News » October 22, 2001
SHELL GAME
Citibank attacks money-laundering regulations
By Lucy Komisar
Offshore banking has helped Citibank clients hide millions.
Citibank is leading a fight by American banks to gut the anti-moneylaundering
laws currently being considered in Congress—laws that could significantly
change the way banks do business for their wealthiest clients.
Citibank is seeking an exception to a proposed ban on doing business with shell
banks, which have no physical presence and are situated “virtually”
in offshore zones to avoid taxes and regulations. The banks are used to hide
and launder perhaps billions of dollars a year. “Citibank is the only major
bank in the United States that admits to having shell banks as clients, and
it doesn’t want to give them up," says a congressional staffer, who spoke
on condition of anonymity. "Citibank is the most active bank trying to
gut the ban on shell banks, and the American Bankers Association is trotting
behind them.”
In an example of what having friends at the top can do for the financial services
lobby, which is one of the largest and most powerful in Congress, Richard Small,
director of Citibank’s anti-money-laundering department, lobbied the House
and Senate committees to insert an exception that would allow U.S. banks to
work with shell financial services companies, the staffer says. The clause was
deleted in the Senate version, but at press time the House committee had yet
to vote on the bill. “The House bill [makes it] look like they’re
banning shell banks, but the exception makes the ban meaningless,” explains
the staffer.
Small, who until recently headed the anti-money-laundering office of the Federal
Reserve, declined to comment. But a Citibank spokesman says that the banking
conglomerate supports the legislation and that it is “working with U.S.
government and industry associates to determine the most effective means to
prevent the banking system worldwide from being used for criminal purposes.”
Yet as recently as May, Citibank was forced to close two accounts held in its
own offshore banks in the Bahamas and the Cayman Islands after a Senate investigation
revealed that several million dollars in drug money had been laundered through
the accounts. Both the accounts were from shell banks affiliated with financial
services companies, for which Small was seeking the exception, and one with
a securities firm linked to drug money. Citibank “closed the accounts of
the two [banks] we reported on,” the staffer said, “but they have
others.”
The American Banking Association has been fighting along with Citibank to delete
the “due diligence” clause in the legislation, which would require
that banks make a concerted effort to verify the source of foreign funds they
transfer or receive. Peter Blocklin, senior federal legislative representative
for the ABA, told the New York Times that banks were “already doing
due diligence.”
But a congressional report released in March of this year said the opposite,
charging four of the largest U.S. banks—Citibank, J.P. Morgan, Bank of
America and First Union—with having inadequate money-laundering controls
and weak due diligence practices. Sen. Carl Levin (D-Michigan), co-sponsor of
the Senate bill, says the banks are in fact “asleep at the switch.”
About $500 billion—or half of the global total—is laundered through
U.S. banks each year, according to the Bureau of National Affairs. Jack Blum,
a Washington lawyer who co-authored a U.N. report on offshore banking, estimates
that $70 billion in taxes is lost every year when the richest U.S. taxpayers
hide money in offshore banking accounts. Regardless, Republicans historically
have been vehemently opposed to regulating money in U.S. banks, and the bills
being considered are a radical about-face, brought about by the September 11
attacks as part of Bush’s anti-terrorism plan.
In an area where the United States has been lax for decades, the proposed legislation
is reasonably strong. But although the money-laundering controls are a significant
step forward, they still ignore many of the problems in the U.S. banking and
money-transfer system. The legislation permits, but does not require, the Treasury
Department to stop U.S. banks from working with banks in countries where secrecy
laws prevent cooperation with investigators (countries like the Cayman Islands
and the Bahamas). It asks only a quick study of imposing regulations on investment
companies and hedge funds, which are not currently regulated at all. And the
Bush administration is not requiring suspicious activity reports (which banks
are currently required to file for suspicious transactions over $10,000) from
casinos, money transmitters like Western Union and stock brokerages—all
of which, because they consistently handle large amounts of cash, are prime
targets for money launderers.
Until the United States closes these gaping loopholes in the system, the flow of illegal funds from the world’s wealthiest, and the world’s wealthiest criminals, will continue.
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Appeared in the November 12, 2001 Issue
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