in Mexico, and sent to the New York concentration account to the attention of Ms. Elliott. Some of the funds were forwarded to Trocca accounts in London and Switzerland, setting the pattern for the 1993 and 1994 checks. In May and June 1993, in a period of less than 3 weeks, seven cashiers checks were presented to Citibank's Mexico City branch, totaling $40 million. This amount far exceeded Ms. Elliott's initial estimate of the account's potential size; however, the account documentation contains no evidence of any inquiry to check on the source of funds.
By the end of June 1994, the total funds in the Salinas accounts originating from Mexican cashiers checks had reached $67 million. In a June 29, 1993 email, Ms. Elliott wrote to a colleague in Switzerland: "This account is turning into an exciting profitable one for us all[.] [M]any thanks for making me look good." [CB022908.]
Additional cashier checks followed throughout 1993 and 1994. In a two week period in January 1994, for example, four cashiers checks totaling $19 million were transferred from Mexico through the New York concentration account to the Trocca accounts in London and Switzerland. Altogether, between October 1992 and October 1994, about $67 million was moved from Mexico using Mexican bank cashiers checks and the New York concentration account. In excess of $20 million was transferred to Salinas accounts through other means, for a grand total in excess of $87 million.
All of the cashiers checks used in Mexico named Citibank as the payee, rather than Mr. Salinas, Paulina Castanon or Patricia Rios. When asked whether the private bank was aware of the origin of the funds used to obtain these cashiers checks, Ms. Elliott indicated that no one had made the necessary inquiries. Both Ms. Elliott and Mr. Misan informed the Subcommittee that the private bank did not attempt to determine if Mr. Salinas had accounts at the banks that issued the checks or whether any accounts that existed at the banks were large enough to support the size of the checks presented to Citibank.
When asked why the private bank used this method to transfer the Salinas funds, Ms. Elliott explained that she was attempting to meet Mr. Salinas' request for the confidential movement of his funds from Mexico. The GAO report states that the method, in fact, "effectively disguised the funds' source and destination, thus breaking the funds' paper trail." This break in the paper trail was due primarily to three factors: (1) the cashiers checks named only banks as the payor and payee; (2) the cashiers checks were handled by Citibank in Mexico for a non-account holder using an alias; and (3) the funds passed through the private bank's concentration account in New York, bypassing any specific client account and further obscuring the true source and ultimate destination of the funds. The GAO report states:

"Citibank ... acknowledged that the fund transfers could have been wired to the Salinas checking account in Citibank New York or directly to Citibank London or Citibank Switzerland, thus retaining a paper trail. The [Citibank] representative stated, however, that Citibank had believed that the movement of the funds could be expedited by having them deposited first to the Citibank concentration account. When asked, the Citibank representative could not explain how the transfers were thus expedited."
In addition to moving funds from Mexico, the private bank also performed other services for Mr. Salinas. In 1994, the private bank issued him a loan of $3 million, secured by his deposits. The private bank also provided bill payment services and credit cards. In 1994, it activated a second shell company, Birchwood Heights, Ltd. to hold real estate that Mr. Salinas had acquired in the U.S. through another Bahamian PIC. In January 1995, the private bank agreed to Mr. Salinas' request to transfer $5 million to an account at Julius Baer Bank, "through another bank" to disguise the origin of the funds. [CB023414] Citibank routed the funds first through its own New York concentration account and then to Julius Baer Bank's correspondent account at Chase Manhattan Bank in New York. [CB023412-13.]
Citibank has calculated it received over $2 million in fees associated with the Salinas accounts, from 1992 to 1996. [CB021344] Additional fees have accumulated since then.
Due Diligence. In early February 1995, the Mexican press reported that Mr. Salinas was under suspicion of being involved with the murder of his former brother-in-law, Ruiz Massieu, a leading Mexican politician. According to Ms. Elliott, in a meeting previously scheduled to discuss other matters, she asked Mr. Salinas about the allegation. He described it as politically motivated and denied any involvement. On February 28, 1995, Mr. Salinas was arrested and imprisoned in Mexico on suspicion of murder.
On the day following the arrest, a number of telephone conversations took place between private bank personnel in New York, London and Switzerland. The telephone conversations to London were recorded on an automatic taping system. The tape transcripts indicate that the private bank's initial reaction to the arrest was not to assist law enforcement, but to determine whether the Salinas accounts should be moved to Switzerland to make discovery of the assets and bank records more difficult. This suggestion was made by the head of the private bank at the time, Hubertus Rukavina, and discussed by several employees. It was not acted upon, apparently because it was agreed that London bank records would disclose the funds transfer to Switzerland. Private bank employees also tried to determine whether to require immediate repayment of an outstanding $3 million loan that had been made to Trocca, so that if the funds in the Trocca accounts were frozen by authorities, Citibank funds would not be at risk.
Citibank transcripts indicate that after Mr. Salinas' arrest, Citibank officials responsible for the account in Europe asked Ms. Elliott to prepare a more detailed analysis of the origin of client's funds so that they "could be more comfortable about it." Ms. Elliot said that one step she took to comply with the request was to review the client profile for the account in the private bank's client database, known as the Client Account Management System or CAMS. The private bank's due diligence policies required private bankers to include information in the client profile about the client's business background and source of wealth. Ms. Elliott told the Subcommittee staff that when she reviewed the Salinas profile, she discovered that in the three years the accounts had been open in clear violation of bank policy she had never completed the required information on his business background or source of wealth. The profile was blank. She said she added the information to the client profile on the day that she discovered the omission, using the information that she had at hand.
The absence of any information in the Salinas profile nearly three years after the account had been established is striking because during this same period, 1992 until 1995, top leadership in the Western Hemisphere Division had sent numerous, strongly worded memoranda urging, and ultimately ordering, its private bankers to complete and update information on their client account profiles. Several internal audits had specifically identified incomplete client profiles as a problem. As the supervisor of the Mexican team in New York, Ms. Elliott was responsible for implementing Division policy and corrective action plans responding to audit findings.
When Ms. Elliott filled out the client profile, she wrote that Mr. Salinas was a civil engineer, a "member of the Mexican political and social elite," and was "known to have owned a construction company ... until some time late 1992 or early 1993, and to have participated in major construction projects." Ms. Elliott acknowledged to the Subcommittee staff that neither she nor anyone else at the private bank had ever verified the existence of the construction company or the projects it had handled. Ms. Elliott said that Mr. Salinas had told her of a construction company he was thinking of selling, and Mr. Hank had told her that the sale had gone through and Mr. Salinas had "done very well." She admitted, however, that she did not know the company's name, to whom it was sold, when the sale took place, the amounts involved or the profits realized nor had she made any effort to obtain that information.
On March 3, 1995, Ms. Elliott sent a memorandum to her Division head, Mr. Montero, explaining "the basis for the acceptance of this account, during 1992." [CB7178] The memorandum describes her initial meeting with Mr. Salinas and Mr. Hank, and reports a statement by Mr. Salinas that "he had several banking relationships, including a 'sizeable account at a Swiss bank.'" The memorandum notes that Mr. Salinas was the member of a prominent Mexican family "known to be wealthy," had business dealings with Mr. Hank, and was married to Paulina Castanon who was "known to have received a large cash settlement after her divorce." The memorandum makes no mention of a construction company.
In her interview with Subcommittee staff, Ms. Elliott indicated that she listed the Salinas family wealth as a possible source of the funds in the accounts, because Mexican families have a tradition of bestowing some portion of the parents' wealth on their children, and she thought that might have happened in this instance. However, there is no evidence that she attempted to verify through Mr. Salinas or by any other means that family funds were a source of the funds in the Salinas accounts.
Ms. Elliott told the Subcommittee staff that, in early 1995, her superiors seemed satisfied with the way she had opened and managed the Salinas accounts, but a decision was also made, due to the arrest, to turn over management of the accounts to the private bank's legal department.
Closing the Account. According to Ms. Elliott, three to four weeks after Mr. Salinas had been arrested, the issue was still generating a great deal of publicity. Mr. Montero, Mr. Misan and the private bank attorney for the Western Hemisphere Division, Sandra Lopez Bird, informed Ms. Elliott they had decided to ask Ms. Salinas to close the Salinas Citibank accounts and move the funds elsewhere. They asked her to speak with Ms. Salinas about that matter. Although Ms. Elliott initially resisted the decision, she eventually agreed to speak to Ms. Salinas. However, Ms. Elliott did not discuss this matter with Ms. Salinas until early October 1995.
Ms. Elliott said that Ms. Salinas indicated during the October conversation, which took place in Mexico, that she could not transfer her funds to a certain Swiss bank, because that bank had frozen her account and was not accepting additional funds. Ms. Elliott said she reported this information to her superiors in New York. On November 14, 1995, Ms. Salinas met with bank personnel in Switzerland to begin the process of closing the Salinas accounts at the private bank. According to a November 14, 1995 Confidas memo, when Ms. Salinas met with Confidas staff to make plans to close the accounts she informed Citibank personnel:

"[S]he had discussed this with Amy Elliott who told her that because Citibank was a U.S. institution with a global presence the Mexican government might more easily demand information for political reasons under U.S.-Mexican treaties than with a non- U.S. bank."

According to the memo, Ms. Salinas also denied that any funds had been blocked by a Swiss bank; that authorities were alleging that Mr. Salinas was involved in corruption; or that the Salinas funds were in any other way allegedly involved in crime.

Legal Proceedings. The next day, November 15th, Ms. Salinas was arrested in Switzerland at Banque Pictet, where she and Raul Salinas had approximately $84 million in accounts under the name Juan Guillermo Gomez Gutierrez, a false identity Mr. Salinas had used at that bank. On November 16th, Swiss police issued an order freezing Salinas accounts at several Swiss banks, including Citibank. Approximately $132 million was frozen, including about $27 million at the Citibank private bank offices in Switzerland. A British court later froze the Salinas accounts in London.
On November 17th, Citibank filed a Criminal Referral Form on Raul Salinas and Paulina Castanon with U.S. law enforcement officials. The form mentioned the Salinas accounts in New York which held less than two hundred thousand dollars, but not the Trocca accounts in London or Switzerland holding the bulk of the Salinas money then nearly $50 million.
On November 21st, in response to a request for information on the Salinas accounts relayed by a Swiss colleague on behalf of "requesting authorities" [CB009449], private bank personnel in New York including Ms. Elliott, Mr. Misan, and Sandra Lopez Bird reviewed the Salinas client profile and jointly redrafted the information that Ms. Elliott had provided in March regarding Mr. Salinas' source of wealth. The new description emphasized his construction company, his family's wealth and cited Ms. Salinas' divorce settlement. The document containing the edits was marked "Attorney-Client privilege." [CB21433]
Ms. Salinas was released from Swiss prison in December 1995. Ms. Elliott said that Ms. Salinas telephoned her and spoke briefly about the Salinas accounts, stating for the first time that some of the funds had come from other individuals who had given Mr. Salinas millions of dollars to invest on their behalf. Ms. Elliott indicated to the Subcommittee staff that Mr. Salinas had never told her that; it was inconsistent with her understanding of the sources of the funds in the accounts; and it caused her concern about whether the Salinases had been completely forthcoming about their funds.
In October 1998, a Swiss federal court ordered civil forfeiture of $114 million frozen in the Salinas accounts, as illegal proceeds related to narcotics trafficking. The forfeiture order was based upon a nonpublic report by the Swiss Attorney General, summarizing a three-year investigation which concluded that Mr. Salinas had received substantial funds from narcotics traffickers. In July 1999, the highest Swiss court invalidated the seizure order on procedural grounds, holding that the proceedings should have been brought by local "cantonal authorities" rather than federal authorities, like the Attorney General. The court also ordered the Salinas funds to remain frozen, while Swiss cantonal authorities considered further proceedings.
In Mexico, in January 1999, after a lengthy trial, a court convicted Mr. Salinas of murder. In July 1999, the murder conviction was upheld on appeal. Two years earlier, in July 1997, another Mexican court dismissed money laundering charges against Salinas, on the grounds that no prior court ruling had determined that the $21 million in dispute had been illegally obtained. That dismissal was upheld by an appeals court in May 1998. Mexican law enforcement officials informed the Subcommittee staff that the Mexican government has nearly completed its investigation into the sources of Mr. Salinas' funds and plans to file charges of illicit enrichment and money laundering against Mr. Salinas in the near future.
In the United States, the U.S. Attorney for the Southern District of New York initiated an investigation into whether the Citibank private bank or any of its employees should be charged with money laundering in connection with the Salinas accounts. No indictments have been brought, and the five-year statute of limitations may soon bar any prosecution of these matters.
The Issues
The Salinas case history raises issues involving due diligence, secrecy and the application of anti-money laundering controls to accounts belonging to a public figure.
Lack of Due Diligence. A private bank is obligated by law to take steps to ensure that its clients do not involve the bank in money laundering. To meet its anti-money laundering obligations, the Citibank private bank has developed detailed policies and procedures requiring its private bankers to conduct due diligence in opening and managing client accounts. Ms. Elliott was asked to testify as an expert government witness in a 1994 money laundering case about the obligation of private bankers to obtain adequate information on their clients. She testified that, "'[K]now your client,' at least in our bank, is part of the culture. It's part of ... the way you do things. It's part of the way you conduct yourself." She also testified that it is an ongoing responsibility.
In the Salinas matter, the private bank accepted Mr. Salinas as a client without any specific review of his background and without determining the source of the funds that would be deposited into his accounts. Ms. Elliott admits that, in place of conducting a due diligence review, she relied on the verbal reference provided by Mr. Hank and her general knowledge of the reputation and wealth of the Salinas family. She admits that she did not investigate Mr. Salinas' employment, financial background, or assets.
It also important to note that her superiors did not find fault with her performance. No one asked her to find out more or to write up what she knew until after Mr. Salinas had been arrested. The suggestion of a Confidas employee in Switzerland to obtain a more detailed reference and the approval of the EMEA Division head was not acted upon. Instead, the Western Hemisphere Division head approved opening the account on the scant information provided. Nor did management realize that the Salinas client profile was missing required background information for three years running, despite a series of management initiatives to improve client profiles, internal audits criticizing incomplete profiles, and a compliance review which specifically identified Ms. Salinas' profile as being incomplete.
As Ms. Elliott acknowledged at the American Express trial, due diligence requirements do not end when a decision is made to open an account. They are an ongoing responsibility. The failure to perform due diligence prior to opening the Salinas accounts was compounded when Mr. Salinas began depositing tens of millions of dollars into his shell company's offshore accounts, which quickly reached an aggregate balance far above the $20 million account potential that Citibank had projected in 1992. Just three weeks in 1993 saw $40 million in deposits, with more after that. The Subcommittee investigation has determined that no one questioned Mr. Salinas about the origin of these funds. Far from expressing concern or questioning the source of the funds, Ms. Elliott wrote to her colleagues in June 1993, that the Salinas account "is turning into an exciting profitable one for us all[.] [M]any thanks for making me look good." [CB022908.]
Ms. Elliott was not alone in her inaction. There is no evidence that other private bank personnel charged with monitoring client accounts for suspicious transactions raised any questions about the Salinas accounts. Our investigation has uncovered no other auditor or compliance officer in Mexico, New York, London or Switzerland who questioned the Salinas account activity in 1993 and 1994. The individual in the New York office responsible for monitoring client transactions told the Subcommittee staff that he was unaware of the increase in the Salinas accounts at the time. Because the funds were moved through the New York concentration account, the transactions were not registered with any client account, effectively bypassing the monitoring system in place.
There is one document prepared in 1995, after the Swiss police had frozen the Salinas funds, which suggests that one or more Citibank employees in Mexico may have expressed concerns about the Salinas transfers while they were going on. A draft memorandum prepared by the financial controller in Citibank's Mexico City office, in anticipation of a briefing of Mexican bank regulators on the Salinas matter, states the following.

"To open an account for all of its clients, Citibank requires a thorough Customer Profile which demonstrates the client's personal data as well as his source of wealth. ... Routinely the Officer [of Citibank N.Y.] would call and advise Mexico that a transaction would be initiated. ... Mexico became concerned about the frequency and size of the transactions. Mexico was reassured by Citibank N.Y. that the 'Know your Customer' guidelines were in place, had been followed, and that the volume of the transactions were consistent with the client's profile. Given this reassurance, it was concluded that the transactions were not of a suspicious nature and that no issue existed."
When questioned, neither the author of the memorandum nor others could identify who called New York or who provided assurances about the Salinas account. What is clear is that, at the time of the transfers, little effort was expended to determine the source of the millions of dollars flowing from Mexico to New York to London and Switzerland. When questioned about his lack of intervention on this matter, Mr. Misan, then the private bank's Mexico Country head, stated that when he took his position his superiors, Mr. Figueiredo and Mr. Montero, informed him that there were some Mexican client accounts that he should not supervise. Mr. Misan told the Subcommittee staff that, as a result, he did not supervise the Salinas accounts.
An added factor is that allegations of corruption involving Mr. Salinas existed at the time. The chief executive officer of Citicorp, John Reed, told Subcommittee staff of a conversation he had with Mexican businessmen in 1993 or 1994 about Raul Salinas' "inserting himself in local business deals inappropriately" and potentially embarrassing his brother, then president of Mexico. A 1992 press report in a Mexican publication called El Pais, characterized Conasupo, the agency Mr. Salinas headed, as an agency "sadly famous for its corruption, including accusations of impropriety against Raul Salinas ... during his period as a public official." An August 1993 article from a California newspaper, the Sacramento Bee, reported unsubstantiated rumors "flying in government circles and among the national press that members of the Salinas family ... are taking advantage of the president's office to build massive personal fortunes. ... According to some of the stories, Salinas' siblings are involved in a wide variety of unsavory business deals, peddling their influence, using other people as phony fronts and generally throwing their weight around in their commercial dealings. ... [O]ff the record, such stories are the talk of the town."
Private bank personnel uniformly told the Subcommittee staff that they were unaware of such press reports and rumors until February 1995, when Ms. Elliott confronted Mr. Salinas about the murder allegations and he was subsequently arrested. Whether or not the private bank was aware of the allegations in this particular case, the larger issue is what a private bank should do with such information when it arrives. None of the private banks interviewed by the Subcommittee staff, including Citibank, had standards spelling out how negative media reports or indictments involving a private bank client should be handled. The danger is the allegations turn out to be correct, and a financial institution finds itself having participated in transactions which in the Salinas case may have involved large-scale money laundering.
Secrecy. A second issue raised by the Salinas case history involves how far a private bank should go in accommodating client requests for secrecy. In the Salinas matter, the private bank not only established a shell company with layers of disguised ownership, but also permitted a third party using an alias to deposit funds into the account, accepted multi-million dollar cashiers checks without knowing the origin of the funds, and moved the funds out of the country through a Citibank concentration account that hid the origin and destination of the client's wire transfers. It is one thing for a private bank to provide reasonable levels of confidentiality; it is another for a private bank to provide the means for an individual to deposit millions of dollars in Swiss accounts in ways that even auditors would find difficult to detect. When products and services are structured to satisfy a client's demand for secrecy, they become much more vulnerable to money laundering.
The Salinas matter also highlights the tension that exists between a bank's obligations to its clients and its obligations to combat money laundering. After Mr. Salinas was arrested, Mr. Rukavina, the head of the Citibank private bank at that time, suggested that the Salinas accounts in London be transferred to Switzerland because they would be afforded more secrecy there. Similarly, according to Ms. Salinas, Ms. Elliott advised her that it might be wise to move the Trocca accounts out of Citibank because it might be more difficult for Mexican authorities to obtain account information from a non-U.S. bank. A former Citibank private banker told the Subcommittee staff that, after the Salinas incident, private bankers in New York were instructed to review their client files and "purge" information connecting the clients to offshore PICs or trusts.
After Mr. Salinas' arrest in February 1995, private bank officials and attorneys restricted activities in the Trocca account, put it under the control of the legal department, made a decision to terminate the relationship and secured repayment of an outstanding loan out of concern that the bank's funds would be at risk if a government froze the assets in the accounts. Yet, it was not until six months later after Ms. Salinas' arrest that Citibank filed a criminal referral on the Salinas accounts. That referral made no mention of the Trocca accounts, even though it was Trocca that held almost all of the clients' assets and was the subject of all the Citibank actions six months earlier.
Anti-Money Laundering Controls and Public Figures. The Salinas case history also raises questions about what steps a private bank should take when the person asking the bank to move millions of dollars to offshore accounts is a senior government official or close relative.
Citibank and other private banks have long taken the position that senior government officials, politicians and other public figures merit heightened scrutiny. Citibank's public figure policy requires the approval of the private bank head to open an account and annual reviews of account activity. Other private banks have established even more specific standards for reviewing public figures. One prohibits acceptance of a government official as a client unless the official has "verifiable nonpolitical sources of income." Another prohibits acceptance of any government official who wants to "open accounts in jurisdictions outside their home country."
At each of the private banks interviewed by the Subcommittee staff, when asked for an analysis of the Salinas matter, the response was that the private bank should have begun asking tougher questions when millions of dollars began flowing out of Mexico. The consensus view was that corruption was a known problem in Mexico, and Mr. Salinas' post as a government official for five years and his relationship to his brother raised concerns that should have been addressed.
Citibank's current public figure policy includes close relatives in the definition of a public figure, but in 1992, it was an open question as to whether relatives were covered. In the Salinas matter, some private bank documentation deemed him a public figure, while other documentation did not. After his arrest, private bank personnel discussed his status and determined he was not a public figure by virtue of his relationship to Carlos Salinas. Apparently, no one in the private bank then knew that Raul himself had held a government post in Mexico.
As a top official of Confidas remarked on the day that Mr. Salinas was arrested:
"What we need to be preparing to do is to say why we thought it was okay to have the relationship with this customer when we knew who the brother was. I mean, Amy Elliott can say all she wants that the money came from, you know making roads in, in Mexico or something like that but the big question is [going to] be why didn't we think, or why didn't we question, or did, did, didn't we care?"
Pattern of Poor Account Management. Many of the actions taken with respect to the Salinas account were the subject of criticisms in audits of the private bank. For example, a 1996 audit of private bank offices handling Latin American clients during 1995, focusing primarily on the relationships managed and serviced in New York, gave the offices an audit rating of "2" a failing score. Acknowledging that the Latin American Account Offices were the largest and most profitable segment of the private bank's Western Hemisphere Division, the audit concluded that major deficiencies "increase[d] the exposure to money laundering schemes and internal fraud." Among the weaknesses discussed in the audit were the following practices, all of which were employed in the servicing of the Salinas account:

* "New clients are accepted before performing fundamental KYC procedures." The office "continues to accept new clients without complete identification and reference checks. As a result, the Bank and individual employees are exposed to significant civil penalties and criminal charges because customers attempting to launder money may not be detected."

* Waivers [of KYC requirements] are granted too frequently."

* The Latin America office "does not effectively monitor the transactions of all clients, especially those that may require increased scrutiny because of political affiliations, cash-based businesses or special name arrangements."

* "Confidentiality is behind use of the [concentration] account. . .The use of the concentration account for this purpose is inappropriate because of the heightened concerns over money laundering."

These audit findings suggest that Ms. Elliott's conduct in the Salinas matter was far from unique. The 1996 audit concluded by saying that "[It] seems the Unit's priority was to focus on customer service, even when it meant internal controls would be compromised. Recent discussions with employees in the unit indicate this philosophy has not changed."
(2) Asif Ali Zardari Case History
The Facts
The second case history involves Asif Ali Zardari, the husband of Benazir Bhutto, former Prime Minister of Pakistan. Ms. Bhutto was elected Prime Minister in 1988, dismissed by the President of Pakistan in August 1990 for alleged corruption and inability to maintain law and order, elected Prime Minister again in October 1993, and dismissed by the President again in November 1996. At various times, Mr. Zardari served as Senator, Environment Minister and Minister for Investment in the Bhutto government. Inbetween the two Bhutto administrations, he was incarcerated in 1990 and 1991 on charges of corruption; the charges were eventually dropped. During Ms. Bhutto's second term there were increasing allegations of corruption in her government, and a major target of those allegations was Mr. Zardari. It has been reported that the government of Pakistan claims that Ms. Bhutto and Mr. Zardari stole over $1 billion from the country.
During the period 1994 to1997, Citibank opened and maintained three private bank accounts in Switzerland and a consumer account in Dubai for three corporations under Mr. Zardari's control. There are allegations that some of these accounts were used to disguise $10 million in kickbacks for a gold importing contract to Pakistan.
Structure of Private Bank Relationship. Mr. Zardari's relationship with Citibank began in October 1994, through the services of Kamran Amouzegar, a private banker at Citibank private bank in Switzerland, and Jens Schlegelmilch, a Swiss lawyer who was the Bhutto family's attorney in Europe and close personal friend for more than 20 years. According to Citibank, Mr. Schlegelmilch represented to Mr. Amouzegar that he was working for the Dubai royal family and he wanted to open some accounts at the Citibank branch office in Dubai. Mr. Schlegelmilch had a Dubai residency permit and a visa signed by a member of the Dubai royal family. Mr. Amouzegar agreed to introduce Mr. Schlegelmilch to a banker in the Citibank branch office in Dubai.
According to Citicorp, Mr. Schlegelmilch told the Citibank Dubai banker that he wanted to open an account in the name of M.S. Capricorn Trading, a British Virgin Island PIC. The stated purpose of the account was to receive money and transfer it to Switzerland. The account was opened in early October 1994.
According to Citibank, Mr. Schlegelmilch informed the Dubai banker that he would serve as the representative of the account and the signatory on the account. Under Dubai law, a bank is not required to know an account's beneficial owner, only the signatory. Citibank told the Subcommittee staff that Mr. Schlegelmilch did not reveal to the Dubai banker that Mr. Zardari was the beneficial owner of the PIC, and the account manager never asked him the identity of the beneficial owner of the account. Instead, according to Citibank, she assumed the beneficial owner of the account was the member of the royal family who had signed Mr. Schlegelmilch 's visa. According to Citibank, the account manager actually performed some due diligence on the royal family member whom she believed to be the beneficial owner of the account.
Shortly after opening the account in Dubai, Mr. Schlegelmilch signed a standard referral agreement with Citibank Switzerland private bank guaranteeing him 20% of the first three years of client net revenues earned by the bank from each client he referred to the private bank .
On February 27, 1995, Mr. Schlegelmilch, working with Mr. Amouzegar, opened three accounts at the Citibank Switzerland private bank. The accounts were opened in the name of M.S. Capricorn Trading, which already had an account at Citibank's Dubai branch, as well as Marvel and Bomer Finance, two other British Virgin Island PICs established by Mr. Schlegelmilch, according to Citibank. Each private bank account listed Mr. Schlegelmilch as the account contact and signatory. Citibank informed the Subcommittee that the Swiss Form A, a government-required beneficial owner identification form, identified Mr. Zardari as the beneficial owner of each PIC.
Lack of Due Diligence. The decision to allow Mr. Schlegelmilch to open the three accounts on behalf of Mr. Zardari, according to Citibank, involved officials at the highest levels of the private bank. The officials were: (a) Mr. Amouzegar, the private banker; (b) Deepak Sharma, then head of private bank operations in Pakistan; (c) Phillipe Holderbeke, then head of private bank operations in Switzerland (who became head of the Europe, Middle East, Africa Division in February 1996); (d) Salim Raza, then head of the EMEA Division of the private bank; and (e) Hubertus Rukavina, then head of the Citibank private bank. Mr. Rukavina told the Subcommittee staff that when he was asked about opening the Zardari accounts, he did not make the decision to open them, but rather directed that the matter be discussed with Mr. Sharma. According to Mr. Rukavina, he never heard whether the accounts were ultimately opened. Mr. Rukavina left the private bank in 1996 and left Citibank in 1999.
Citibank informed the Subcommittee staff that the private bank was aware of the allegations of corruption against Mr. Zardari at the time it opened the accounts in Switzerland. However, Citibank reasoned that if the charges for which Mr. Zardari had been incarcerated for two years had any merit, they would not have been dropped. Bank officials also believed that the family wealth of Ms. Bhutto and Mr. Zardari was large enough to support a large private bank account, even though Citibank was not able to specify what actions were taken to verify the amount and source of their wealth. Citibank said that bank officials were also aware of the M.S. Capricorn Trading account in Dubai, and they were comforted by the fact that there had been no problems with that account. According to Citibank, Mr. Amouzegar informed his superiors that Mr. Zardari was the beneficial owner of the Capricorn account in Dubai when they were considering the request to open the accounts in Switzerland. Inexplicably, however, the Dubai account manager was apparently still operating under the assumption that the beneficial owner of the Dubai Capricorn account was a member of the Dubai royal family. Subcommittee staff have been unable to determine whether Citibank officials were unaware of or inattentive to the serious inconsistency between Citibank Switzerland and Citibank Dubai with respect to the Capricorn Trading account. Citibank also informed the Subcommittee staff that bank officials had some concerns that if they turned down the accounts, their actions may have implications for the corporation's operations in Pakistan; however, they said they never received any threats on that issue.
Citibank told the Subcommittee staff the private bank decided to allow Mr. Schlegelmilch to open the three accounts for Mr. Zardari on the condition that the private bank would not be the primary accounts for Mr. Zardari's assets and the accounts would function as passive investment accounts. Citibank told the Subcommittee staff that Mr. Holderbeke signed a memo delineating the restrictions placed on the accounts, including a $40 million aggregate limit on the size of the three accounts, and transaction restrictions requiring the accounts to function as passive, stable investments, without multiple transactions or funding pass-throughs. None of the Citibank personnel interviewed by Subcommittee staff could identify any other private bank account with these types of restrictions. Other private banks interviewed by the Subcommittee staff were asked if they had ever accepted a client on the condition that certain restrictions be imposed on the account. The banks all said they had not. One bank representative explained that if the bank felt that it needed to place restrictions on the client's account, it didn't want that type of client. The existence of the restrictions are in themselves proof of the private bank's awareness of Mr. Zardari's poor reputation and concerns regarding the sources of his wealth.
Movement of Funds. Citibank told the Subcommittee staff that, once opened, only three deposits were made into the M.S. Capricorn Trading account in Dubai. Two deposits, totaling $10 million were made into the account almost immediately after it was opened. Citibank records show that one $5 million deposit was made on October 5,1994, and another was made on October 6, 1994. The source of both deposits was A.R.Y. International Exchange, a company owned by Abdul Razzak Yaqub, a Pakistani gold bullion trader living in Dubai.
According to the New York Times, in December 1994, the Bhutto government awarded Mr. Razzak an exclusive gold import license. In an interview with the New York Times, Mr. Razzak acknowledged that he had used the exclusive license to import more than $500 million worth of gold into Pakistan. Mr. Razzak denies, however, making any payments to Mr. Zardari. Citibank could not explain the two $5 million payments. Ms. Bhutto told the Subcommittee staff that since A.R.Y. International Exchange is a foreign exchange business, the payments did not necessarily come from Mr. Razzak, but could have come from a third party who was merely making use of A.R.Y.'s exchange services. The staff invited Ms. Bhutto to provide additional information on the M.S. Capricorn Trading accounts, but she has not yet done so.
On February 25, 1995, a third deposit of $8 million was made into the Dubai M.S. Capricorn Trading account. Records show that the payment was made through American Express, with the originator of the account listed as "Morgan NYC." Citibank indicated it does not know who Morgan NYC is, nor does it know the source of the $8 million.
All of the funds in the Dubai account of M.S. Capricorn Trading were moved to the Swiss accounts in the Spring of 1995. On March 6, 1995, $8.1 million was transferred; and on May 5, 1995, another $10.2 million was transferred. Both transfers involved U.S. dollars and were routed through Citibank's New York offices. Citibank informed the Subcommittee staff that M.S. Capricorn Trading closed its Dubai account shortly after the last transfer was completed.
Citibank has indicated that significant amounts of other funds were also deposited into the Swiss accounts. As described below, the $40 million cap was reached, and millions of additional dollars also passed through those accounts. However, Swiss bank secrecy law has prevented the Subcommittee from obtaining the details on the transactions in the Zardari accounts.
Account Monitoring. Citibank told the Subcommittee staff that, in 1996, the Swiss office of the private bank conducted a number of reviews of the Zardari Swiss accounts, finally deciding in October to close them.
The first review was allegedly in early 1996, triggered by increasing publicity about allegations of corruption against Mr. Zardari. Citibank told the Subcommittee staff that Messrs. Holderbeke, Raza, Sharma and Amouzegar participated in the review, and apparently concluded that the allegations were politically motivated and that the accounts should remain open. The Subcommittee staff was told that the review did not include looking at the accounts' transaction activity.
In March or April, 1996, Mr. Amouzegar asked that the overall limit on the Zardari accounts be increased from $40 million to $60 million, apparently because the accounts had reached the previously imposed limit of $40 million. Citibank told the Subcommittee staff that Mr. Holderbeke considered the request, but declined to increase the $40 million limit.
In June, press reports in the United Kingdom that Mr. Zardari had purchased real estate in London triggered still another review of the Zardari accounts. Citibank private bank told the Subcommittee staff that its Swiss office internally discussed the source of the funds for the property purchase. Mr. Amouzegar and Mr. Raza then met with Mr. Schlegelmilch, who allegedly informed them that funds had been deposited into the Citibank accounts, transferred to another PIC account outside of Citibank and used to purchase the property. Mr. Schlegelmilch allegedly indicated the funds had come from the sale of some sugar mills and were legitimate. Citibank told the Subcommittee staff it is not sure if anyone at the private bank attempted to validate the information about the sale of the sugar mills. In addition, even though this account activity violated the condition imposed by Citibank that the accounts were not to be used as a pass through for funds, the accounts were kept open.
Closing the Accounts. In July 1996, after Mr. Amouzegar left the private bank to open his own company, another private banker, Cedric Grant, took over management of the Zardari accounts. Citibank told the Subcommittee staff that Mr. Grant began to review the Zardari accounts about one month later to familiarize himself with them. He also reviewed the transactions that had taken place within the accounts.
In September and October 1996, press accounts in Pakistan repeatedly raised questions about corruption by Mr. Zardari and Ms. Bhutto, as Ms. Bhutto's re-election campaign increased its activities prior to a February election date. In September, Ms. Bhutto's only surviving brother, Murtaza Bhutto, was assassinated, and Ms. Bhutto's mother accused Ms. Bhutto and Mr. Zardari of masterminding the murder, because the brother had been leading opposition to Ms. Bhutto.
In October, Mr. Grant completed his review of the Zardari accounts and provided a written analysis to Messrs. Holderbeke, Sharma and Raza, according to Citibank. Mr. Grant had found numerous violations of the account restrictions imposed by Citibank, including multiple transactions and funding pass-throughs. Citibank told the Subcommittee staff that the accounts had functioned more as checking accounts than passive investment accounts, directly contrary to the private bank's restrictions. Apparently, well over $40 million had flowed through the accounts, though Subcommittee staff were unable to ascertain the actual amount because Swiss bank secrecy law prohibits Citibank from sharing that information with the Subcommittee. Citibank indicated that Mr. Amouzegar had either igno