<DOC>
[107 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:71166.wais]

                                                         S. Hrg. 107-84

  ROLE OF U.S. CORRESPONDENT BANKING IN INTERNATIONAL MONEY LAUNDERING

=======================================================================


                                HEARINGS

                               before the

                       PERMANENT SUBCOMMITTEE ON
                             INVESTIGATIONS

                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                        MARCH 1, 2, AND 6, 2001

                               __________

                             VOLUME 1 OF 5

                               __________

      Printed for the use of the Committee on Governmental Affairs


                   U.S. GOVERNMENT PRINTING OFFICE
71-166                     WASHINGTON : 2001

_______________________________________________________________________
For sale by the Superintendent of Documents, Congressional Sales Office
         U.S. Government Printing Office, Washington, DC 20402


                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   FRED THOMPSON, Tennessee, Chairman
           JOSEPH I. LIEBERMAN, Connecticut, Ranking Democrat
TED STEVENS, Alaska                  CARL LEVIN, Michigan
SUSAN M. COLLINS, Maine              DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi            MAX CLELAND, Georgia
JUDD GREGG, New Hampshire            THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah              JEAN CARNAHAN, Missouri
             Hannah S. Sistare, Staff Director and Counsel
     Joyce A. Rechtschaffen, Democratic Staff Director and Counsel
                     Darla D. Cassell, Chief Clerk

                                 ------                                

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                   SUSAN M. COLLINS, Maine, Chairman
                 CARL LEVIN, Michigan, Ranking Democrat
TED STEVENS, Alaska                  DANIEL K. AKAKA, Hawaii
GEORGE V. VOINOVICH, Ohio            RICHARD J. DURBIN, Illinois
PETE V. DOMENICI, New Mexico         ROBERT G. TORRICELLI, New Jersey
THAD COCHRAN, Mississippi            MAX CLELAND, Georgia
JUDD GREGG, New Hampshire            THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah              JEAN CARNAHAN, Missouri
         Christopher A. Ford, Chief Counsel and Staff Director
     Linda J. Gustitus, Democratic Chief Counsel and Staff Director
             Elise J. Bean, Democratic Deputy Chief Counsel
       Robert L. Roach, Democratic Counsel and Chief Investigator
                     Mary D. Robertson, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Collins......................................... 1, 51, 101
    Senator Levin........................................... 4, 53, 102
    Senator Carnahan.............................................     9

                               WITNESSES
                        Thursday, March 1, 2001

John M. Mathewson, former owner of Guardian Bank and Trust 
  (Cayman) Ltd., accompanied by Oscar C. Gonzalez, Esq...........    10
James C. Christie, Senior Vice President, Global Treasury Risk 
  Management, Bank of America, Oakland, California...............    22
David A. Weisbrod, Senior Vice President, Treasury Services 
  Division, The Chase Manhattan Bank, New York, New York.........    27

                         Friday, March 2, 2001

Jack A. Blum, Partner, Lobel, Novins and Lamont, Washington, DC..    57
Anne Vitale, former Managing Director and Deputy General Counsel, 
  Republic National Bank of New York, and Current Special 
  Litigation Counsel, HSBC USA, Inc., New York, New York.........    60
Robb Evans, Managing Partner, Robb Evans and Associates, Sun 
  Valley, California.............................................    62
Jorge A. Bermudez, Executive Vice President and Head of e-
  Business, Citibank, N.A., New York, New York...................    75
Carlos Fedrigotti, President and Country Corporate Officer for 
  Citibank Argentina, Buenos Aires, Argentina....................    78
Martin Lopez, Vice President and Citibank Corporate Bank Head, 
  Republic of South Africa.......................................    80

                         Tuesday, March 6, 2001

Arthur O. Jacques, Esquire, Jacques Little Barristers and 
  Solicitors, Toronto, Ontario, Canada...........................   105
Joseph M. Myers, Acting Deputy Assistant Secretary (Enforcement 
  Policy), U.S. Department of the Treasury, Washington, DC.......   117
Mary Lee Warren, Deputy Assistant Attorney General, Criminal 
  Division, U.S. Department of Justice, Washington, DC...........   120

                      Alphabical List of Witnesses

Bermudez, Jorge A.:
    Testimony....................................................    75
    Prepared statement with attachments..........................   180
Blum, Jack A.:
    Testimony....................................................    57
    Prepared statement...........................................   162
Christie, James C.:
    Testimony....................................................    22
    Prepared statement...........................................   143
Evans, Robb:
    Testimony....................................................    62
    Prepared statement...........................................   172
Fedrigotti, Carlos:
    Testimony....................................................    78
    Prepared statement...........................................   223
Jacques, Arthur O.:
    Testimony....................................................   105
    Prepared statement with attachments..........................   241
Lopez, Martin:
    Testimony....................................................    80
    Prepared statement...........................................   233
Mathewson, John M.:
    Testimony....................................................    10
    Prepared statement...........................................   139
Myers, Joseph M.:
    Testimony....................................................   117
    Prepared statement...........................................   250
Vitale, Anne:
    Testimony....................................................    60
    Prepared statement...........................................   168
Warren, Mary Lee:
    Testimony....................................................   120
    Prepared statement...........................................   256
Weisbrod, David A.:
    Testimony....................................................    27
    Prepared statement...........................................   156

                                Appendix

``Correspondent Banking: A Gateway to Money Laundering,'' report 
  by the Minority Staff Report of the Permanent Subcommittee on 
  Investigations (see contents for report on page 274)...........   273

                                Exhibits

* May be found in the files of the Subcommittee
                                                                   Page

 1. Diagrams on correspondent banking...........................   692
 2. American International Bank marketing documents.............   694
 3. Three nested banks at American International Bank...........   697
 4. Bank of America call memo on American International Bank....   698
 5. American International Bank's correspondent account history.   699
 6. Internet gambling advertisement naming Bank of America......   700
 7. Fortuna Alliance deposits into Swiss American Bank account 
  at Chase Manhattan.............................................   702
 8. Chase Manhattan Bank e-mail of 9/10/99 concerning Swiss 
  American/Antigua Bank..........................................   703
 9. Chase Manhattan Bank e-mail of 8/5/98 regarding Swiss 
  American Bank..................................................   706
10. Chase Manhattan Bank memo of 11/17/98 regarding Swiss 
  American Bank..................................................   707
11. Frauds through Swiss American Bank/Swiss American National 
  Bank...........................................................   708
12. Chase Manhattan Bank e-mail of 12/6/99 regarding Swiss 
  American Bank..................................................   709
13. Internet gambling advertisements naming Chase Manhattan Bank   710
14. Chase Manhattan Bank e-mail of 3/19/93 regarding Swiss 
  American Bank..................................................   718
15. Citibank summary of M.A. Bank seizure.......................   719
16. Letter of 9/29/00 from Citibank counsel to the Permanent 
  Subcommittee on Investigations regarding M.A. Bank.............   721
17. Seizure Warrant of 5/14/98 regarding M.A. Bank..............   725
18. Subpoena to Citibank New York dated 5/18/98 regarding M.A. 
  Casa de Cambio.................................................   727
19. Example of an M.A. Bank withdrawal slip.....................   731
20. Citibank e-mail of 12/3/99 regarding anti-money laundering 
  procedures.....................................................   732
21. Letter of 9/29/00 from Citibank counsel to the Permanent 
  Subcommittee on Investigations regarding correspondent banking 
  policy.........................................................   734
22. Report of Citigroup Anti-Money Laundering Unit..............   740
23. Schedule of wire transfers through Citibank New York and 
  American Exchange Company......................................   742
24. Monthly statements of Citibank New York correspondent 
  accounts for Banco Republica, American Exchange Company, and 
  Federal Bank...................................................   743
25. Ownership diagram of Grupo Moneta...........................   749
26. Excerpts from Citibank documents regarding relationship with 
  Grupo Moneta...................................................   751
27. Citibank and Central Bank of Argentina documents regarding 
  the anti-money laundering program of Federal Bank..............   752
28. Excerpt from Resolution No. 395/96 of the Central Bank of 
  Argentina......................................................   754
29. Excerpt from Citibank memo regarding ownership of Federal 
  Bank...........................................................   756
30. Citibank account opening steps..............................   757
31. Excerpts regarding Citibank's policy on opening accounts for 
  offshore shell banks...........................................   758
32. Series of letters exchanged between the Central Bank of 
  Argentina and Citibank Argentina regarding ownership of Federal 
  Bank...........................................................   760
33. British Trade and Commerce Bank certificates of deposit.....   782
34. British Trade and Commerce Bank documents...................   784
35. Internet advertisements for offshore shell banks............   789
36. Treasury Regulations on Suspicious Activity Reports.........   804
37. 1997 Citibank memo regarding Grupo Moneta...................   805
38. Bank of America and Chase Manhattan Bank comments on Swiss 
  American Bank..................................................   807
39. Chase Manhattan Bank e-mail of 10/12/95 regarding Swiss 
  American Bank..................................................   809
40. Chase Manhattan Bank call memo of 1/23/96 regarding AIB.....   810
41. Chase Manhattan Bank e-mail of 9/9/99 regarding Swiss 
  American Bank..................................................   812
42. Bank of America call memo of 9/4/92 regarding Swiss American 
  Bank...........................................................   813
43. Letter of 3/12/97 from Chase Manhattan Bank to AIB regarding 
  account closing................................................   814
44. Chart entitled ``Gateway to U.S. Banks''....................   815
45. Summary of Gold Chance Fraud prepared by the Minority Staff 
  of the Permanent Subcommittee on Investigations, March 6, 2001.   816
46. Guardian Bank and Trust Visa Card produced by John Mathewson 
  at the March 1, 2001, Permanent Subcommittee on Investigations 
  hearing........................................................   823
47. Permanent Subcommittee on Investigations' staff rendition of 
  a chart entitled ``$3 Million Deposit of Gold Chance Funds 
  Depleted in Wire Transfers By British Trade & Commerce Bank to 
  33 Bank Accounts in 45 Days, December 1999-January 2000'' 
  included in the testimony of Arthur Jacques before the 
  Subcommittee on March 6, 2001..................................   824
48. Supplemental remarks of Jorge Bermudez......................   825
49. Supplemental remarks of Carlos Fedrigotti...................   827
50. Supplemental questions and answers of the U.S. Department of 
  Justice........................................................   829
51. Supplemental questions and answers of U.S. Department of the 
  Treasury.......................................................   855
52. Supplemental questions and answers of Citibank..............   863
53. Supplemental questions and answers of Bank of America.......   867
54. Supplemental questions and answers of J.P. Morgan Chase.....   868
55. Documents from foreign governments relevant to the Permanent 
  Subcommittee on Investigations staff report or hearings on 
  money laundering:
    a. Government of Antigua and Barbuda letter dated July 14, 
  2000...........................................................   871
    b. Jersey Financial Services Commission letter dated March 
  13, 2001.......................................................   874
    c. Guernsey Financial Services Commission letter dated March 
  15, 2001.......................................................   876
    d. Government of Anguilla Statement of Facts................   879
    e. Press articles on new shell bank prohibitions in the 
  Bahamas and Cayman Islands.....................................   883

                                Volume 2

56. Documents related to American International Bank, Caribbean 
  American Bank or Overseas Development Bank and Trust Company 
  (Case Studies No. 1-3):
    a. American International Bank general documents............   885
    b. Ford/Forum documents.....................................   950
    c. Mark Harris bank documents...............................   998
    d. Carribean American Bank documents........................  1024
    e. Bank of America documents................................  1196
    f. Toronto Dominion Bank (New York) documents...............  1225
    g. Chase Manhattan Bank documents...........................  1234
    h. Popular Bank of Florida (now BAC Florida Bank) documents.  1249
    i. Overseas Development Bank and Trust documents............  1297
    j. First National Bank of Commerce (now Bank One 
  Corporation) documents.........................................  1449
    k. AmTrade International Bank documents.....................  1481
57. Documents related to British Trade and Commerce Bank (Case 
  Study No. 4):
    a. British Trade and Commerce Bank (BTCB) general documents.  1493
    b. BTCB financial documents.................................  1604
    c. BTCB management and employee documents...................  1729

                                Volume 3

    d. BTCB high yield investment program documents.............  1823
    e. Internet gambling documents..............................  1842
    f. Banco Industrial de Venezuela documents..................  1908
    g. Security Bank documents..................................  1989
    h. First Union National Bank documents......................  2027
    i. Koop fraud documents.....................................  2099
    j. Cook fraud documents.....................................  2238
    k. Gold Chance fraud documents..............................  2287
    l. $10 million CD interpleader documents....................  2484
   m. Miscellaneous documents relating to BTCB:
         1. KPJ Trust/Tiong documents...........................  2621
         2. Brett/Bailett documents.............................  2670
         3. Vector Medical Technology documents.................  2682
    n. Permanent Subcommittee on Investigation Deposition of 
  John G. Long IV, February 26, 2001.............................     *
    o. SEALED EXHIBIT: Suspicious Activity Reports..............     *

                                Volume 4

58. Documents related to Hanover Bank (Case Study No. 5):
    a. Hanover Bank general documents...........................  2789
    b. Harris Bank International and Standard Bank Jersey Ltd. 
  documents......................................................  2857
    c. Clerical Medical documents...............................  2907
    d. Eric Rawle Samuel documents..............................  2919
    e. Koop fraud documents.....................................  2943
    f. Casio Computer fraud documents...........................  2984
    g. FSA investigation documents..............................  3016
    h. Unanswered information request to Richard O'Dell Poulden.  3043
59. Documents related to British Bank of Latin America (Case 
  Study No. 6):
    a. British Bank of Latin America general documents..........  3049
    b. Bank of New York documents...............................  3100
    c. 1999 and 2000 National Money Laundering Strategy excerpts  3127
    d. Operation Casablanca and Operation Juno documents........  3138
    e. SEALED EXHIBIT: Proprietary information on British Bank 
  of Latin America...............................................     *
60. Documents related to European Bank (Case Study No. 7):
    a. European Bank general documents..........................  3182
    b. Citibank documents.......................................  3219
    c. Taves fraud documents....................................  3319
    d. Benford account documents................................  3435
    e. Internet Processing Corp. account documents..............  3627
    f. Nest Bank documents......................................  3682

                                Volume 5

61. Documents related to Swiss American Bank and Swiss American 
  National Bank (Case Study No. 8):
    a. Swiss American Bank and Swiss American National Bank 
  general documents..............................................  3703
    b. Bank Ownership...........................................  3715
    c. Bank Leadership..........................................  3735
    d. Fitzgerald case documents................................  3814
    e. Gherman fraud documents..................................  3931
    f. Debella fraud documents..................................  3957
    g. Fortuna Alliance fraud documents.........................  4035
    h. Documents related to other frauds or questionable 
  accounts.......................................................  4083
    i. Bank of New York documents...............................  4122
    j. Bank of America documents................................  4175
    k. Chase Manhattan Bank documents...........................  4222
    l. InterSafe Global documents...............................  4269
   m. Documents related to Peter Herrington.....................  4282
62. Documents related to M.A. Bank (Case Study No. 9):
    a. M.A. Bank general documents..............................  4391
    b. Permanent Subcommittee on Investigations correspondence 
  with M.A. Bank representatives.................................  4411
    c. Permanent Subcommittee on Investigations correspondence 
  with M.A. Bank agents in Uruguay...............................  4422
    d. Court filings and U.S. Department of Justice 
  correspondence.................................................  4434
    e. M.A. Bank documents related to Mr. DiTullio..............  4474
    f. U.S. Customs records of interviews.......................  4477
    g. Permanent Subcommittee on Investigations correspondence 
  with Citibank..................................................  4501
    h. Citibank documents related to M.A. Bank..................  4504
63. Documents related to Federal Bank (Case Study No. 10):
    a. Central Bank of the Bahamas documents....................  4585
    b. CEI related documents....................................  4617
    c. Account opening and closing documents....................  4629
    d. Resolution No. 395 of the Central Bank of Argentina......  4647
    e. Analyses of Banco Republica, Federal Bank and other Grupo 
  Moneta entities in Citibank files..............................  4665
    f. Excerpts from the audits of Banco Republica by the 
  Central Bank of Argentina......................................  4793
64. Koop Fraud documents related to Overseas Development Bank 
  and Trust, British Trade and Commerce Bank, and Hanover Bank...  4835

 
  ROLE OF U.S. CORRESPONDENT BANKING IN INTERNATIONAL MONEY LAUNDERING

                              ----------                              


                        THURSDAY, MARCH 1, 2001

                                       U.S. Senate,
                Permanent Subcommittee on Investigations,  
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:34 a.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Susan M. 
Collins, Chairman of the Subcommittee, presiding.
    Present: Senators Collins, Levin, and Carnahan.
    Staff Present: Christopher A. Ford, Chief Counsel and Staff 
Director; Mary D. Robertson, Chief Clerk; Rena Johnson, Deputy 
Chief Counsel; Frank Fountain, Senior Counsel; Eileen Fisher, 
Investigator; Claire Barnard, Detailee/HHS; Linda Gustitus, 
Democratic Staff Director and Chief Counsel; Elise Bean, 
Democratic Deputy Chief Counsel; Bob Roach, Democratic Counsel; 
Laura Stuber, Democratic Counsel; Ken Saccoccia, Congressional 
Fellow; Anne Fisher and Judy White (Senator Cochran); Kathleen 
Long (Senator Levin); Marianne Upton and Karla Mitchell 
(Senator Durbin); and Sandy Fried (Senator Carnahan).

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. The Subcommittee will come to order. Good 
morning.
    During the next few days, the Permanent Subcommittee on 
Investigations will examine the complex world of correspondent 
banking and the extent to which the international correspondent 
banking system can involve U.S. banks in money laundering, 
allowing criminals to exploit our financial system. These 
hearings, initiated by the Subcommittee's Ranking Minority 
Member Senator Levin, are the culmination of a lengthy 
investigation into correspondent banking by his staff and 
represent the second phase of the Subcommittee's examination of 
money laundering and its effect on our financial system.
    Correspondent banking is the means by which one bank, the 
correspondent bank, provides financial services to another 
bank, often referred to as the respondent bank. Typically, the 
respondent bank has no physical presence in the jurisdiction in 
which it maintains a correspondent account. Correspondent 
banking thus enables the respondent bank to provide services to 
its customers that otherwise would be unavailable because of 
geographic limitations.
    Correspondent banking is an integral part of the domestic 
and international banking systems. Without correspondent 
banking, in fact, it would often be impossible for banks to 
provide comprehensive nationwide and international banking 
services--among them, the vital capacity to transfer money by 
wire with amazing speed and accuracy across international 
boundaries. U.S. banks maintain thousands of correspondent 
relationships, through which billions of dollars move every 
day.
    American banks provide some correspondent clients with fee-
based products only, such as currency exchange services, 
interest-bearing and demand-deposit accounts, and wire 
transfers to investment services. For other clients, U.S. banks 
also offer credit-related products, such as loans, credit 
extensions, and lines of credit. This distinction between the 
provision of fee-based products and service-based products is 
significant because the Minority investigation has shown that 
some U.S. banks conducted more due diligence when evaluating 
potential correspondent banking clients for credit 
relationships--in other words, when their own finances were at 
stake--than when only fee-based services were at issue.
    Not surprisingly, money launderers have capitalized on this 
relative lack of scrutiny for non-credit relationships. They 
too often can fly under the radar of the U.S. banks. In other 
words, money launderers gamble that the banks will not notice--
or perhaps not scrutinize--the source of funds flowing through 
their correspondent accounts.
    The Subcommittee investigation has shown that, in some 
instances, the gamble has paid off. Through such accounts, the 
perpetrators of criminal schemes have succeeded in moving their 
ill-gotten gains around the world ahead of law enforcement 
officials, in many cases ultimately returning these funds to 
the United States in a laundered form that they can enjoy with 
impunity.
    Regrettably, the source of these monies was often 
fraudulent schemes perpetrated by Americans against Americans. 
For example, Melvin Ford of Maryland was the central figure in 
the Forum, which appears to be a Ponzi-type investment scheme. 
Ford targeted low- and middle-income African Americans who 
attended his seminars and rallies, promising them 
extraordinarily high returns for their investment. The Forum 
established a relationship with American International Bank in 
1993 and accounted for perhaps as many as 6,000 of American 
International Bank's 8,000 customers. By 1997, in fact, more 
than half of American International Bank's $110 million in 
assets were attributable to the Forum and its investors.
    The Subcommittee's investigation has established that three 
types of foreign banks are particularly high risk, that is, 
prime candidates to harbor the funds of money launderers. They 
are: First, ``shell'' banks; second, offshore banks; and, 
third, banks in jurisdictions with strong bank secrecy and weak 
anti-money laundering laws. ``Shell'' banks do not maintain a 
physical presence anywhere, which makes it very difficult for 
the licensing jurisdiction to regulate them.
    Offshore banks are not able to conduct business with the 
residents of their licensing jurisdiction. Because they have no 
effect upon local citizens, and because they are often 
lucrative profit centers for the licensing jurisdiction, local 
government regulators often have very little incentive to 
engage in serious oversight.
    The third category of high-risk foreign banks consists of 
banks in jurisdictions that simply have weak anti-money 
laundering laws. The lax regulatory environment obviously 
attracts those who wish to launder money. U.S. banks that rely 
upon local regulators in such cases to police respondent banks 
hang their hopes only upon a shadow.
    The investigation revealed troubling gaps in U.S. banks' 
oversight of their correspondent relationships with these three 
types of banks. Moreover, labyrinthine banking relationships 
can also make due diligence more difficult. In several cases, 
U.S. banks were actually surprised to learn that they were 
conducting transactions for foreign banks with whom they had no 
direct correspondent account. These foreign banks had 
established correspondent accounts at other foreign banks, 
which in turn maintained correspondent accounts at the U.S. 
institutions.
    Given the intricate nature of the schemes that criminals 
use to launder money, there are obviously some practical 
limitations upon the intensity of scrutiny that U.S. banks can 
give to the customers of their correspondent banking clients, 
or to any particular link in the chain of ``nested'' 
correspondent accounts. A requirement that U.S. banks 
thoroughly investigate the business dealings of each and every 
customer of a correspondent banking client--in other words, 
their customers' customers--might well provide burdensome and 
impractical, doing more harm to the financial industry than 
good in preventing money laundering.
    Nevertheless, the investigation's case studies make it 
equally apparent that U.S. banks must do a better job, first, 
of initially screening correspondent banking clients and then 
of monitoring these clients' accounts once they are opened. For 
example, some U.S. banks neglected to verify that their 
correspondent banking customers had effective anti-money 
laundering procedures in place at the time that they opened 
correspondent accounts. Moreover, U.S. banks have sometimes 
been far too slow to react to information they receive from 
government officials and from the media about suspicious 
activity by their correspondent banking customers. There is 
clearly much room for improvement here.
    I see the goals of these hearings as twofold: First, a 
careful examination of the case studies of those who have 
successfully manipulated the correspondent banking system to 
launder money should shed some light on how these schemes have 
worked and point out some weaknesses in current anti-money 
laundering procedures and protections. These disclosures should 
make it possible for U.S. banks to better understand and act 
upon the warning signs of money laundering in correspondent 
banking, helping to prevent such abuses in the future.
    Second, we must consider whether both banks and regulators 
have the tools they need to prevent money laundering through 
correspondent banking. I want to emphasize that the banking 
industry has made great strides in its efforts to stem money 
laundering. For example, the Office of the Comptroller of the 
Currency has noted that banks have generally complied 
successfully with their obligations under the Bank Secrecy Act 
to implement good currency transaction reporting programs. 
Nevertheless, gaps in oversight clearly still occur, and they 
are serious ones. One way of preventing such gaps is for the 
banking community to work more closely with the regulators and 
law enforcement officials to exchange information.
    I look forward to hearing the testimony of our witnesses 
today and in the subsequent 2 days of hearings.
    At this time I would like to recognize the distinguished 
Ranking Minority Member of the Subcommittee, Senator Levin, for 
his opening statement, but before I do so, I first want to 
thank him and his staff for their extraordinary and extensive 
work on this very complex investigation.
    Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Thank you very much, Madam Chairman, for 
calling these hearings, for convening them, and for your very 
kind remarks.
    Today we are going to be taking an insider's look at how 
U.S. banks are being used by rogue and high-risk foreign banks 
and their criminal clients to launder the proceeds of crimes 
such as drug trafficking, financial fraud, Internet gambling, 
and tax evasion.
    Now, what does it mean to launder money? It means that you 
take the dirty money that you get from selling drugs or 
accepting a bribe or defrauding someone and you move it through 
bank accounts or businesses in order to lose any link between 
the money and its source. And then you can spend that money 
without anyone asking any questions. One way you can do that is 
to move the money through correspondent bank accounts at U.S. 
banks.
    The U.S. banking system is one of the premier banking 
systems in the world. It is also one of the safest and 
soundest. Our strong regulatory environment helps to ensure 
that. And our dollar is the strongest currency in the world, 
which is one of the reasons why U.S. banks are so attractive.
    So if criminals can move their money through U.S. banks, 
they can not only disguise their money but they can also 
acquire the prestige of the U.S banking system and the services 
that banking system provides.
    Here is a rather simple chart that shows how the proceeds 
from criminal activity and corruption can make its way into 
U.S. banks.\1\ Ordinarily, the dirty money from criminal 
activity cannot get into a U.S. bank directly. It cannot go 
directly down to a U.S. bank, as shown on the right-hand side 
of that chart. That is because U.S. banks have to report cash 
transactions over $10,000, and they keep watch on the 
activities of their individual banking clients. But that same 
money can get into the same U.S. bank, by using an offshore 
bank that has a correspondent account at the U.S. bank. In 
other words, instead of going directly into the bank, which it 
is frustrated from doing by our regulatory apparatus, if it can 
move to an offshore bank and then use that offshore bank's 
account at the U.S. bank, it can accomplish very simply what it 
cannot do directly. That is what has happened over and over and 
over again in the high-risk foreign banks investigated by my 
staff.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 44 that appears in the Appendix on page 814.
---------------------------------------------------------------------------
    For most Americans, a bank conjures up positive images of 
respectability and sound fiscal management. We picture a well-
maintained building, a trained staff, a prudent bank president, 
all operating under regulations that ensure the bank's safe, 
sound and lawful operation. But not all banks fit that image. 
Some banks in the world are quite the opposite. They operate 
without controls, without regulatory oversight, and even 
without physical offices or trained staff. Some of these high-
risk foreign banks are themselves engaged in criminal behavior, 
such as financial frauds; some have clients who are engaged in 
criminal behavior, such as drug trafficking and political 
corruption; and some have such poor anti-money laundering 
controls that they don't know--and some don't care--whether or 
not their clients are engaged in criminal behavior.
    One might suppose that those kinds of foreign banks would 
be unable to open accounts at U.S. banks, that U.S. banks would 
recognize them as posing such high money laundering risks that 
they would not give them entry into the U.S. financial system. 
But you would be wrong.
    A year-long investigation by my Subcommittee staff has 
found that high-risk foreign banks have been able to open 
accounts at U.S. banks, and some of these U.S. accounts have 
become conduits for criminal proceeds. When one bank opens an 
account for and provides banking services to another bank, it 
is called correspondent banking. The bank that provides the 
banking services is called the correspondent bank. The client 
that uses the services is called the respondent bank. 
Correspondent banking is essential to the movement of money 
around the world for international trade and commerce. But 
because many U.S. banks have failed to adequately screen and 
monitor foreign banks which open accounts, correspondent 
banking has also become a gateway to the U.S. financial system 
for criminals and money launderers.
    Based on its work over the past year, the staff 
investigation identified three categories of foreign banks that 
pose high money laundering risks, as outlined by the Chairman: 
Shell banks, offshore banks, and banks in foreign jurisdictions 
that do not cooperate with international anti-money laundering 
efforts.
    ``Shell bank,'' as we use that term, means a bank that does 
not have a fixed physical presence in any country. It is a bank 
that does not have a physical office where customers go to 
conduct banking transactions or where regulators can go to 
inspect records and observe bank operations. Instead, these 
shell banks enjoy a shadowy existence, operating out of the 
offices of a related company, or from an undisclosed location 
that may be hinted at but never named. We found one shell bank 
that was operated out of the owner's home.
    Due to their lack of visibility and presence, these shell 
banks have largely evaded the public spotlight, and U.S. banks 
opening accounts for them appear too often not to care how they 
operate.
    The staff conducted an in-depth investigation of four shell 
banks: Caribbean American Bank, Federal Bank, Hanover Bank, and 
M.A. Bank. In all four cases, the investigation found the shell 
bank to be operating far outside the parameters of normal 
banking practice, without basic administrative controls, and 
without anti-money laundering safeguards. The investigation 
found that the banks had avoided regulatory oversight both in 
their licensing jurisdiction and in the countries where they 
conducted transactions. All four shell banks used accounts at 
U.S. banks to move millions of dollars in suspect funds across 
international lines, funds associated with drug trafficking, 
financial fraud, bribe money, or other misconduct.
    Offshore banks are banks whose licenses bar them from 
transacting banking activities with the citizens of their own 
home jurisdiction, but empower them to transact business 
``offshore'' with the citizens of other countries. In other 
words, the countries that create these banks protect their own 
citizens from them, but unleash them on the rest of the 
international community. One might ask why any U.S. bank would 
want to do business with a bank which is not allowed to 
transact business in its home jurisdiction, but they do. Major 
U.S. banks have opened accounts for hundreds, if not thousands, 
of offshore banks.
    About 4,000 offshore banks now hold licenses from about 60 
countries around the world and control almost $5 trillion in 
assets. About half of these offshore banks are thought to be 
located in the Caribbean and Latin America, with the rest in 
Europe, Asia, Africa, and the Middle East. The offshore banking 
sector continues to grow, even as the international outcry over 
their association with crime and corruption is also increasing.
    One reason that offshore banks pose high money laundering 
risks is that the country licensing the bank has less incentive 
to police it, since that bank is barred from doing business 
with the country's own citizenry. Another reason is that 
offshore banking is a money-making enterprise for the 
governments of small countries which license them, and the less 
demands made by the government on bank owners, the more 
attractive the country becomes as a licensing locale. Offshore 
banks often rely on these disincentives to minimize regulatory 
oversight of their operations, increasing the risk that some 
will become vehicles for money laundering, tax evasion, or 
other crimes.
    The third category of high-risk foreign banks are banks 
that are licensed by jurisdictions that do not cooperate with 
international anti-money laundering efforts. In June of 2000, 
the Financial Action Task Force on Money Laundering, which is 
the leading international body fighting money laundering, 
issued a list of 15 countries determined to be non-cooperative 
with international anti-money laundering efforts. Together, 
these 15 jurisdictions have licensed hundreds and perhaps 
thousands of banks, all of which introduce money laundering 
risks into international correspondent banking. In July of 
2000, U.S. banking regulators issued advisories warning U.S. 
banks against doing business with banks in the listed 
jurisdictions. But if you thought that these advisories caused 
U.S. banks to stop doing business with those banks, think 
again.
    Now, why do U.S. banks open correspondent accounts for 
these high-risk banks? For some banks, correspondent accounts 
are easy money. When a U.S. bank isn't extending credit, 
correspondent accounts carry no monetary risk to the U.S. bank, 
they provide income through the fees charged for the services 
rendered, and the attitude has been that ``a bank is a bank is 
a bank.'' We know, though, that that is not true. Some U.S. 
banks are apparently unaware of the money laundering involved; 
others seem to assume their systems will catch specific 
problems. But too often U.S. banks have failed to conduct the 
initial and ongoing due diligence which is needed to get a 
clear picture of the foreign banks using their services. And 
when negative press reports or information regarding suspicious 
activity did come to the attention of U.S. banks, in too many 
cases the information did not result in a serious review of the 
foreign banks involved or in concrete actions to prevent money 
laundering.
    The result is that U.S. banks, through their correspondent 
account services, become aiders and abetters, unwittingly--but 
aiders and abetters, nonetheless--of laundering the proceeds of 
drug trafficking or financial fraud or tax evasion or Internet 
gambling or other illegal acts. We cannot spend billions of 
taxpayer dollars to interdict drugs and eradicate coca farms 
and at the same time let drug lords deposit illegal drug 
profits in foreign banks with U.S. correspondent accounts. We 
cannot be consistent and are not consistent if we condemn 
corruption in foreign business practices and make illegal the 
payment of bribes by our businesses to foreign government 
officials, and then let bribe money be deposited in U.S. bank 
accounts earning interest.
    We cannot fight for human rights in all parts of the globe 
and then let corrupt public officials from other countries 
steal from their own people and place corrupt funds in U.S. 
bank accounts to enjoy the safety and soundness of the U.S. 
banking system. Money laundering not only finances crime, it 
pollutes international banking systems, it impedes the 
international fight against corruption, it distorts economies, 
and it undermines honest government.
    The Subcommittee is devoting 3 days of hearings to the 
money laundering problems posed by high-risk foreign banks' 
opening correspondent accounts at U.S. banks. Again, I want to 
thank our Subcommittee Chairman, Senator Collins, for her 
support of this investigation and for allocating these 3 days 
of hearings to this subject.
    Today we are going to look at how high-risk banks work and 
how U.S. banks respond to them. Tomorrow's hearing will focus 
on the special problems posed by foreign offshore shell banks. 
And the third day of hearings, next Tuesday, will focus on what 
can and should be done to strengthen anti-money laundering 
safeguards in U.S. correspondent banking. Based on the 
testimony and recommendations received, I will be introducing 
legislation in the near future to try to strengthen U.S. law in 
this area in order to close the net around criminals using 
accounts of high-risk foreign banks in U.S. banks to launder 
money.
    Today we are going to hear first from a U.S. citizen, John 
Mathewson, who used to own and manage an offshore bank in the 
Caribbean called Guardian Bank and Trust. After 10 years at the 
bank, Mr. Mathewson was arrested in the United States for tax 
evasion and money laundering. He pled guilty to charges and 
agreed to cooperate with U.S. law enforcement. One action which 
he took, which was the first and so far the only time that I 
know of in U.S. law enforcement history that it has happened, 
Mr. Mathewson turned over a year's worth of offshore banking 
records for inspection and review. These records not only 
provided invaluable information about how an offshore bank 
operates, but has also enabled U.S. law enforcement to initiate 
prosecutions of numerous of his bank's clients for tax evasion 
and other misconduct. Mr. Mathewson has since provided valuable 
testimony in many of these prosecutions, and today he will 
provide testimony about how an offshore bank and its clients 
have used U.S. bank accounts to launder funds. He will also 
explain how dependent offshore banks are on other banks to 
conduct their operations and how U.S. banks hold tremendous 
power in their hands to decide which offshore banks will gain 
access to the U.S. banking system.
    We will then hear from two U.S. banks, Bank of America and 
Chase Manhattan Bank, that opened correspondent accounts for 
offshore banks. One case involves American International Bank, 
an offshore bank that was able to open accounts at these as 
well as other U.S. banks, despite having a bad local 
reputation, its own correspondent accounts for rogue banks, and 
increasing evidence that the bank's accounts held suspect funds 
related to major financial frauds. Another offshore bank, Swiss 
American Bank, opened accounts at both banks as well. It 
maintained these accounts for years, despite mounting evidence 
that the Swiss American Bank's accounts were repositories for 
funds associated with financial frauds or Internet gambling or 
other illicit activities. In the face of repeated evidence of 
questionable activities, our U.S. banks kept open the Swiss 
American Bank accounts, and today we are going to find out how 
that could happen.
    Last year, U.S. taxpayers spent $600 million in the fight 
against money laundering. U.S. banks are required by law to 
join in this fight by operating anti-money laundering programs 
designed to detect and stop criminals from washing their dirty 
money through U.S. banks. We cannot condemn jurisdictions with 
weak anti-money laundering controls, weak banking oversight, 
and unregulated offshore sectors, and then tolerate U.S. banks 
doing business with the very banks that those jurisdictions 
license and unleash on the world.
    Since the report was issued last month, we have already 
seen some results. With respect to the high-risk foreign banks 
that were the subject of the case histories, the governments of 
Antigua-Barbuda, the Bahamas, and Dominica have revoked or 
suspended the license of four of the banks. The Cayman Islands 
also announced that by the end of this year, all of its 
offshore banks that are not branches or units of other banks, 
of which there are 62, will have to enhance their physical 
presence on the island by opening an office with bank records 
and a resident manager. In the United States, the New York 
Clearing House Association, which is composed of a dozen of the 
largest correspondent banks in the United States, has announced 
its intention to develop a code of best practices for the 
industry. And we have also been told by banks like Chase 
Manhattan that they have begun top-to-bottom reviews of their 
correspondent accounts. These are encouraging signs, although 
obviously much more must be done.
    Our banks, our U.S. banks, are the gatekeepers through 
which foreign banks and their clients have to pass to get 
access to U.S. dollars; U.S. banking services such as wire 
transfers, investments, and credit; and the U.S. banking 
system, which is surely one of the best in the world. When it 
comes to high-risk foreign banks, U.S. banks have too often not 
lived up to that gatekeeping role. They need to do a better job 
in screening and monitoring the high-risk foreign banks that 
want access to our banking system. Only then will we end the 
money laundering activities and help to ensure that crime 
doesn't pay.
    Thank you.
    Senator Collins. Senator Carnahan, I want to welcome you as 
a new Member of the Subcommittee, and I would call upon you for 
any opening comments that you might have.

             OPENING STATEMENT OF SENATOR CARNAHAN

    Senator Carnahan. Thank you, Senator Collins. I commend you 
for calling this hearing, and I look forward to working with 
you in the days ahead on future investigative hearings.
    Senator Levin, I would like to thank you for your 
leadership on this investigation and in developing this very 
valuable report.
    I am greatly concerned about this issue. I think the 
average American would be shocked to learn how easy it is for 
drug dealers and scam artists to launder money or evade taxes. 
And as a result, we are spending a tremendous amount of money 
dealing with the consequences of this illicit activity. I am 
pleased that Senator Levin and the Subcommittee have exposed 
this problem and made recommendations on how to prevent this 
fraud and abuse on American consumers.
    Thank you.
    Senator Collins. Thank you.
    We will be using our timing system today. Each witness will 
be asked to limit their oral testimony to 10 minutes. Your 
entire written testimony will be submitted in the record. There 
is a timing system that we use. When the red light comes on, 
you have about 1 minute to conclude your comments. We will also 
be doing rounds of questioning that will be 10 minutes in 
length also.
    Without objection, I am going to make all of the exhibits 
that are used today part of the hearing record.
    I would now like to introduce our first witness this 
morning. He is John Mathewson, who formerly owned Guardian Bank 
in the Cayman Islands. Mr. Mathewson's testimony will provide 
insider knowledge regarding how an offshore bank can use the 
products and services available through its correspondent 
accounts to conceal the proceeds of crime. Mr. Mathewson will 
be accompanied this morning by his attorney, Oscar Gonzalez.
    Pursuant to Rule VI, all witnesses who testify before the 
Subcommittee are required to be sworn. At this time I would ask 
that the witness please stand and raise his right hand. Do you 
swear that the testimony you are about to give to the 
Subcommittee will be the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Mr. Mathewson. I do.
    Senator Collins. Mr. Mathewson, you may proceed with your 
statement.

  TESTIMONY OF JOHN M. MATHEWSON,\1\ FORMER OWNER OF GUARDIAN 
BANK AND TRUST (CAYMAN) LTD., ACCOMPANIED BY OSCAR C. GONZALEZ, 
                              ESQ.

    Mr. Mathewson. First, I would like to express my 
appreciation and surprise at the amount of knowledge both 
Senator Collins and Senator Levin have elicited in their 
opening statements. And, also, I should address Senator 
Collins, Senator Levin, Senator Carnahan, distinguished 
persons. Having spent more than 10 years in the offshore 
industry, it is surprising to hear a couple of Americans who 
have accumulated the knowledge that the two of you have 
accumulated for purposes of protecting the United States from 
offshore banking.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Mathewson appears in the Appendix 
on page 139.
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    I prepared a written statement, sent it to Elise Bean, 
asked her what portion of it I should read to the Committee, 
and she told me none of it because if I read it, everyone's 
eyes would begin to glaze over. And I said, ``Well, all right. 
What should I do?'' And she said, ``Well, wing it.'' So I'm 
winging it.
    I'm 72 years old. I'm an ex-Marine. I served in China. I'm 
one of the few survivors of that era. I'm rather proud of 
having been in the Marine Corps. I appreciate the United 
States. I thank God I was born in this country, especially 
after seeing other countries and what goes on in them.
    I have been asked, Why have you cooperated to the extent 
that you have with the U.S. Government? And the reasons are 
twofold: One, my appreciation for being able to live and also 
for having been born in the United States; and, two, 
individuals in New Jersey who dealt with me. One was William 
Waldie of the FBI. He would erase any thoughts that one might 
have about the recent FBI individual who had done work for the 
Russians. Waldie is a man of his word. He is very honorable. 
And also John Carney, who is the Assistant U.S. Attorney in New 
Jersey, who lived up to his word, is honorable. And without 
those two, I would not have cooperated to the extent that I 
have cooperated.
    In addition, there is Judge Lechner in New Jersey, who, 
after he had sentenced me to probation, asked me very 
pointedly, will you continue your cooperation with the U.S. 
authorities? My answer was yes. I have continued it.
    Now, I could tell many stories about offshore banking. I 
could tell one of my own where I was a successful businessman 
in the Chicago area. I learned to fly. I did not learn to fly 
in the Marine Corps. I learned as a civilian. Over the years, I 
had three aircraft. With an aircraft at your disposal, there is 
always a temptation to fly almost anyplace, whether it is 
necessary or not. I had read about the Cayman Islands, had read 
about the tax advantages pertaining to the Cayman Islands, and 
1 day decided it was time that I go down there and find out 
about them.
    So I flew my aircraft to the Cayman Islands. En route, over 
Cuba, in what is called the Hiron Corridor, I had three MiGs 
come up, one on either side of the aircraft and one in front. I 
was on course with Havana Center. I asked them what was going 
on, and they said, Senor, we are identifying your aircraft. 
With that, the MiGs peeled off, and I didn't see them again. 
They were so close to my aircraft that I could make out the 
features of the pilots. I continued to the Cayman Islands, 
landed. It was late on a Friday afternoon, got a phone book, 
looked up banks, saw the Swiss Bank Corporation, and thought, 
well, I've heard of them before, I guess they're legitimate, 
and I called them.
    I spoke to the managing director, Rodney Bond, and he said 
they were closing the bank shortly. I had told him I wanted to 
start an account. He said, I'll wait for you. So I took a cab 
over there and opened an account with the Swiss Bank 
Corporation. That was my first introduction to offshore 
banking. I didn't know anything about it before that time.
    I continued to go down to the Cayman Islands. I enjoyed the 
weather. I enjoyed the beach. I enjoyed the people. And over 
the years I got tired of the business I was in in the Chicago 
area and decided I would go into semi-retirement. I bought a 
home in the Cayman Islands, went down there to live. Two weeks 
after I was there, two individuals in the financial community, 
Keith High and Rex Rankin, who are still active, propositioned 
me to buy 60 percent of the shares of a bank. I thought it over 
and thought, well, it's a good idea.
    I was then told that I would have to go in to see the 
inspector of banks of the Cayman Islands. I did this. He 
informed me I would have to undergo a check by the FBI and also 
Scotland Yard. I told him to go ahead. Two weeks later, I 
received a phone call I had been approved as a 60-percent 
shareholder of a bank in the Cayman Islands.
    I worked very hard with the bank, giving it American 
expertise in advertising and so forth. And after a 10-year 
period--or I should say at the end of the 10-year period, our 
earnings for the latest year, before the bank was taken over, 
were $5 million. I was going from zero to $5 million. We had 
applied for an additional bank license in the Bahamas. We were 
told that bank license would be approved, all they needed was a 
letter from the Cayman Island financial authorities stating 
that we were an active business, an active bank in the Cayman 
Islands.
    That letter was never obtained, and on January 18, the 
Cayman Island Government came into Guardian Bank with an order 
stating that the bank was not being operated in a manner that 
was beneficial to the Cayman Islands and that Ernst and Young, 
the accounting firm, was to take over the bank and run it for a 
period of 90 days and then report to the governor and council.
    We left the bank realizing that there would be no bank 
after a 90-day period of a bunch of accountants running it, and 
contacted Coopers and Lybrand and put the bank into 
liquidation.
    After a 10-year period, we had $150 million in footings in 
the bank. We had about 2,000 clients. I became a member of the 
Cayman Island Rotary Club. In fact, I was president of the club 
in 1993. In this club was a nucleus of managing directors and 
other employees associated with the financial business in the 
Cayman Islands. Everything I ever needed to know about banking 
I learned from them in our gab fests after the Rotary meetings. 
All of the things that Guardian did was learned from other 
banks. I have never had an original thought in my life, but I 
have been able to take what other people do and sometimes do a 
better job with it. But Guardian was just a run-of-the-mill 
bank in the Cayman Islands doing its thing, the same as all of 
the others.
    The one thing I learned very quickly, after having a bank 
in the islands, was that clients opening an offshore account 
were doing so for tax evasion; otherwise, they never would have 
paid the fees that were charged to them for offshore banking. 
There would be no point in it.
    Also, considering that all of these services that we 
provided offshore were free from U.S. banks in the United 
States, it didn't make sense.
    Now, the Cayman Islands very proudly claims that they have 
US$600 billion on deposit, and they have 600 banks registered 
and doing business in the Cayman Islands. My thought is: How 
much of the $600 billion in the Cayman Islands is there for tax 
evasion?
    I will tell one story and then I will cut this off. I knew 
Don Stewart of the Royal Bank of Canada reasonably well. He 
also was a Rotarian. And he would tell stories about before I 
came on the island when things were very wide open, about 
planes coming in with boxes of $100 bills and how it would take 
all night to count the money. Now, he never said where the 
money came from, but this was something that continued for 
days. Also, a Rudy Evans, who was the equivalent of a chief of 
police in the Cayman Islands, tells about the money he earned 
by guarding all of this money when it was being counted at the 
Royal Bank of Canada. This was a very common practice.
    The firm of attorneys that I used to go over the paperwork 
to go into the banking business was a firm called Meyers and 
Alberca. They, as far as I know, are still in business. When I 
went in with the various papers for them to look over, Daryl 
Meyers brought me into his office and apparently thinking that, 
well, now I am a member of the financial community, why cover 
anything up, he had two suitcases sitting in his office, open, 
full with $100 bills. I know a little something about currency, 
and I would guess there was at least US$10 million in those two 
suitcases. I didn't say anything. He didn't say anything. 
Apparently, he had just received this money, and I would assume 
it was going into one of the banks on the island.
    I believe that is my opening statement.
    Senator Collins. Thank you, Mr. Mathewson.
    Mr. Mathewson, would you please describe what the assets 
and client base were of Guardian Bank at its peak?
    Mr. Mathewson. I heard ``the assets.'' What was----
    Senator Collins. The client--how many clients and what were 
the assets of the bank at its peak?
    Mr. Mathewson. Yes, ma'am. The assets of the bank were 
approximately $150 million, and there were around 2,000 
accounts.
    Senator Collins. And since Guardian was an offshore bank, 
as I understand it, that means that none of its depositors were 
citizens of the Cayman Islands. Is that correct?
    Mr. Mathewson. That's correct.
    Senator Collins. In your testimony, you estimated that 
approximately 95 percent of Guardian's clients were, in fact, 
citizens of the United States. Is that accurate?
    Mr. Mathewson. That was a guess. However, William Waldie of 
the FBI made it a point to check that out, and he verified that 
it was 95 percent. So it was a pretty good guess.
    Senator Collins. And as I understand it, in your judgment, 
virtually all of Guardian's clients were engaged in tax 
evasion. Is that an accurate statement?
    Mr. Mathewson. That's an accurate statement. However, one 
thing I might point out, most of its clients were legitimate 
business people and professionals in the United States.
    Senator Collins. Legitimate, but engaging in tax evasion?
    Mr. Mathewson. Exactly, yes.
    Senator Collins. Well, some of us would quarrel with the 
word ``legitimate.''
    Mr. Mathewson. All right. I understand.
    Senator Collins. What leads you to conclude that the 
clients of Guardian Bank were overwhelmingly engaged in tax 
evasion?
    Mr. Mathewson. Every once in a while I would have a 
prospective client ask if Guardian Bank sent out 1099's for 
earnings.
    Senator Collins. And did it?
    Mr. Mathewson. No, it did not. And my reply usually was, 
well, if you would like one sent, please advise us.
    Senator Collins. Did anyone ever take you up on that offer?
    Mr. Mathewson. No one ever took me up on it.
    Senator Collins. It is not illegal for an American citizen 
to maintain offshore accounts, but obviously any income from 
that account is supposed to be reported to the IRS. According 
to one government estimate, at least $70 billion a year in 
personal income tax revenue is lost to tax havens such as the 
Cayman Islands.
    In your judgment, are there any legitimate reasons why an 
American citizen would use the services of an offshore bank?
    Mr. Mathewson. Some of the other reasons that an offshore 
bank would be used by a U.S. person would be to hide money from 
a spouse; in the event of a bankruptcy, to secrete funds 
offshore out of the bankruptcy; but this all would be tax 
evasion, anyway. No, I don't think so. I think it is almost 
ridiculous to think that anyone would establish an offshore 
account without the thought of being able to make money with it 
by evading taxes.
    Senator Collins. Mr. Mathewson, without the correspondent 
banking accounts in the United States, would Guardian have been 
able to conduct its business and provide the services that its 
clients wanted?
    Mr. Mathewson. Senator, you have hit on the Achilles heel 
of the entire offshore banking industry. Without correspondent 
banks to accept U.S.-dollar checks and wire transfers, the 
banks would be out of business in the Cayman Islands.
    Senator Collins. Did Guardian's U.S. correspondent banks 
take any steps to determine the sources of Guardian's deposits? 
Was there scrutiny given to the accounts or the sources of 
money?
    Mr. Mathewson. None that I know of.
    Senator Collins. And why do you feel that was the case? Why 
wasn't there more scrutiny?
    Mr. Mathewson. I'm not certain they really cared, as long 
as they were receiving substantial funds. And, remember, there 
were millions and millions of dollars involved.
    Senator Collins. In fee income to the correspondent banks 
in the United States?
    Mr. Mathewson. Well, for instance, with the Bank of New 
York, we kept very substantial accounts there, and they paid 
interest on those accounts.
    I think they just didn't really wish to rock the boat, and 
they were very happy with the deposits that were going into 
their bank and would have liked even more.
    Senator Collins. Was it expensive for your American clients 
to maintain accounts with Guardian?
    Mr. Mathewson. Yes.
    Senator Collins. Could you give us some idea of the charges 
that were imposed and also explain the idea of corporate 
accounts that were used to shield the identities and how much 
you charged for those accounts?
    Mr. Mathewson. Most of our clients did have Cayman Island 
corporations. The cost of establishing a corporation for them 
was $5,000. In addition to that, there was a $3,000 annual 
management fee payable in advance. So the total cost initially 
was $8,000.
    There were other charges. For instance, if they wanted a 
wire transfer, we charged either $100 or $150. I've forgotten 
the exact amount. If there was an incoming wire transfer, we 
charged approximately $100 for that.
    Anything that we did, there was a charge. If they called, 
the cost of the telephone was put onto their account. It was 
quite costly, and considering that all of those services could 
be provided in the United States for no charge, it made no 
sense unless there was tax evasion as the ultimate goal.
    Senator Collins. Thank you, Mr. Mathewson.
    Senator Levin.
    Senator Levin. Thank you, Madam Chairman.
    If a U.S. citizen came to the bank and wanted to open up an 
account, what would you have advised them on how to do that? 
And tell us about the creation of these corporations as well 
that you have made reference to.
    Mr. Mathewson. All right. Would you repeat the first part?
    Senator Levin. Yes. If a U.S. citizen came to your bank and 
said he wanted to open a bank account, what would you advise?
    Mr. Mathewson. Normally, when they would come in, they 
would come in either as a result of some advertising or our 
audio-visual presentation at one of the hotels or it was a 
recommendation. After a number of years in business, 75 percent 
of our clientele was coming in from recommendations of other 
clients.
    When they would come in, for the most part it had been 
explained to them what could be done offshore. The Cayman 
Islands has a confidentiality law whereby it is a crime to 
divulge account information. Therefore, they should be provided 
with complete anonymity relative to the account that they would 
establish.
    You can take it a step further by having a corporation, and 
we provided directors for that corporation so that the 
individual account-holder never had to sign anything or have 
his name visible to anyone. And the only one who was aware that 
this U.S. citizen, in most cases, was the beneficial owner of a 
corporation was in the Guardian Bank. It was no place else.
    Senator Levin. So by setting up a corporation, there was 
another layer of secrecy in effect that would be added to that 
account. Is that correct?
    Mr. Mathewson. Yes, sir.
    Senator Levin. When you indicated before that somebody was 
paying $5,000 to set up that corporation and then a $3,000-per-
year management fee, that is $8,000 up front and then an 
ongoing $3,000 per year. That is what people were paying for 
additional secrecy? Is that fair to say?
    Mr. Mathewson. Precisely.
    Senator Levin. Isn't that really what this is all about, is 
that people are paying here to hide assets from usually the 
U.S. Government to which they would owe taxes on that money if 
the government knew about it?
    Mr. Mathewson. Yes.
    Senator Levin. Did any of your clients open accounts in 
their own names?
    Mr. Mathewson. We had very few, possibly a handful, that 
had accounts in their name only.
    Senator Levin. In their own name.
    Mr. Mathewson. Yes. However----
    Senator Levin. You said in their name only, or in their own 
name?
    Mr. Mathewson. Well, in their name only, which was also in 
their name. However, with those few clients that had an 
individual account, we referred to it only by the account 
number. We did not use the individual's name in any paperwork 
pertaining to it.
    Senator Levin. All right. The purpose of that being, again, 
to keep that client's identity secret. Is that correct?
    Mr. Mathewson. Yes, sir. By the way, I knew very well a Sir 
Vassal Johnson, who is Caymanian, and he was knighted by Queen 
Elizabeth on the island for having established the 
confidentiality laws and the financial secrecy of the island 
and being responsible for the success of the financial 
community.
    Senator Levin. That secrecy is one of the things that 
attracts people who are trying to evade taxes. Is that fair to 
say?
    Mr. Mathewson. Without that secrecy, the Cayman Islands 
would be a fishing community again.
    Senator Levin. Am I correct that the Guardian Bank issued 
credit cards also to its clients?
    Mr. Mathewson. Yes, sir.
    Senator Levin. And isn't that the way clients frequently 
got access to those funds, is through that credit card?
    Mr. Mathewson. It was another means where they could take 
funds or earnings out of their account and spend those funds 
either in the U.S. or worldwide.
    Senator Levin. And they also did that through wire 
transfers?
    Mr. Mathewson. Well, they could do it through wire 
transfers. However, the card probably was the safest way of 
accomplishing it.
    Senator Levin. Now, did you send monthly bank statements to 
your clients in the United States?
    Mr. Mathewson. We did not.
    Senator Levin. Again, that was to keep any records out of 
the United States. Is that correct?
    Mr. Mathewson. That's correct.
    Senator Levin. How did the clients generally deposit their 
money in that bank?
    Mr. Mathewson. Several ways: Cash occasionally, checks that 
they brought in with them when they established the account, 
and then ongoing, sending checks by regular U.S. mail to the 
bank. We instructed the clients to make those checks out to 
G.B., which would stand for Guardian Bank, G.B.&T., Guardian 
Bank and Trust, or we gave them options to make them out to 
Sentinel Limited, Fulcrum Limited, and there was one other, and 
I don't recollect that one. It was Tower Limited.
    Senator Levin. And then how did the checks get into the 
correspondent account?
    Mr. Mathewson. We received a number of checks every day. 
After we processed them and credited the individual client 
account, we batched them, sent them by courier to whoever our 
correspondent bank was at the time, whether it would be the 
Bank of New York, First Union, or any of the others.
    Senator Levin. Now, you have indicated what some of the 
services were that the U.S. banks, your correspondent banks, 
did for your clients: Clearing checks, receiving and sending 
wire transfers, and so forth. And those were services that you 
performed as well, and I believe you said that the U.S. banks 
were critical to each of those transactions that you performed.
    What would have happened if the Guardian Bank had been 
unable to open a U.S.-dollar correspondent account at a U.S. 
bank? Could you have handled U.S. clients unless you were able 
to open those correspondent accounts at U.S. banks?
    Mr. Mathewson. Remember, there's always a flanking 
movement, Senator. If we were unable to open a U.S. 
correspondent banking relationship, we probably would have gone 
to another bank that had a correspondent relationship and pay 
them a fee for clearing our checks.
    Senator Levin. And then would have had an account with 
them?
    Mr. Mathewson. Yes, sir.
    Senator Levin. So that if for any reason you couldn't have 
opened a correspondent account at a U.S. bank, you then would 
have done it indirectly through opening an account with a bank 
that did have a correspondent account at a U.S. bank. Is that 
fair to say?
    Mr. Mathewson. That's correct.
    Senator Levin. But unless you could either open up your own 
correspondent account with a U.S. bank or establish an account 
with a bank that did have a correspondent account with a U.S. 
bank, is it not fair to say that you simply could not have 
handled U.S. clients?
    Mr. Mathewson. That's exactly right.
    Senator Levin. You said in your statement and again this 
morning that small offshore banks are fully dependent upon the 
more established banks to give them access to banking services 
such as wire transfers, check clearing, credit cards, and 
investment accounts, and that they couldn't stay in business 
without having this access. My question now then is this: Since 
these offshore banks are so totally dependent, as you have just 
testified, upon having access to those services through that 
U.S. bank, either directly by establishing a correspondent 
account or establishing an account with another bank that does 
have a correspondent account, is it fair to say that U.S. banks 
can demand any information and cooperation from a foreign bank 
that they need in order to decide to open or maintain an 
account for that bank? In other words, they are the ones that 
are needed. It is our U.S. banks that are performing the 
services and that they can demand information that they want or 
else simply say we are not going to open the account. They have 
that power, do they not?
    Mr. Mathewson. Yes, they do.
    Senator Levin. Thank you. My time is up.
    Senator Collins. Senator Carnahan.
    Senator Carnahan. Thank you.
    Mr. Mathewson, thank you for being here today. Your 
testimony is certainly quite eye-opening.
    In your former bank, Guardian Bank and Trust Limited, 
citizens deposited money into your accounts in an attempt to 
evade paying U.S. taxes. In your estimation, how widespread is 
this activity?
    Mr. Mathewson. I can only speak from my own experience. We 
had many people come to the Cayman Islands, came into Guardian 
Bank very interested in finding a way to secrete funds in some 
fashion or another. Taking the Cayman Islands' own publication 
of $600 billion U.S. dollars on deposit, I have to think it's 
rather widespread.
    Senator Carnahan. The Subcommittee's investigation has also 
uncovered instances where scam artists convinced average 
citizens to invest money in correspondent accounts for high 
returns. The banks then refused to return the money to the 
defrauded investor. While this situation may not be a part of 
your direct experiences, I would like to know if you have any 
suggestions on how consumers could protect themselves from 
these types of scams.
    Mr. Mathewson. I suppose there will always be con artists 
out there peddling something that purportedly is going to make 
them a great deal of money for very little effort. And there's 
a certain intrigue pertaining to the offshore industry that 
people are attracted to.
    I don't know any way to protect the individual who doesn't 
detect the con being perpetrated against himself except that, 
for instance, with the publicity that has been and will be 
emanating from these hearings, attorneys in the United States 
and also worldwide are going to warn their clients to stay away 
from the offshore accounts. If someone is affluent and goes 
into his attorney and says, hey, I got a million bucks and I'd 
like to secrete it someplace, the attorney is probably going to 
say, well, don't do anything, the offshore industry is probably 
over when it comes to secreting money.
    But, again, going back to your question, I have no way of 
suggesting a way to eliminate this fraud perpetrated on people.
    Senator Carnahan. Thank you very much.
    Thank you, Madam Chairman.
    Senator Collins. Thank you, Senator.
    Mr. Mathewson, in your opening statement, you described 
Guardian as a run-of-the-mill bank. By that I assume you mean 
that the kinds of services provided, the reason that people had 
deposits in Guardian Bank, are similar to those of other banks 
in the Cayman Islands. Is that correct? That the kinds of 
services you were providing for people who were essentially 
hiding assets was commonplace?
    Mr. Mathewson. Yes.
    Senator Collins. You also stated that you could think of no 
legitimate reason why an American citizen would use an offshore 
account, particularly since the charges were so high compared 
to what an American bank would charge. Is that correct as well?
    Mr. Mathewson. That's very correct, yes.
    Senator Collins. And yet there is an estimated $600 billion 
of American assets on deposit at these banks in the Cayman 
Islands?
    Mr. Mathewson. That's what the Cayman Island Government 
claims.
    Senator Collins. Given those facts, shouldn't any 
correspondent account request from a Cayman Island bank to an 
American bank raise a red flag?
    Mr. Mathewson. It should certainly set off the alarm bells, 
yes.
    Senator Collins. And yet, in your experience, you found it 
very easy to open correspondent accounts with American banks, 
with virtually no questions asked. Is that correct?
    Mr. Mathewson. That's correct. Practically no questions. We 
also opened accounts with, for instance, Prudential Bache of 
New York and gave them millions of dollars of offshore funds 
for investment in everything from shares of Microsoft to U.S. 
Treasury bills.
    Senator Collins. And yet, in your judgment, every one of 
your 2,000 clients at the peak of Guardian Bank's existence, 
every one of those individuals was hiding assets. Is that 
correct?
    Mr. Mathewson. Yes.
    Senator Collins. Either from the American Government or 
from a bankruptcy court or a divorced spouse or someone else 
who was entitled potentially to a share of those assets?
    Mr. Mathewson. I agree with that.
    Senator Collins. Thank you.
    Senator Levin, do you have any further questions?
    Senator Levin. Just a few.
    In using your correspondent account at American banks, you 
didn't then have to be particularly clever or in any way 
deceptive--you could just very readily deposit that money, as 
the Chairman says, with no questions asked.
    Mr. Mathewson. Yes. That's correct. There were no 
questions. We sent checks to them. They cleared them and put 
them into the Guardian account.
    Senator Levin. Did they ever press you for information 
about your operations? Did you have a ``know your customer'' 
person come to you every year and say, hey, we want to see what 
is going on here, whether this money is tax evasion money, 
whether this is being hidden from creditors in bankruptcy 
court? Did you have that kind of scrutiny on a regular basis 
from banks?
    Mr. Mathewson. Senator Levin, I never had any bank officer 
from the United States, from a correspondent bank that we were 
using, come in to talk to me, nor have I ever met anyone.
    Senator Levin. I just want to comment on one reference you 
made to the legitimacy of people who were depositing money in 
their accounts in your bank. Tax evasion, as you pointed out, 
is not legitimate, but some of the other reasons that you 
mentioned as being the reason that legitimate people had for 
depositing money are not legitimate either, including trying to 
hide assets from creditors in bankruptcy court. I won't get 
involved in divorce proceedings because you cannot in a divorce 
proceeding either hide assets from your spouse and deceive a 
court as to what assets you have. So with that one 
qualification relative to your testimony this morning, I think 
your testimony has been extraordinarily accurate, powerful, and 
right on target. I would just take exception with that one 
reference you made relative to the legitimacy of some of the 
people who try to evade taxes or try to use your accounts for 
other purposes.
    I can't think offhand--now, there may be legitimate 
reasons, but I haven't heard any this morning, for hiding 
money.
    Mr. Mathewson. Senator, I hear you loud and clear. When I 
said that these people or some of them were quite legitimate, 
I'm referring to their businesses, they're paying taxes in the 
United States. However, once they crossed the line and started 
an account offshore, they were then evading taxes for one 
reason or another.
    Senator Levin. When the checks came in to you, did you or 
your clients put the account numbers on those checks?
    Mr. Mathewson. We did not. And occasionally we would have a 
client who was so used to putting account numbers on things in 
the United States, and they would put their Cayman Island 
account number on the check. In some instances, we'd send the 
check back to them and tell them to rewrite it and leave the 
account number off.
    Senator Levin. And put the account number on a separate 
piece of paper?
    Mr. Mathewson. Correct.
    Senator Levin. I have a great deal of difficulty with U.S. 
banks doing business with shell banks, period. It seems to me 
that all of the problems that those banks create that you have 
outlined here this morning are such that there should not be 
that kind of acceptance of an account from a shell bank--at 
least I can't see offhand the reason why we should allow our 
banks to do business with a shell bank.
    Now, relative to offshore banks, do you think that the same 
kind of restriction should apply to offshore banks? Should we 
allow our banks to do business with offshore banks with whom 
they have no affiliation?
    Mr. Mathewson. I don't think you have to prohibit our banks 
from doing business with offshore banks, but I think you can 
make it so that the individual client who is planning to evade 
taxes just isn't going to take money offshore.
    For instance, we'll say--I'll pick on the Bank of New York 
since they've been picked on quite a bit recently, anyway. If 
the Bank of New York had an officer who would go over all of 
the checks received from offshore banks and all of the wire 
transfers to see if there was anything in those checks and wire 
transfers that would smack of fraud, it would cut way down on 
the use of offshore accounts by Americans, because this 
publicity would get out.
    Senator Levin. How about requiring that the account numbers 
be on those checks?
    Mr. Mathewson. Yes, right. Well, something on the check. 
But I think, with thinking it through, that it would be 
possible to cut down on offshore banking considerably.
    Senator Levin. The Cayman Islands has strengthened some of 
its rules since 1995 when you ended your operation in the 
Caymans, and I think we just want to make note of this, that 
apparently they have made a number of improvements in the way 
that they regulate offshore banks. Just this week--and I am 
sure that these hearings have something to do with it, and our 
investigation has a lot to do with it--they have made an 
announcement that any bank that is in possession of an offshore 
license must maintain an office with a manager and keep its 
records in the Caymans. That I think would be an improvement, 
but the practices that you have described do flourish in other 
banks in other jurisdictions, and we will hope that the 
Caymans' tightening up will produce some results in the Cayman 
Islands themselves. But do you have any comment on that recent 
action by the Caymans?
    Mr. Mathewson. I am sure that they are attempting to cover 
their flanks and to keep their financial business going. When 
you're dealing with a Third World country--and no matter 
whether they like it or not, the Cayman Islands is Third 
World--you're always subject to payoffs and activities that are 
outside of the law.
    For instance, about 6 months before Guardian was taken 
over, I had a political figure come in to see me and ask for 
$250,000 in cash and a percentage of the bank's shares. I told 
him to shove off, I wasn't interested. He warned me that I 
would regret doing this.
    Well, hindsight is always great. I would assume it's 
possible that if I had gone along with his wishes that Guardian 
Bank might very well still be in existence.
    That individual is still a member of the legislative 
assembly of the Cayman Islands. He is still one who is trying 
to wiggle around U.S. rules, and I just thought I'd point this 
out, that they are trying to go around any rules or regulations 
that are made to impede their financial progress.
    Senator Levin. Tax evasion is not a crime in the Caymans. 
But it is here, and what you just described, I hope, is a crime 
in the Caymans. In any event, if you haven't already reported 
that to our FBI so that they can send that information to the 
Cayman Government, I would ask that you do that.
    Thank you.
    Senator Collins. Thank you, Senator Levin.
    Senator Carnahan, do you have any further questions?
    Senator Carnahan. No further questions.
    Senator Collins. Thank you.
    Mr. Mathewson, I would like to thank you for your testimony 
today. It was extraordinarily helpful to the Subcommittee, and 
I appreciate your cooperation.
    Mr. Mathewson. Thank you, Senator Collins. I was asked to 
bring in one of the Guardian Bank credit cards by Ms. Bean. 
Would you like to see that?
    Senator Levin. Yes, could you show us the credit card? 
Would that be all right, Madam Chair?
    Senator Collins. Sure.
    Senator Levin. Would you show us that credit card? And do 
we have a copy of it? \1\
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    \1\ See Exhibit No. 46 that appears in the Appendix on page 823.
---------------------------------------------------------------------------
    Mr. Mathewson. Now, that was my personal credit card.
    Senator Collins. What is very interesting about this credit 
card is it is made out to Guardian Bank. It does not have your 
name on it or any client's name on it. Is that typical of how 
the credit card----
    Mr. Mathewson. It could have been ABC Corporation also, 
backed by a U.S. citizen. And if you look on the back of the 
card, you'll see my signature, which is illegible. No one ever 
questioned that card, and I made a number of charges on it over 
a period of time, as did many of our clients.
    Senator Collins. We are putting it on the audio-visual 
system so that it can be seen.
    Senator Levin.
    Senator Levin. Yes. The fact that your signature is 
illegible I don't think distinguishes this card from any other 
credit card. [Laughter.]
    Mr. Mathewson. No.
    Senator Levin. In more significant ways, it is very 
distinctive. It does not have your name on it.
    Mr. Mathewson. Right.
    Senator Levin. And what you are saying is that when your 
bank issued these credit cards, frequently they would be issued 
to a corporation which had been set up in the Caymans to 
protect the identity of people so that there would be total 
secrecy, but that a person who had set up that corporation in 
the Cayman Islands and who had used your bank to hide their 
money could walk into a bank here or to an ATM machine and use 
that credit card, with only a corporate name on it, not their 
own name on it, and have access to their account at your bank. 
Is that right?
    Mr. Mathewson. Exactly, Senator. And if you recollect, 
early on I mentioned that I have never had an original thought 
in my life. When I introduced the use of credit cards at 
Guardian Bank, I did so because I had learned that Barclay's 
and some of the other major banks were also using credit cards, 
and I thought, why not, it sounds like a good idea.
    Senator Levin. It sure makes hiding money and evading taxes 
mighty simple, and that is exactly what is going on in these 
kinds of offshore banks. You have come forward, which has been 
very helpful, and hopefully after these hearings and after we 
tighten up the law, it is going to be a lot more difficult to 
hide money that should not be hidden and to evade taxes which 
should be paid, like other citizens pay their taxes. And 
hopefully the other kind of money laundering activities which 
go on at too many of these respondent banks will be reduced 
significantly. That will come because of a lot of reasons, but 
in part because of your coming forward here and making this 
testimony available to us and to other agencies of our Federal 
Government.
    Thank you.
    Mr. Mathewson. Thank you.
    Senator Collins. Thank you, Mr. Mathewson. You may be 
excused.
    Mr. Mathewson, we will get your credit card back to you in 
the hall.
    Mr. Mathewson. OK.
    Senator Collins. Although it looks like any of us could use 
it with impunity. Thank you.
    I would now like to call forward our second panel of 
witnesses this morning. They are representatives of Bank of 
America and J.P. Morgan Chase.
    I would first like to introduce James Christie, who is 
Senior Vice President, Global Treasury Risk Management of Bank 
of America. Also testifying this morning is David Weisbrod, the 
Senior Vice President of Treasury Services Division of the 
Chase Manhattan Bank or J.P. Morgan Chase, I guess it is more 
properly called now.
    Pursuant to Rule VI, all witnesses who testify before the 
Subcommittee are required to be sworn, so at this time I would 
ask you both to please stand and raise your right hands. Do you 
swear that the testimony you are about to give to the 
Subcommittee will be the truth, the whole truth, and nothing 
but the truth, so help you, God?
    Mr. Christie. Yes, I do.
    Mr. Weisbrod. Yes, I do.
    Senator Collins. Mr. Christie, you may proceed.

   TESTIMONY OF JAMES C. CHRISTIE,\1\ SENIOR VICE PRESIDENT, 
  GLOBAL TREASURY RISK MANAGEMENT, BANK OF AMERICA, OAKLAND, 
                           CALIFORNIA

    Mr. Christie. Thank you. Good morning, Chairman Collins, 
Senator Levin, and members of the Subcommittee. I am Jim 
Christie, a senior officer at Bank of America, and I am pleased 
to appear before the Permanent Subcommittee on Investigations 
to discuss Bank of America's anti-money laundering efforts.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Christie appears in the Appendix 
on page 143.
---------------------------------------------------------------------------
    We appreciate the opportunity to meet with you today to 
discuss some of the cooperative efforts we have taken in 
working with the U.S. Government to detect and deter fraud and 
money laundering and also, of course, to answer your questions.
    Senator Levin, your staff spent a considerable amount of 
time with us to learn about correspondent banking and how it 
works. Senator Collins, we were one of the first banks to 
volunteer to assist your staff and Senator Levin's staff in 
this learning process. And, of course, you know we also 
submitted a detailed response to the survey distributed by the 
Subcommittee staff members last year.
    As we mentioned in our earlier discussions with your staff 
members and in our response to the survey, correspondent 
banking is indeed vital to the financial industry. The notion 
of correspondent banking has been in existence since the 
creation of banking. Without correspondent banking, the global 
markets could not function. Correspondent banking is the basis 
for the settlement of payments and the movement of funds on a 
worldwide basis.
    According to outside sources, each day, through the use of 
two major wire transfer systems--that is, Fedwire and CHIPS--
trillions of dollars of settlements are made. Bank of America 
settles approximately 500 billion on a daily basis. However, 
the same attributes that make correspondent banking work fast 
and efficient for commerce also make it vulnerable to money 
laundering.
    We take very seriously our role in assisting the United 
States and other governmental agencies in the fight against 
money laundering. For many years, law enforcement authorities 
worldwide have recognized Bank of America as a cooperative 
institution in assisting law enforcement in its efforts to 
combat money laundering. An example of our willingness to 
cooperate, our bank agreed to establish undercover accounts for 
the benefit of U.S. law enforcement in its Operation 
Casablanca, a controversial operation that has left the Bank of 
America brand exposed to adverse media attention. In the past, 
we also received an award from the Internal Revenue Service 
recognizing our cooperative efforts with that agency.
    We believe that our bank has a solid program in place, 
including adequate internal controls and practices, to detect 
and report suspicious activities related to money laundering. 
In the United States, for example, Bank of America is one of 
the top filers of currency transaction reports--also known as 
CTRs--and also suspicious activity reports--known as SARs. 
These reports are useful to law enforcement in investigating 
financial crimes and money laundering activities.
    In the year 2000, for example, we filed over 1.5 million 
CTRs and nearly 12 percent of all the CTRs filed with the U.S. 
Government. In addition, we filed nearly 19,000 of the reported 
140,000 SARs filed in the United States, or 14 percent of the 
total filings.
    Our ability to recognize and file reportable activities 
does not come without a sizable investment in technology and 
human resources. Bank of America has invested heavily in 
monitoring systems over the years to capture and report cash 
and other activities potentially related to money laundering. 
The bank's internally built wire-monitoring systems, for 
example, have been reviewed and assessed by numerous regulatory 
and law enforcement authorities. Several of these agencies, 
including the U.S. Financial Crimes Enforcement Network--or 
FinCEN, as it is commonly known--have given our systems high 
praise. Still, we have not been complacent in our monitoring 
efforts. In fact, we have recently made a further investment 
into new technology to enhance our wire monitoring, and we 
continue to research other available solutions.
    Obviously, at the heart of any monitoring system is the 
person who is reviewing the activity and making judgments about 
what is suspicious. Here, too, we have increased our staff and 
upgraded a number of those positions.
    Now, let me speak to the business of correspondent banking 
and how it works within Bank of America.
    Our correspondent banking function is organized 
geographically in four divisions, that is, the United States 
and Canada Division, Asia Division, Europe, Middle East, and 
Africa Division, and Latin America Division. Each division has 
the authority to organize its functional responsibilities in a 
way they believe best serves our correspondent bank customers 
while still maintaining the use of our corporate policies and 
anti-money laundering controls and procedures. Each of the 
division managers reports up to the head of our Global 
Corporate and Investment Banking Group.
    As mentioned in our response to your survey, we offer the 
same correspondent banking services and products that other 
banks in the industry offer, and you've already listed and 
named those in your opening remarks.
    There is a great deal of separation of responsibilities and 
controls that assures safety and soundness in how we operate. 
This functional separation requires a number of staff members 
to become familiar with our corresponding bank relationships. 
Overall, we believe this type of organization approach provides 
outstanding service to our clients and instills proper checks 
and balances to guard against fraud. It also fosters an 
environment that encourages our associates to truly know our 
correspondent customers.
    Today we maintain approximately 1,900 foreign correspondent 
bank deposit accounts in the United States. As a matter of 
policy and practice, we do not maintain accounts for foreign 
shell banks. Certainly in the United States, we maintain 1,200 
relationships with foreign institutions, including 125 
relationships for foreign banks located in the 15 jurisdictions 
named by the Financial Action Task Force on Money Laundering. 
The relationships are with branches of institutions that 
maintain a home base office in one country and have established 
a physical presence in the Financial Action Task Force-listed 
country or with banks that are licensed by the local 
jurisdiction and maintain a physical presence in that country.
    Before Bank of America would open a relationship today with 
a foreign bank in a high-risk country, or, for that matter, 
anywhere else in the world, a rigorous, risk-based due 
diligence process would take place. The level of due diligence 
would depend upon several factors, including, but not limited 
to, whether the bank is a branch of a reputable bank based 
somewhere else in the world; whether the bank already maintains 
a relationship with Bank of America; who the principals are and 
their experiences in operating a bank; whether a letter of 
introduction is available from a reputable banking 
organization; and other such relevant factors.
    As part of our correspondent banking policy and standards, 
an account would not be established for any institution that 
does not maintain a physical presence in the high-risk country 
in which the bank is licensed. As mentioned earlier, we do not 
currently maintain, to the best of our knowledge, any 
correspondent accounts for foreign shell banks.
    Minimum due diligence that typically would be required to 
open a correspondent bank account will include a copy of the 
bank's incorporation documents and bylaws, the institution's 
latest financial statements, a copy of the resolution of the 
board of directors authorizing them to proceed with 
establishing the relationship, and dealing with those who are 
authorized to do so, plus certified copies of the passports of 
the principals, a search of the company registry, or 
equivalent, or an undertaking from a law firm as to what 
documents are held on the registry and any other relevant 
documents.
    A visit to the institution's physical operation and, where 
applicable, to the primary place of business is also required. 
We will also want to know what ``know your customer'' standards 
the applicant bank has in place; what type of client base the 
applicant maintains; whether the correspondent bank will offer 
services to other foreign correspondent banks, including any 
located in high-risk countries; whether the bank has monitoring 
systems in place to detect and investigate unusual or 
suspicious activities related to money laundering; and the 
typical amounts and volumes of activity the bank anticipates 
having with us and whether these volumes seem appropriate.
    We might also ask for the results of audits and regulatory 
examinations. However, there is no certainty that this 
information would be provided to us.
    We will also look to other due diligence information such 
as search of publicly available data on the applicant or its 
principals. Also, we generally have an understanding of most 
regulatory environments, especially if Bank of America has a 
physical presence in the jurisdiction. If not, we would assess 
the regulatory environment as well. In fact, several units 
within our bank meet on a constant basis with regulatory 
authorities. We would also check the applicant and its 
principals against Office of Foreign Asset Control--i.e., the 
OFAC list--to see if there were any matches.
    It should be noted that our wire-monitoring systems are 
used to monitor transactions, not the normal or expected 
activities of the foreign bank customers themselves. We look at 
certain types of information contained in the wire transaction 
fields to determine whether or not the transaction is 
suspicious. If we find an issue with a transaction, we refer 
the transaction back to the relationship manager and foreign 
correspondent bank for further resolution with its own 
customer. If the transaction were deemed reportable under U.S. 
regulations, we would also file the required suspicious 
activity report in the United States.
    If the transaction involves a foreign bank customer who 
also maintains an account with Bank of America in the United 
States, the transaction may have already been identified by the 
monitoring systems.
    We assess several factors in making the decision to close 
out a relationship with a high-risk foreign bank. The factors 
might include a change in our business strategy, a downturn in 
the foreign country's economy, a credit decision, turnover in 
the correspondent bank's management, a loss of confidence in 
the principals of the foreign office, or a lack of comfort in 
the type of customers that the foreign bank maintains.
    As I said before, we send $500 billion through the system 
each day; therefore, Bank of America certainly recognizes its 
corporate duty to be the leader in trying to fight against 
money laundering. In addition to our policies and procedures 
and the monitoring systems I mentioned earlier, we have 
undertaken many steps to combat money laundering. This includes 
especially training of our associates on the importance of 
recognizing and reporting unusual and suspicious activity. Bank 
of America has been favorably recognized by the law enforcement 
community, as I mentioned earlier.
    Senators Collins and Levin, you have asked us to discuss 
our relationship with Swiss American Bank and American 
International Bank. It is generally not our policy to discuss, 
particularly in an open forum, our relationship with bank 
customers or information about customers. Certainly both of you 
can appreciate this.
    However, under the circumstances, we shall provide you with 
the history of the accounts, and I am prepared to discuss these 
relationships with you today to the best of my ability.
    I see the red light. I better hurry up.
    Senator Collins. Why don't you take a couple more moments 
and finish up?
    Mr. Christie. OK. Thank you.
    I think we'll probably get into the details of American 
International Bank and Swiss Bank, so I don't need to refer to 
those at the moment. It would be the opening and closing of 
those accounts.
    Regarding the recommendations, you have asked us to comment 
on what more can be done beyond our own continued efforts to 
combat money laundering. As I noted earlier, we take seriously 
the problem of money laundering. One recommendation we have is 
to strengthen communication efforts between the government and 
the banking industry. Given our discussions with your staff and 
dealings with regulatory and law enforcement staffs throughout 
the world, we are aware that many governments have been able to 
identify, through their own investigative efforts, the names of 
individuals, companies, banks, other organizations, and 
countries that continue to facilitate or tolerate other money 
laundering activities. In fact, your staff has done a great 
job--I have to compliment them--in uncovering a lot of 
information about our ex-customers, AIB and Swiss American 
Bank, including some of their customers that I am not sure we, 
in the banking industry, could have uncovered on our own.
    It would be extremely beneficial for the U.S. Government 
and foreign governments to provide these names to the banking 
industry, these suspicious names. U.S. banks, including Bank of 
America, are already required to maintain a system to interdict 
funds transfer activity for OFAC. By providing us with the 
names of the entities that are engaged in fraud and other 
related activities, we could add this information to our 
monitoring systems and identify for law enforcement the 
activities of these entities. This information would in turn 
potentially allow us to identify the accounts of or 
relationships with the named entities.
    In the past, the U.S. Government has provided us the names 
of countries and high-risk areas for drug trafficking and money 
laundering, such as the report FinCEN released on Antigua a 
couple of years ago. It would be even more beneficial to 
provide us with the names of the entities that the U.S. 
Government ``knows'' are promoting illegal activities.
    In conclusion, I wish to thank the Chairman and Senator 
Levin and other Members of the Subcommittee for the opportunity 
to voice Bank of America's position on this topic and assure 
you that we will continue our efforts worldwide to assist in 
the fight against money laundering. Also, again, I wish to 
thank the staff members for their investigative efforts. The 
resulting report helped to shed light on the need to change and 
enhance many of our policies and procedures at Bank of America.
    I personally have learned from this exercise, and as a 
result, we have already expanded our wire-monitoring process, 
established more stringent and formal procedures for both 
opening and closing accounts, and we have put processes and 
procedures in place to better coordinate suspicious information 
with relationship managers, senior managers, and including my 
own risk management staff.
    Again, thank you for this time on today's agenda, and I 
look forward to answering your questions.
    Senator Collins. Thank you, Mr. Christie.
    Mr. Weisbrod, would you proceed, please?

   TESTIMONY OF DAVID A. WEISBROD,\1\ SENIOR VICE PRESIDENT, 
TREASURY SERVICES DIVISION, THE CHASE MANHATTAN BANK, NEW YORK, 
                            NEW YORK

    Mr. Weisbrod. Thank you, Madam Chairwoman. My name is David 
Weisbrod, and I am a Senior Vice President of the Chase 
Manhattan Bank in our Treasury Services Division. In such 
capacity, I have oversight responsibility for the division's 
credit and operating risk management policies, procedures, and 
practices attendant to the bank's relationships with 
approximately 3,500 correspondents. The Chase Manhattan Bank, 
headquartered in New York City, is the largest bank of J.P. 
Morgan Chase and Company, a multi-bank holding company with 
assets in excess of $700 billion. I appreciate the opportunity 
to make this statement on the very important topic before the 
Subcommittee today, international correspondent banking and 
money laundering.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Weisbrod appears in the Appendix 
on page 156.
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    Correspondents maintaining accounts with Chase in New York 
sometimes have credit relationships with us, but almost always 
require U.S.-dollar funds transfer clearing services. To place 
the size, scope, and importance of the clearing business in 
perspective, on an average day Chase processes over 220,000 
wire payments with a value in excess of $1.2 trillion. On 
January 16 of this year, we experienced a record volume day 
when 363,000 wire payments for $1.8 trillion were processed. 
This translates to $21 million processed nearly every second, 
with an average transaction size just under $5 million.
    Over 93 percent of these transactions are processed 
straight through, which means that the transactions are done 
entirely by our automated systems, without any manual 
intervention. While we are proud of our funds transfer prowess 
and its importance to worldwide commercial interchange and the 
global capital markets, we also understand our special 
responsibility to guard against the laundering of money and 
other criminal abuses in the system.
    By way of background, our primary focus in the creation of 
a global funds transfer system and the resulting processes 
surrounding correspondent bank risk management has been upon 
safety and soundness issues, that is, upon the credit risk and 
operating problems that might lead to large credit exposures 
that could otherwise disrupt the smooth functioning of the 
payment system. These are very important public concerns that 
must remain in the forefront of an effective risk management 
program. In the last 2 years, however, we have witnessed 
revelations as to how the Bank of New York was used in 
connection with money laundering schemes orchestrated through 
several Russian banks. In the wake of that incident, heightened 
attention has been given to the need to expand anti-money 
laundering programs to protect banks from being exposed to such 
illicit funds transfer activities. We, at Chase, have taken a 
series of steps to expand our anti-money laundering 
initiatives.
    First, Chase has significantly enhanced its new account-
opening procedures and ``know your customer'' due diligence. We 
are currently conducting, as Senator Levin referred to, a 
review of our entire correspondent bank base using these 
enhancements. As part of that review, all existing and new 
Chase customers will be documented utilizing a new ``know your 
customer'' checklist. The checklist covers such items as the 
customer's history of doing business with Chase, a detailed 
understanding of the customer's ownership structure, whether it 
is a publicly owned entity or privately held, understanding of 
the customer's cash flows and Chase products to be used. The 
checklist also requires responses as to whether the customer 
has sustained negative media coverage and the source of 
referral for the relationship. In addition, the customer is 
requested to provide its most recent audited financial 
statements, preferably for the last 3 years. And a first 
priority for this review has been placed upon the FATF 
countries, Antigua and Barbuda, and the Seychelles. If after 
this review we are uncomfortable with the continued maintenance 
of any account, we intend to close it.
    Second, all Treasury Services' customers will be subject to 
periodic reviews in order to assure that the circumstances have 
not changed that would significantly affect the manner in which 
their accounts are utilized or in such a way as to present an 
unacceptable risk of illegal activity. The periodic review 
cycle will vary based upon the perceived risk of doing business 
with a particular set of clients or jurisdictions.
    Third, Chase has enhanced its anti-money laundering 
transaction monitoring efforts in several ways. Last year, we 
established a Funds Transfer Monitoring Committee, co-chaired 
by myself and our chief compliance officer, which meets monthly 
to review questionable funds transfers. As part of this 
process, we have launched a Web-based monitoring system 
designed to review U.S.-dollar funds transfers on an after-the-
fact basis. The system utilizes patterning or watchlist 
methodologies to flag potentially suspicious transactions. The 
transactions are then evaluated by a dedicated staff set up for 
this purpose. All of the FATF countries are included on the 
watchlist. Chase has had for some time a monitoring committee 
that meets periodically to review questionable strings of money 
orders or traveler's checks.
    Finally, Chase has intensified its effort to provide anti-
money laundering training to even more of its employees, 
recently introducing a new Web-based training and testing 
program for employees having desktop Internet access. All 4,400 
Treasury Services employees will be required--mandatory--to 
take this training and to pass an online test. Not only do they 
have to do the training, but they have to pass a test as well. 
Chase has always been in the forefront in providing anti-money 
laundering training, having trained, through 1999, over 27,000 
employees in domestic locations and over 16,000 employees in 
foreign locations.
    Our Bank Secrecy Act compliance program is specially 
focused upon high-risk banks and high-risk products. I have 
just mentioned the high-risk countries which have been our 
focus. In such countries, and elsewhere, it has been our 
practice not to open accounts for shell banks. With offshore 
banks, we intend to maintain a heightened sense of vigilance, 
for we now better understand some of the ways in which offshore 
banks in high-risk jurisdictions can be exploited for money 
laundering or other dubious purposes. While these risks are 
recognized in its 1999 Working Paper on Offshore Banking, the 
International Monetary Fund has identified offshore financial 
centers, or OFCs, as ``an important and growing intermediation 
channel for emerging economies.'' Moreover, the IMF has 
reported that ``a number of legitimate factors continue to 
attract financial institutions and investors to OFCs.'' As the 
Minority staff's February 5th report points out, there are over 
4,000 offshore banks. An important future challenge facing us 
will be to determine how we can develop procedures which will 
enhance our ability to separate the good banks from the bad 
banks, the vigilant from the less vigilant.
    In addition to high-risk banks, we well understand the 
risks associated with the high-risk products identified in the 
Minority staff's report, that is, wire transfers, payable 
through accounts and pouch/cash letter activity. I have already 
mentioned our automated systems for monitoring wire transfer 
activity and monetary instruments. In the case of payable 
through accounts, of which we only have two, we follow 
judiciously the guidelines of the Federal banking regulators. 
Moreover, we have a corporate-wide policy which requires that 
any such account be approved by a senior officer and notified 
in writing to the bank's chief compliance officer.
    Combating money laundering and other illegalities within 
the international correspondent banking system is no easy task. 
The Minority staff's own report on page 41 recognizes that due 
diligence information is often difficult to obtain from foreign 
jurisdictions, and that which is obtained may be limited or 
difficult to evaluate; that language barriers may impose 
additional difficulties; that travel to foreign jurisdictions 
by U.S. correspondent bankers is costly and may not produce 
immediate or accurate information; and generally that due 
diligence, both at account opening and continuing after the 
account is opened, is not easy in international correspondent 
banking. And we could not agree more.
    We recognize that the need to hone our Bank Secrecy Act 
compliance program is ongoing, but we do not purport to have 
all the answers. For example, the whole notion of ``nesting,'' 
as it is referred to in the Minority staff's report, is a very, 
very difficult problem. It is typical for small banks to 
maintain accounts with slightly larger banks, who maintain 
accounts with more and larger banks and so forth and so on. 
These relationships are necessary and appropriate, in fact, 
essential to the conduct of global, commercial, and capital 
markets activities. Unfortunately, these tiered relationships 
can also hide and make difficult to detect illicit activities.
    We need to bring the expertise and experience of the 
financial services industry to address these and other 
difficult issues, and we need to do it now. An example of how 
effective such an effort can be was demonstrated by the recent 
Wolfsberg Principles on private banking. In a similar vein, 
Chase has enthusiastically joined with its fellow members of 
the New York Clearing House in creating a task force to develop 
best practice principles for correspondent banking.
    We welcome the opportunity to work closely with our State 
and Federal banking regulators in areas such as this, although 
we do not expect our regulators either to have all the answers. 
As cited in the Minority staff's report, for example, it was 
not until September of 2000, just a few months ago, that the 
Comptroller of the Currency identified international 
correspondent banking as a high-risk area. Money laundering 
attendant to international correspondent banking is, in fact, 
an international problem. We thus support the efforts of the 
Financial Action Task Force, the Basel Committee on Banking 
Supervision of the Bank for International Settlements, and 
other national and international organizations worldwide which 
are focused upon this problem. While we believe it to be 
impossible to have complete assurance that no bad actors are 
slipping through the system, with a renewed vigor on the part 
of the private sector, with help from our domestic banking 
regulators, and with the cooperation of foreign governments and 
international agencies, we all can do better in the future.
    Senator Collins. Thank you.
    Senator Levin, why don't you lead off questioning this 
round?
    Senator Levin. Thank you very much, Madam Chairman.
    First, let me thank our witnesses and the banks that they 
represent for the cooperation which they have shown in this 
investigation, and their filling in of the questionnaires. That 
is very helpful. We are going to be looking through these 
questions into some of the past actions of these banks. But as 
far as this investigation is concerned, you have been very 
cooperative and your willingness to help us sort through some 
of these issues is essential.
    First, on the question of shell banks, I think that you 
testified just a moment ago, Mr. Weisbrod, that you do not open 
a correspondent account with a shell bank. Is that correct?
    Mr. Weisbrod. Yes, sir.
    Senator Levin. OK. I believe you have also indicated that 
for the Bank of America, Mr. Christie?
    Mr. Christie. That's true.
    Senator Levin. Is there any reason why we should not just 
flat out prohibit U.S. banks from opening correspondent 
accounts with shell banks?
    Mr. Christie. Personally, I think it would be just fine, 
but some lawyers would tell you that there might be unique 
situations for legitimate transactions. But I don't know what 
they would be.
    Senator Levin. Mr. Weisbrod.
    Mr. Weisbrod. I haven't thought of the need for legislation 
in this area. I think that the banks themselves that are 
attentive to the issue will unilaterally make the same 
decisions that Bank of America and Chase have.
    Senator Levin. What about the banks that aren't attentive 
to the issue?
    Mr. Weisbrod. That is a good question.
    Senator Levin. Is there any reason, though, that you can 
see why we should not either through regulation or through law 
just simply prohibit the opening up of an account with a shell 
bank?
    Mr. Weisbrod. I can think of no reason offhand why.
    Senator Levin. First, Bank of America. You established a 
correspondent relationship with Swiss American National Bank in 
1987, and then in 1990 and 1991, the relationship manager 
raised concerns about the management and operations of the 
bank. In June 1991, Swiss American National Bank, which was an 
onshore domestic Antiguan bank, wrote to the Bank of America, 
canceled its account, and instructed the Bank of America to 
open an account for its offshore affiliate, Swiss American 
Bank. The relationship manager for the Bank of America at that 
time told our staff that it looked like the account was opened 
without anyone at the Bank of America making a determination if 
they wanted the Swiss American Bank to open an account--in 
other words, no vetting, no due diligence by the Bank of 
America in that one. The relationship manager said that the 
Swiss American National Bank and the Swiss American Bank were 
both the same institution.
    A similar thing happened with Chase. Swiss American 
National Bank had an account with Chase since 1981. In 1995, 
Swiss American Bank--that is the offshore bank--opened an 
account. The account-opening documentation contained little 
more than an annual report, and here is what the sales 
representative wrote: ``Given that there is a demand deposit 
account already opened in our books in the name of Swiss 
American National Bank of Antigua, no further account 
justification comments are included.''
    But the two banks were different in significant ways. The 
National Bank was a domestic commercial bank, which was 
regulated by the Eastern Caribbean Central Bank; whereas, the 
Swiss American Bank was an offshore bank, catering to 
international clients and regulated by a jurisdiction that had 
little or no regulation at the time, and that was Antigua at 
that time. But the only thing that the two banks had in common 
was the management, and Bank of America had concerns about 
that.
    So I would like to ask both of you: Shouldn't there have 
been more due diligence to explore the primary focus of Swiss 
American Bank's business and the nature of its clientele to 
better understand what Swiss American Bank was going to do 
before accepting its account?
    Mr. Christie. All right. I'd like to answer this way: I 
think if we can look back in history a little bit, a long time 
ago, probably when I first started with the Bank of America, 
correspondent banking was not deemed to be a risky business. In 
fact, it was sort of a boring business for anybody who wanted 
to get ahead in a bank. And so not enough attention was paid to 
it, and there was no risk, there were no losses, there was no 
harm. And this was before we learned about money laundering 
related to narcotic drugs and so forth moving through the 
banks.
    So the account officers grew up in an environment that said 
all banks are good, and the more banks we can have in our 
portfolio, the better, and this is a good business because we 
already have the machinery and mechanisms for clearing checks 
and wire transfers and so forth. So if you can think of that as 
the environment and for some of the account officers that grew 
up in that environment, it was more of a knife-and-fork kind of 
business. You went out and you had lunch or dinner with them, 
learned what they were doing, and perhaps played golf and came 
back and looked at the balances.
    Well, obviously, in this case, in 1987, when the account 
was opened, that was certainly true with regard to the account 
officer at that point in time. That's when we first started the 
relationship with the Swiss American National Bank. In fact, 
that person happened to be in Antigua and thought he knew 
everybody in Antigua and thought he knew the regulations there 
and thought that he could do no harm.
    But in 1991, the environment was still somewhat the same 
except by this time we knew that banks could fail, so we had 
greatly enhanced and heightened our concerns and awareness 
about the credit quality of banks and any kind of credit risk 
we might take with a bank.
    So if it was going to be a bank or a transaction that was 
going to require credit, a different attitude was present, plus 
more sets of eyes would have looked at the bank or the 
transaction. But in this case, it was not a credit transaction. 
It was not a credit opportunity. It was simply in the account 
officer's mind, this existing customer of ours who's been with 
us for a number of years now, gee, they're simply rearranging 
their banking relationship. I mean, I saw some of the memos 
that your staff saw, and, in fact, there's one statement in 
there that says, oh, well, they're just opening another 
account. And so you're right. No one stopped at that point in 
time and took a deep breath and said, what is this new bank 
that we're opening the account for?
    Had we stopped and done that and had we had the benefit of 
all the knowledge we have today, after all of the 
investigations and reporting that we now see from your staff, 
obviously we should have done something different. But the 
environment didn't call for it then.
    Also, in that time frame, an account, as long as there was 
no credit, could be opened by the authority or the 
authorization of the account officer, him- or herself. So I'm 
afraid that the environment was different at that point in 
time, and that's how the accounts got opened.
    Senator Levin. Do you have any comment on that?
    Mr. Weisbrod. I would answer your question with one word, 
and that is, yes, there should have been more due diligence. 
And we have an enhanced program which we're implementing now to 
avoid a repetition.
    Senator Levin. OK. Mr. Christie, now relative to American 
International Bank. The Bank of America established an account 
for American International Bank in 1993.
    Mr. Christie. Correct.
    Senator Levin. The relation manager heavily relied on the 
fact that he knew the owner of the bank, Mr. Cooper, from when 
Mr. Cooper had been affiliated with other Antiguan banks. 
American International Bank was a new bank. It had no 
operational history. There was little probing by the 
relationship manager into the nature of the bank or its 
clientele.
    The material which was supplied to your bank by the 
American International Bank, however, raised some questions. 
First, it indicated that although the American International 
Bank was formed in 1990, it did not hold its first 
organizational meeting until December 1992 and did not begin 
operations until mid-1993. Should that have raised a red flag?
    Mr. Christie. It seemed strange to me when I saw the facts, 
yes.
    Senator Levin. All right. Now, we also have portions of a 
brochure of the American International Bank, which was included 
in the account-opening documents. So when they opened the 
account with you, this was a brochure which was given to you. 
It stressed confidentiality, called it a competitive advantage, 
stressed that the host country has criminal penalties against 
disclosure of client information, except by the order of a 
court. It notes that there are no tax treaties or information 
exchange treaties between Antigua and foreign countries, other 
than England. It touts the advantages of forming an 
international business corporation in Antigua, and no reporting 
requirements on offshore activities. The books of the 
corporation may be kept in any part of the world. Wherever 
those books are, if you can figure out where they are, you can 
try to get them, but you will never know where they are because 
they can be anywhere. They are allowed to be kept anywhere. 
They don't have to be kept in Antigua.
    Shares of the corporation may be issued in bearer share 
form, which means that the owner of the company is whoever has 
physical possession of the shares of the corporation. So you 
never know who the ownership of your account is when you have 
these bearer shares.
    Shouldn't this brochure emphasizing those ways to keep 
secret this money, shouldn't that have raised some red flags? 
Shouldn't that have set off some alarm bells?
    Mr. Christie. Absolutely. I can't deny that.
    Senator Levin. My final question, and my time on this round 
is up, I am just curious about this. Do you know whether or not 
it is still the law in Antigua that the books of the 
corporation may be kept in any part of the world and that share 
certificates can be issued and registered in bearer form?
    Mr. Christie. I don't know.
    Senator Levin. Do you happen to know, Mr. Weisbrod?
    Mr. Weisbrod. I don't.
    Senator Levin. Thank you. My time on this round is up. 
Thank you.
    Senator Collins. Thank you, Senator Levin.
    I mentioned in my opening statement that one of the aspects 
of this investigation that has troubled me is that American 
banks seem to do much more due diligence when they are 
extending credit to correspondent accounts than when they are 
just providing fee-based services. And there are numerous 
examples of that. I would like to ask you, Mr. Christie, about 
one. I realize it goes back many years ago, but I think it 
amply demonstrates the difference in due diligence that is 
applied when a bank has its own funds on the line, and it is 
Exhibit 14 \1\ in the book that I am going to be referring to.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 14 that appears in the Appendix on page 718.
---------------------------------------------------------------------------
    In 1993, 2 years after opening a correspondent account for 
Swiss American Bank, the relationship manager sought approval 
to establish a line of credit on behalf of Swiss American 
Bank's private banking clients. And the request was denied by 
Bank of America's credit manager because, in his opinion, the 
risk potential was too great for the bank. And he noted that, 
``We know little about the parentage of this bank'' and ``its 
structure appears designed to isolate the real owners and to 
take advantage of tax and regulatory havens.''
    He further goes on to say in the exhibit, ``The potential 
for being blindsided is quite pronounced, and I'm not in favor 
of the presentation. If we knew more about the parentage, 
respectability, and integrity of the bank, I would be willing 
to consider trade finance, but I would continue to believe that 
we should not extend credit to service their private banking 
clients.''
    This is a pretty serious indictment of this whole account, 
isn't it? Here the credit manager is saying that we just don't 
know enough about the parentage, respectability, and integrity 
of the bank. I don't understand why that finding by the credit 
manager didn't trigger a review of the entire relationship that 
Bank of America had with Swiss American Bank. If those kinds of 
findings were made when Bank of America was considering 
extending credit to Swiss American Bank's customers, why didn't 
that trigger a review of whether this correspondent bank 
account should even exist, whether you should be providing any 
services?
    Mr. Christie. Excellent question. Obviously being a credit 
and risk manager type person, this fellow did a good job. I 
would say that. But the problem then was--and I will tell you 
it's not the same today. But the problem then was that too much 
of this was somewhat compartmentalized, and also because we 
didn't give credit to this bank, the full, if you will, control 
of what we did with that relationship was left within the hands 
of that relationship manager. And so the relationship manager 
in this case went to the credit department and said can we have 
credit, and the credit department said no; he walks away and 
says, well, it's not worth fighting--I believe that's also in 
your documentation--but the credit department in those days had 
no further obligation to report this up or to report it across 
the organization. That probably should not have been that way 
at that time. You wouldn't have had this question, and we 
probably wouldn't have had the account.
    Today, as my friend next to me was saying, today we 
wouldn't open the account without someone on my staff, which is 
risk management, reviewing the documentation and the due 
diligence and making sure we would be comfortable in having 
this relationship in our portfolio, and not that we're 
necessarily going to give them credit on day one, but if this 
sort of request came up, how would we react to it in the 
future?
    So what you're citing historically is absolutely correct, 
and I think it was not well managed at that time. I think today 
we've taken steps to correct that.
    Senator Collins. Mr. Weisbrod, I want to give you an 
example that is more recent, and that is in some ways more 
troubling. In the fall of 1999--and I am going to be referring 
to Exhibit 41,\1\ if you want to follow along. In the fall of 
1999, Swiss American Bank asked Chase to open foreign currency 
accounts for Swiss American Bank and Swiss American National 
Bank in London. Now, presumably because these accounts, again, 
posed a greater risk to Chase than those institutions' existing 
accounts, Chase's credit manager conducted another review of 
the two banks, and the review included some pretty strong 
language.
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    \1\ See Exhibit No. 41 that appears in the Appendix on page 812.
---------------------------------------------------------------------------
    The Chase credit manager wrote, ``My own unscientific 
grading of certain geographic locations includes the 
presumption (biased obviously) that anything from Antigua is 
probably diseased and contagious and should be avoided like 
mosquitoes in Queens.''
    He then goes on to say, ``Meanwhile, my head is going back 
into the sand on this one,'' which is a troubling statement.
    I find this remarkable in many ways. If, in fact, a credit 
manager felt that anything from Antigua should be avoided--and 
I think some of the testimony we heard from Mr. Mathewson about 
tax havens suggests there may be good reason for that--why 
did--well, let me ask, first of all, did Chase go on to open 
the foreign currency accounts in London in this case?
    Mr. Weisbrod. No, Senator Collins, we did not open the 
multi-currency accounts, and just one minor point of 
correction. The document that is referenced is really written 
by a client manager. This would not be written by a credit 
officer. But that's----
    Senator Collins. Well, it is still an employee of Chase who 
is raising concerns about doing business with this bank.
    Mr. Weisbrod. Yes.
    Senator Collins. Is that correct?
    Mr. Weisbrod. Yes, which is why I said it's a minor 
correction, because the fundamental point of your question is 
still germane.
    I believe what was referenced in this message is an account 
being opened elsewhere in the organization. What the client 
manager was attempting to say is that this is an area of the 
world that is, as Mr. Mathewson described this morning, an 
emerging market, one where the standards are not as high--he 
does put it in very graphic terms in the message here--not as 
high as we're used to in this country; and that anyone who 
would be opening accounts or dealing with businesses in that 
part of the world should be mindful of that. He was really 
referring to another area of the bank that was going to be 
opening this particular account and hoping that they were as 
mindful of the ``know your customer'' principle as he was. And, 
yes, it's written in very colorful language.
    Senator Collins. But, in fact, Chase continued to do 
business with Swiss American Bank for some time. Is that 
correct?
    Mr. Weisbrod. Yes.
    Senator Collins. And it is my understanding that actually 
Chase closed its accounts only in October of last year. Is that 
accurate?
    Mr. Weisbrod. Well, we initiated the closing of the account 
in April, and the account was finally closed in October of last 
year.
    Senator Collins. One of the things that troubles me--and 
our investigation has documented this--is it seems to take an 
extraordinarily long time between when information is conveyed 
to the bank that there may be suspicious activity, even if that 
information comes from a law enforcement official, and when an 
account is actually closed, and I would like to have you both 
comment on why that is. Mr. Christie, we will start with you.
    Mr. Christie. Well, certainly there are good and bad 
examples, and, unfortunately, you are seeing a couple bad 
examples from us. But part of it is that we are dealing with 
what we believe is suspicious information and activity about a 
bank's customers. And so if you believe--until someone is 
proven guilty, our lawyers have trained us over the years, 
many, many years, that you have to be careful in how you handle 
your relationship with your customer, either when you deny them 
loans or when you close their accounts. Because if you in some 
way damage their business or their reputation, they could come 
back to you in U.S. courts of law and sue us for that damage.
    Especially with a bank, if you were to put them in a 
position where they have to--they are scrambling around looking 
for other accounts and the word gets out that, well, gee, Bank 
of America is closing them out, I wonder what's wrong, and all 
of a sudden it gets to their customers and the customers could 
come flooding in and draining their deposits out of the 
accounts--I mean, that is ``sky is falling,'' I understand, but 
that's the worry and concern that we do have on our minds that 
we don't do something untoward. But that doesn't excuse us for 
some of the long terms that it takes while they are trying to 
find another correspondent bank account. And, typically, in my 
humble opinion--it depends on your account agreement with the 
customer and what it legally says in the account agreement. It 
could bind you to 30 days. It could bind you to 60 days. I've 
seen some that bind you to 90 days after giving notice. Ninety 
to 120 days should be sufficient. And as I say, in our new 
process and procedures, we will be tightening that up, and it 
will have oversight by people like my risk management staff, 
whereas before, as I said earlier, this was allowed to happen 
because the relationship manager, with other things on his or 
her mind, and the account administration folks with other 
things on their mind, once they close down the cash management 
products, which they thought was the risk, i.e., the wire 
transfer services, cash letter and so forth, letting the 
account slowly drain down to nothing was sort of a non-event in 
their mind, and, yeah, we'll close it when it gets down to 
zero.
    Senator Collins. Mr. Weisbrod.
    Mr. Weisbrod. Senator Collins, there is one remark that you 
made which I would like to make sure we are clear about, and 
that is that if a--I think you referred to a law enforcement 
officer. I don't believe a law enforcement officer contacted us 
during the Swiss American incident, certainly not directly with 
anything adverse about the bank.
    I certainly endorse everything that my colleague to the 
right has just expressed, but I would emphasize, very strongly 
emphasize that if we do get communication from a law 
enforcement officer about suspicious activities regarding a 
bank customer, then we would take action--in fact, I think that 
is what happened in the instance of AIB. We were more 
forthcoming in terms of closing.
    Senator Collins. Thank you.
    Senator Levin.
    Senator Levin. I want to go back to the American 
International Bank for a moment and ask you, Mr. Weisbrod, 
about your entering into a relationship with the American 
International Bank.
    First of all, the Chase sales representative talked to the 
American International Bank and described in a memo what the 
primary function of that American International Bank was. And 
the last line, or second from the last line in that memo--and 
this is Exhibit 40 \1\--says, and I am going to paraphrase part 
of it, basically that taking in deposits from U.S. nationals is 
not a transgression. It becomes a transgression if and when 
these nationals end up not reporting the investment. In other 
words, that is the transgression of American law; that is the 
income tax evasion.
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    \1\ See Exhibit No. 40 that appears in the Appendix on page 810.
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    But then this is what your sales representative was told, 
that that is of no legal concern to the offshore depository 
institution. That is of no legal concern to American 
International. Well, it may not be of legal concern to them, 
technically, but it surely ought to be of concern to you in 
terms of your knowing your customer--that you were told or your 
sales agent was told by this potential customer that is of no 
concern to them that their depositors are engaged in income tax 
evasion in the United States.
    So while maybe technically the person at American 
International is correct, it seems to me that is where ``know 
your customer'' should be triggered. That is where you folks 
should say to yourselves, well, wait a minute, if that is the 
view that this potential customer takes, we have got to be very 
cautious before we accept that customer as a depositor if he 
doesn't care whether that money is dirty money.
    Do you agree with that, looking back at that statement of 
your account sales representative?
    Mr. Weisbrod. The American International account was opened 
about 5 years ago. I don't think this account would be opened 
today, based upon several factors: Our enhanced due diligence 
policy which we are very proud of and implementing very 
forcefully, but, moreover, because this account was opened 3 
years before the FinCEN advisory alert on Antigua, and years 
before the FATF alert on troubled countries, as well as before 
the OCC came up with its handbook.
    So the issue--as I think Mr. Christie pointed out, the 
sensitivity regarding this issue was not as great then as it is 
now. So I would give assurance to the Subcommittee that such an 
account would not be opened today by us. At the time, I would 
say that our sales officer had no evidence of tax evasion, 
although--reading between the lines, and as Mr. Mathewson 
testified this morning, you could infer it.
    Senator Levin. It is not just that you can infer. It is 
that when that depositor says it is of no legal concern to us 
that this money is dirty back in 1996--should that not have set 
an alarm bell about who that customer is?
    Mr. Weisbrod. No question, it should----
    Senator Levin. I am talking about 1996. Shouldn't that have 
triggered an alarm?
    Mr. Weisbrod. I don't think that the bank was saying the 
money was dirty. I think they were saying that they had no 
obligation under the law of Antigua.
    Senator Levin. They have no problem accepting dirty money 
under Antiguan law, but you have a responsibility as an 
American bank to know your customer and not to accept as a 
customer somebody who does accept dirty money.
    Mr. Weisbrod. We have a responsibility to know our 
customer, yes, sir.
    Senator Levin. And to accept as a customer, hopefully, a 
bank that accepts legal money. Is that not what ``know your 
customer'' is all about? If they don't care whether the money 
is illegal or not and they have no ``know your customer'' 
requirements whatsoever at that potential customer bank of 
yours, shouldn't that have been a concern of your bank at that 
time, even? I know it is a concern now, but even then should 
that not have been a concern?
    Mr. Christie is shaking his head ``yes,'' so maybe you have 
different answers to that question.
    Mr. Christie. I am sorry. I don't want to put my colleague 
on the spot.
    Senator Levin. OK.
    Mr. Weisbrod. The only confusion that may be here is that 
there is no--I think Mr. Mathewson testified this morning that 
there is no law preventing Americans from depositing with that 
bank, and that the bank in Antigua has no obligation under its 
law to report that income.
    Senator Levin. But you are missing my point, I think, which 
is your obligation relative to your customer. I hope that would 
include that you not accept as a customer a bank which says we 
don't care whether that money is dirty, we have no obligation 
under our law to do anything about it.
    Mr. Weisbrod. I accept the point, Senator. As I said at the 
beginning, this is not an account--I emphasize--not an account 
we would open today. I accept the point totally.
    Senator Levin. I will finish this particular offshore bank, 
the American International Bank, questions with just this last 
question, and thank you for extending my time, Madam Chairman.
    Bank of America terminated its relationship in April 1996 
with American International, and this is what a Bank of America 
relationship manager who had handled that account wrote in July 
1996,\1\ that ``exiting that relationship . . . also seems to 
have been prudent, since although no proof is, of course, 
available, the reputation in the local market is abysmal.'' 
Their reputation in the local market is abysmal. That is what 
Bank of America said their reputation was.
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    \1\ See Exhibit No. 4 that appears in the Appendix on page 698.
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    ``Rumors include money laundering, Russian mafia, etc., 
while management of that bank also now includes the former 
manager of SAB, again not a reassuring situation.'' So, that is 
what their folks found in terms of that reputation. They were 
glad they were out of it and talked about the reputation and 
said it was abysmal.
    Now, Chase obviously had a different view at that time 
because while Bank of America was glad it was out of it because 
of the local reputation of that customer, you were opening an 
account, presumably because you had a different view of that 
customer or else you never would have opened it.
    How is it possible that two banks on the same customer had 
such divergent views of their reputation?
    Mr. Weisbrod. We didn't know that its reputation was 
abysmal. Had we known that at the time, we would not have 
opened the account. We did make some effort to find out. We 
had, I believe, two references from reputable banks before we 
opened the account, and had made some exploration about the 
management; I believe even obtained a copy of its ``know your 
customer'' policy and reviewed that policy with the management. 
But had we known that the reputation was abysmal, we would not 
have opened the account at the time.
    Senator Levin. Thank you.
    Senator Collins. Thank you, Senator Levin.
    Mr. Christie, you mentioned in your opening statement the 
number of changes that Bank of America made in order to improve 
its safeguards against money laundering, and you said that the 
new organizational approach fosters an environment that 
encourages our associates to, ``truly know our correspondent 
bank customers.''
    You also said that your bank has made a decision, which I 
commend you for, to not open correspondent accounts for shell 
banks.
    Mr. Christie. Right.
    Senator Collins. I am trying to reconcile these two 
statements because we know that what some shell banks do is 
open accounts with other foreign banks, which in turn open 
accounts with U.S. banks. As part of your process of opening up 
new accounts so that you, ``truly know our correspondent bank 
customers,'' do you ask whether the foreign bank is doing 
business, or whether you, in effect, will third-hand be doing 
business with a shell bank?
    Mr. Christie. First of all, again, the investigative staff 
did a fantastic job of ferreting all this convolution out for 
us, and we appreciate that very much.
    Honestly, until a year ago, should you logically have 
understood that that might have happened? Sure, you should 
have. Did the correspondent bank account officers think about 
that at that point in time? Probably not. In fact, I don't 
think so. Again, they thought ``I am doing my due diligence on 
this bank that I am going to do business with and, gee, I don't 
see them doing anything illegal. And, gee, I have looked at 
their `know your customer' policies which, they could write 
overnight on the back of a napkin if they wanted to. So I am OK 
with this bank.''
    But I don't think they stopped to think and connect the 
dots backwards, as the Senate investigative report has helped 
us do now, into this ``nesting'' concept. So as I said in my 
opening comments, and I think it is in my testimony, that one 
of the new procedures that we have adopted, is to drill deeper 
into what that bank does, who its customers are, what its 
customer base is.
    And one of the questions is, will they be doing business 
with other correspondent banks? Who are going to be those 
correspondent banks? What is the legitimacy of that? So we have 
changed all that dramatically now. Did we do it in the past? 
No.
    Senator Collins. Is that just going forward or are you 
taking a look at the correspondent accounts that you have now, 
because I suspect you may well discover you are doing business 
indirectly with a shell bank that is in the nesting situation 
that we have described?
    Mr. Christie. No. You are absolutely right. That is a very 
good possibility. And, yes, just like Chase and many other 
large banks today, we are doing a thorough review of our 
correspondent bank portfolio, and we have a new checklist, just 
as they do. We have all these questions we are going to be 
reviewing with these correspondent banks and hopefully 
ferreting out those issues.
    I can tell you that in the last year or two, I don't think 
we have opened any new correspondent bank accounts, and I can 
tell you we have closed a number of them. So, yes, we are on 
the warpath to try and get this cleaned up. I assure you of 
that.
    Senator Collins. Thank you.
    Mr. Weisbrod, in your statement you have an astounding 
fact. You say that on an average day, Chase processes over 
220,000 wire payments with a value in excess of $1.2 trillion. 
The magnitude of that, multiplied by other banks, is really 
extraordinary and shows how much money is being moved around 
the world every single second.
    Senator Levin. We estimated, by the way, $21 million a 
minute.
    Senator Collins. That is extraordinary, so if this hearing 
goes much longer----
    Mr. Christie. Is that in a workday or is that in a 24-hour 
day? [Laughter.]
    Senator Collins. My point is that the magnitude of money 
being wired all around this world makes it so much more 
important that your initial procedures for opening accounts be 
really thorough and sound, because there is no way, as you have 
essentially pointed out by giving us that statistic, that Chase 
or any other large money center bank is going to be able to 
review every single wire transfer that occurs.
    I mean, I am sure you have procedures for triggering a 
human review if certain criteria are met, but obviously the 
magnitude is incredible. Doesn't that mean that if you don't do 
a good job up front in verifying who your customers are and 
being very careful with whom you do business when it comes to 
correspondent bank accounts that inevitably you are going to be 
inadvertently fostering an environment where money laundering 
is expedited by the services you provide?
    Mr. Weisbrod. I wish we had this question on videotape 
because I would use it in our anti-money laundering training 
program. I could not agree more with that statement. It is at 
the very heart of the program of anti-money laundering that a 
bank has to deliver. It is the key.
    But I would go further, too, to say not only the opening of 
the account needs to be scrutinized and we need to do better 
than we have, but then the ongoing review, which is something 
quite frankly we had not been doing in the past but which we 
are doing as part of our enhanced policy, needs also to be 
done.
    So I think the statement is accurate. I would love to 
capture it and use it in our training programs.
    Senator Collins. Thank you.
    Senator Levin.
    Senator Levin. I am sure we would be happy to make that 
available to you.
    I want to go back to Swiss American Bank and take a look at 
Exhibit 38.\1\ These are some of the ongoing concerns that, 
first, Bank of America had. I want to pull up their comments 
from their records.
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    \1\ See Exhibit No. 38 that appears in the Appendix on page 807.
---------------------------------------------------------------------------
    A privately-owned bank with obvious operating problems. 
That was back in August 1990.
    Then in May 1995, you decided to ask Swiss American to find 
another correspondent bank, but since you asked them the month 
before, they appeared, if anything, to be worse than they were 
the month before; poor management; constantly preyed upon by 
con artists. Now, that is May 1995.
    Then in July 1996, according to your records, ``It has been 
a year since we requested Swiss American to find another 
correspondent. . . . We agreed to 90 days for them to notify 
remitters and close the account. . . .'' You talked about how 
they admitted to problems at audits, including 
misclassification and hidden loans. Now, that is July 1996.
    In March 1998, the account is still not closed. ``I had 
long ago required Swiss American to discontinue their clearing 
and wire transfer activities with us, as some transactions 
appeared suspect. . . . We now have the January 1998 issue of 
Money Laundering Alert describing a possible precedent settling 
civil lawsuit by U.S. authorities against Swiss American Bank . 
. . involving the Antiguan Government and accusing 
collaboration with money launderers.'' Then it says that you 
asked them that day to close their account. That is March 1998, 
but it was not until June or July of a year later that that 
account was closed.
    I would just emphasize that not only must you take much 
greater precaution in opening up these accounts, but when you 
have information that is sufficient to close an account and you 
decide to close an account, surely it ought to be done 
decisively at that point. I mean, I have got a lot of problems 
with the length of time it takes banks to decide to close these 
accounts. But here is a case where you decided to close the 
account, and year after year after year that account stayed 
open.
    Would you agree, looking back, that that is not the way 
this anti-money laundering effort should be carried out?
    Mr. Christie. I absolutely agree.
    Senator Levin. Relative to the Chase Bank, if we can put up 
their records relative to the same Swiss American Bank.\38\
    Back in June 1997, Chase received a subpoena for account 
documents. Then in August 1998, records show that Swiss 
American had been suspected of money laundering. ``Can you tell 
me whether this is an account that Chase will continue to 
maintain?''
    Then in November 1998, ``Inquiry revealed that the 
captioned bank has come to official attention as a suspected 
repository of proceeds of con games.'' Further on in that 
comment, it says--and this is what I want to focus on--
``Considering the difficulties in determining actual ownership 
of the bank, its location, the operating environment of these 
offshore banks, and the questions raised above, recommend that 
we exercise special caution in dealing with this entity, if a 
decision is made to continue our relationship at all.''
    Now those are actually the problems with many offshore 
banks, are they not?
    Mr. Weisbrod. Yes.
    Senator Levin. It is difficult to determine actual 
ownership. We have seen it with Antigua, all the efforts that 
are made to make sure no one can determine actual ownership. 
That is true with other jurisdictions as well.
    ``Considering the difficulties in determining actual 
ownership of the bank, its location, the operating environment 
of these offshore banks, and the questions raised above, 
recommend that we exercise special caution.''
    Then a year later, that bank--and this is the last quote on 
that exhibit--``Swiss American Bank is getting too much bad 
press. It is even used as a case study in our money laundering 
training.''
    My gosh, you folks were using Swiss American Bank as a case 
study in your money laundering training. A case study for what, 
for why it ought to stay open or why it ought to be closed?
    Mr. Weisbrod. The case study referred to our belief at the 
time that this was a conduit, an unwilling, unknowing conduit 
for money laundering. In other words, it had been caught in the 
middle between the two parties, and we were using it--our 
compliance area was using it as a case study to show this could 
happen to us. That was really the intent of that.
    Senator Levin. That what could happen to you?
    Mr. Weisbrod. That, in other words, we ourselves could be 
an unwilling conduit between two parties to a money laundering 
transaction.
    Senator Levin. All right, so that even though in August 
1998 you had some evidence that there was suspicion of money 
laundering, in November 1998 you had in your records that they 
were a suspected repository of the proceeds of con games--
considering that you can't determine ownership, location, 
operating environment, you were required yourselves to exercise 
special caution. You still treated them as though they were 
being just an unwitting victim of some other folks. Is that it, 
despite all your own evidence in your own file that they should 
have known and perhaps did know what they were being used for? 
That is what the case study was?
    Mr. Weisbrod. I believe the case study was to show how a 
bank could be caught in the middle, yes, but----
    Senator Levin. You concluded that they were caught in the 
middle, that they were somehow or other an innocent victim of 
someone else?
    Mr. Weisbrod. Senator, to the best of my knowledge, we had 
no knowledge that they were a money laundering institution. 
They were not charged, per se, with that. I am not here to 
debate because I totally agree with the premise that this is 
not an account that we should have done business with. The 
reputation issue here was sufficient to not have this account 
on our books.
    Senator Levin. You did not officially terminate that 
account until you got a subpoena from this Subcommittee, is 
that correct, in October of the year 2000?
    Mr. Weisbrod. Correct.
    Senator Levin. Let me just go to the question of offshore 
banking because I think this is going to get to the meat of 
some potential legislation.
    I think it is pretty clear that shell banks should not be 
able to open accounts at our banks. I am going to say it is 
clear to me, and your two banks do not accept accounts from 
shell banks.
    The question, though, is, for the reason given in your own 
documents, whether there has got to be a heightened sense of 
inspection of offshore banks because of the very reasons that 
are in that document.
    You can't tell who owns them, you don't know where they are 
located, you don't know what the operating environment is.
    You surely, in my judgment, did not exercise special 
caution in that case. That is my own conclusion about one case. 
But whether that is accurate or not, we surely as an industry--
you surely, and I think we as a government--have got to require 
that there be special caution if we allow correspondent banking 
with offshore banks to continue.
    I would like to know whether you agree with that and under 
what circumstances should we allow offshore banks. These are 
banks that are not allowed to deal with the people in the 
jurisdiction which licenses them. The jurisdiction says, we are 
not going to let that offshore bank deal with our people, but 
we will inflict them on the rest of the world.
    Under what circumstances is it legitimate for you folks, 
legitimate banks, to open an account with an offshore bank? And 
if there are such circumstances, in your judgment, what should 
be the heightened requirements for ``know your customer'' in 
the cases where you do open accounts with an offshore bank?
    Mr. Christie, do you want to start?
    Mr. Christie. Sure. There are a few legitimate reasons for 
an offshore bank, but in my mind that has to do with an 
offshore bank for a large, sophisticated, worldwide bank that 
has a legitimate business to have--it doesn't have a branch 
there, it doesn't want to go through the process of opening a 
branch, it doesn't want to deal with the local regulators that 
much.
    Also, you cast it as if the regulators in that country are 
saying, we don't want you to deal with our customers. In my 
mind, that is not the way I interpret that. I mean, in their 
way of doing business, they have got three ways of doing 
business in our country, if you want to. Here is one way, here 
is a second way, and here is a third way.
    Senator Levin. But the first way, if you want to do 
business, requires very careful regulation to make sure that 
you follow certain rules, right?
    Mr. Christie. Right.
    Senator Levin. And that is to protect their own 
constituents?
    Mr. Christie. I don't know that.
    Senator Levin. Isn't that the purpose of regulation?
    Mr. Christie. I don't think they think that way.
    Senator Levin. Well, that is what should be the purpose of 
regulation.
    Mr. Christie. Sure.
    Senator Levin. Keep going.
    Mr. Christie. All right, well, Chase is not a good example 
because they have a presence everyplace. But a good 
correspondent bank customer of ours might have a reason to have 
an offshore bank in that country, and for them, if we have got 
a presence or if they want us to act as their correspondent 
bank, I would see that as a legitimate thing to do.
    What legitimate businesses might come through that--I know 
this is only an example, but, for example, they could have a 
customer who has a travel business. And, of course, in the 
Caribbean a lot of people travel to the Caribbean and there are 
a lot of dollars that flow in through traveling. So it could be 
that there is a need to clear and exchange either the 
traveler's checks or the currency or whatever may come into 
that bank.
    Senator Levin. Why shouldn't that be done onshore instead 
of offshore?
    Mr. Christie. Well, because the business is in that island. 
So the physical presence of those documents, either the checks 
or cash or whatever, is in that island.
    Senator Levin. They are offshore?
    Mr. Christie. Yes, offshore.
    Senator Levin. What percentage of offshore banks would you 
say would meet that narrow standard?
    Mr. Christie. I said that is only one example and I don't 
have all the examples.
    Senator Levin. No, but give me an estimate. Would it be the 
minority or majority of offshore banks.
    Mr. Christie. Of offshore banks?
    Senator Levin. Yes.
    Mr. Christie. Oh, it is probably the minority. I know where 
you are going and I agree with your point.
    Senator Levin. Would you agree, then, that the majority of 
offshore banks--you are guessing, I know, but--the majority of 
offshore banks now would not meet that standard which you feel 
should be met before they are allowed to have correspondent 
accounts?
    Mr. Christie. I think you are right, yes.
    Senator Levin. Mr. Weisbrod.
    Mr. Weisbrod. I think the issue of the offshore banks is a 
complex issue. It is one of the areas that is being addressed 
by the New York Clearing House in its best practices paper, and 
we are endorsing that and working with the New York Clearing 
House.
    We recognize special obligations in terms of understanding 
the offshore banks, and in evaluating their practices with 
regard to the banks that they may be doing business with.
    Senator Levin. Do you want to outline first what those 
special practices should be? What are the additional safeguards 
which should be put in place to make sure that offshore banks 
are not laundering money? What are those safeguards?
    Mr. Weisbrod. I would say first that with regard to the 
FATF jurisdictions, we are particularly looking at whatever 
offshore banking arrangements may exist. As Mr. Christie said, 
there are major banks that use offshore centers for funding in 
capital markets or legitimate regulatory purposes that the Fed 
and others are well aware of.
    And our practice is only to do business with offshore banks 
that are affiliated with such institutions. If there were other 
offshore banks that were in other arrangements, we are not 
going to want to do business with those. We are taking a very, 
very hard look at those, and I don't want to make a blanket 
statement because the business is large, but that is our 
general approach.
    Senator Levin. Finally on this subject, do you think, then, 
that for banks unlike yours which are willing to do business 
with those offshore banks, the ones you are not willing to do 
business with--should we prohibit them from doing so?
    Mr. Weisbrod. I think that the right solution is to work 
internationally to take their license away because----
    Senator Levin. If we can't get that done, should we 
prohibit it by regulation or by law?
    Mr. Weisbrod. That is a matter for the Congress to decide.
    Senator Levin. Thank you.
    This is just one final area I want to go into, and that has 
to do with Internet gambling. It is illegal to place bets over 
the Internet in the United States, and the courts have upheld 
that interpretation. Apparently, one person was convicted of it 
and others have worked out plea agreements with the government.
    Antigua has been a center for Internet gambling, and at 
least until recently the Swiss American Bank serviced the 
accounts of Internet gambling companies, including accepting 
transfers from and making payments to individuals in the United 
States. And this was no secret. Some of the Web sites, which 
maybe we can put up, are in Exhibit 13 \1\ that is before you 
as well.
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    \1\ See Exhibit No. 13 that appears in the Appendix on page 710.
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    Bettors on Internet gambling are instructed to wire 
transfer their funds to the Swiss American Bank account at 
Chase Manhattan. That was Merlin's Magic Castle. Then the next 
one is Gold Nugget. Bettors are instructed to use Swiss 
American Bank's correspondent account at Chase. There are 
literally hundreds of sites like this, so that Chase became a 
big vehicle for the flow of these funds.
    If you take a look at a chart, Exhibit 13, of the Swiss 
American Bank account at Chase for some months during 1998 and 
1999 that we sampled, we can see that a significant percentage 
of the deposits for that month were clearly identified as 
Internet gambling enterprises, and there were a lot of other 
clear instances of what was going on.
    For instance, in late 1998 the sales representatives were 
advised that Swiss American Bank was servicing Internet 
gambling entities and their bettors, but that they didn't 
report it to anybody because they thought it was legal. So your 
sales reps thought that what was going on there was legal.
    Did they ask for a legal opinion from your law department?
    Mr. Weisbrod. No, sir.
    Senator Levin. They just thought it was legal or assumed it 
was legal and kept going.
    Then your fraud department took a look into payments that 
were made through the Swiss American Bank account which 
identified Internet gambling activity at the Swiss American 
Bank in 1999. Then in 1999, Chase was advised that Swiss 
American Bank's monthly use of checks would expand 
significantly due to Internet gambling-related payments.
    But the part that I want to focus on occurred in March 
1998, when the U.S. Attorney for the Southern District of New 
York indicted 21 owners, managers and employees of 11 Internet 
sports betting firms for collecting wagers from U.S. citizens 
over the Internet. Your records were subpoenaed for the trial 
of the owners of one of the firms, and a Chase employee 
provided testimony at the trial about check and wire transfer 
activity at the Swiss American Bank account at Chase that 
involved that firm.
    My question is, since there was a criminal charge against 
somebody which was based on Internet gambling being illegal in 
the United States, at that point was there an opinion requested 
from your law department as to whether or not Internet gambling 
was legal, and if so, what was that opinion at that time?
    Mr. Weisbrod. The date of that, sir, was?
    Senator Levin. April 1998.
    Mr. Weisbrod. No, there was no legal opinion obtained.
    Senator Levin. Or March 1998.
    I am curious about that because now you have an employee 
testifying in a trial where essential to that charge was an 
allegation that there was a criminal activity going on in the 
United States. Wouldn't normally some alarm bells go off at an 
institution when that happens to say, hey, wait a minute, if 
this is illegal and we have somebody testifying in that case, 
shouldn't we stop accepting clearly identified proceeds of an 
illegal activity?
    Mr. Weisbrod. There is no question but that at the time, in 
1998, our employees were not aware of the fact that Internet 
gambling was illegal. And I think, with some fairness, looking 
back, there was some ambiguity, and I think even this 
Subcommittee's report references the ambiguity under the law.
    For example, last year I believe there was an Internet 
Gambling Prohibition Act that was reviewed in Congress, and in 
that there was reference to the fact that there was ambiguity. 
So the fact is that at that time the whole area of Internet and 
e-commerce and the ways it can be used in money laundering was 
not well understood, it is an area of growing importance and 
emerging concern.
    Our major focus in the money laundering area had been in 
cash coming into the bank, and we clamped down on that pretty 
well, and on drugs. The area of Internet gambling did not have 
the same sensitivity that it certainly has now as a result of 
the experience that we have had here.
    Senator Levin. I guess my point, though, is not whether or 
not there was ambiguity, but whether or not there wasn't some 
consideration in your law department as to whether or not you 
might be then accepting the proceeds of an illegal operation. 
Shouldn't that have been at least assessed or analyzed by your 
law department at that point?
    Mr. Weisbrod. It was not. It was not referred to the law 
department at that time.
    Senator Levin. On Internet gambling, what is your position 
on it, or what has it been at the Bank of America?
    Mr. Christie. To be honest with you, until last year, at 
least in my mind, it didn't dawn on me that Internet gambling 
was truly illegal. I mean, I thought if it had been----
    Senator Levin. Distinguished, you mean, from illegal?
    Mr. Christie. Sorry?
    Senator Levin. That is OK. Go on.
    Mr. Christie. Good one.
    Anyway, I didn't realize it was illegal, and I think many 
of my associates around me didn't really fully understand that 
it was illegal. I mean, we have had the creation of so many 
gambling establishments throughout the United States over the 
last few years, you would wonder what was legal or illegal.
    But having read what I have now on the subject and 
consulting with my crack attorneys at the bank, I fully do 
understand the fact that it is illegal. And, again, it would be 
another one of our checkpoints in our due diligence work that 
we would be doing on banks. So, yes, it was a revelation to me 
last year.
    Senator Levin. I think Exhibit 6 \1\ has the Bank of 
America on those same Web sites, so we can show this as not at 
all limited to one bank. But I would hope that all of our banks 
would promptly seek some legal guidance from their counsel and 
close down Web sites. Even if there was ambiguity about it, you 
would think that you would have a legal opinion saying, hey, 
wait a minute, we have got to err on the side of caution; if 
this is reasonably, arguably illegal, we cannot be accepting 
that kind of money.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 6 that appears in the Appendix on page 700.
---------------------------------------------------------------------------
    Mr. Christie. Even if it was legal, I wouldn't want our 
name associated with them on the Web site.
    Senator Levin. Good.
    Mr. Weisbrod. And I would add, if I could, Senator, that 
the moment we did become aware that our name was being used on 
these Web sites without our permission, we took swift action to 
issue a cease and desist to have that stopped. We put it on our 
OFAC filter, as well, to screen all the payments that were 
coming in to make sure there were no illegalities.
    Senator Levin. Let me get to the question of nesting 
correspondent banks. Going back now to American International 
Bank, American International Bank had an account with your 
banks. It also was serving as a correspondent bank for other 
banks.
    Now, Exhibit 3 \2\ here is an exhibit that lists three of 
the half dozen or more banks for which American International 
Bank served as a correspondent, and this is really quite a 
notorious list. As described in the Minority staff report, 
these three banks were all heavily involved with financial 
fraud.
---------------------------------------------------------------------------
    \2\ See Exhibit No. 3 that appears in the Appendix on page 697.
---------------------------------------------------------------------------
    Two of them, Caribbean American Bank and Hanover Bank, were 
shell banks; they didn't exist anywhere. The Caribbean American 
Bank, was nothing but a front for a criminal enterprise. It was 
owned by individuals committing a financial fraud, and all of 
the accounts at that bank are being investigated for money 
laundering.
    The relationship manager at Bank of America told our staff 
that he never knew that American International Bank was serving 
as a correspondent for other banks. One of the salespeople at 
Chase didn't know that American International Bank was serving 
as a correspondent. The other sales representative knew that 
American International Bank was serving as a correspondent and 
thought there was no problem with it. But as we can see from 
this list, there are some bad actors that are nesting within 
the American International Bank and using that bank's 
relationship with your banks to access our U.S. financial 
system.
    Mr. Weisbrod, in your statement you note that the issue of 
nesting creates some problems because there are legitimate 
reasons for small banks to open relationships with larger 
banks, and I think you maybe both have made reference to that 
this morning.
    However, in the case that we have here, there is a high-
risk bank from a high-risk jurisdiction--two things, high-risk 
bank, high-risk jurisdiction--serving as a correspondent for 
other higher-risk banks, two of which were shell banks also 
from a high-risk jurisdiction.
    So I have two questions for both of you. Shouldn't a 
correspondent bank at least know if its clients are serving as 
correspondents for other banks, and if so, who those other 
banks are? That is question one.
    Do you want to start off?
    Mr. Christie. Yes, I believe we should know that and we 
should know who they are.
    Senator Levin. Mr. Weisbrod.
    Mr. Weisbrod. I think in the instance of AIB, we certainly 
made a mistake in letting that bank have a relationship with 
us, and we did terminate the relationship within about a year.
    I think to make a blanket statement that we need to know 
the names of all of the correspondent banks of all of our 
correspondents does present some problem. For example, if we 
are dealing with Deutsche Bank, obviously a reputable bank, and 
they have correspondent relationships with a series of 
Landesbanks throughout Germany, I don't think that is the sort 
of thing this Subcommittee is interested in.
    Certainly, in the instance of high-risk jurisdictions or in 
the instance of offshore banks, we do need to understand 
whether they have correspondent relationships, especially if 
they have them with shell or offshore banks.
    Mr. Christie. If I could amend what I said, I assumed when 
you asked the question you were talking about high-risk 
countries and high-risk banks, and in that context, absolutely. 
But as David has said, if it was Chase Manhattan, I wouldn't 
ask them for their correspondent bank list.
    Senator Levin. Would you agree with Mr. Christie that when 
we talk about high-risk banks in high-risk countries that you 
should know the names of any banks that your correspondent bank 
has accounts for?
    Mr. Weisbrod. One of the high-risk countries is Russia. 
Russia is a country with 2,000 banks. We do have correspondent 
relations with Russian banks. But I am not sure that it would 
be where you draw the line. It is something that is being 
reviewed by the New York Clearing House. It is a thorny 
question and it is being reviewed by the Clearing House as part 
of their best practices paper.
    Senator Levin. There is an ironic conclusion to this matter 
of nested banking that underscores what we are talking about. 
Both of your banks terminated their relationship with American 
International Bank because you felt that you were just no 
longer comfortable doing business with that bank. We will start 
with that. We have gone through that. It may have taken too 
long, but ultimately at the end you terminated your 
relationship with American International Bank.
    Based on the information that you have provided us, both of 
your banks served as correspondents to another Antiguan bank 
called Antigua Overseas Bank. I don't know if you are aware of 
that, but I will lay that out before you anyway. Just assume 
that.
    What I want to let you both know is that a client of 
Antigua Overseas Bank was American International Bank. So you 
finally terminate your relationship with American International 
Bank. You don't want to do business with them, but you are 
doing business with them because Antigua Overseas Bank is a 
correspondent bank for American International Bank. Therefore, 
by using the Antigua Overseas Bank account with you, you are 
serving almost the same function as you previously did for 
American International Bank.
    Now, were either of you aware of that?
    Mr. Christie. No, but we will find out more about it 
tomorrow, I guarantee you.
    Mr. Weisbrod. I am not aware of that, Senator.
    Senator Levin. All right. Can you check into that? And if 
it is true as I have set forth, and we are comfortable that it 
is, let us know what the solution to that problem is. I mean, 
it took you long enough to terminate a relationship with a 
bank, but now it ends up that that bank, because it is indeed a 
respondent bank with the Antigua Overseas Bank--you are, in 
effect, because it is a customer of your customer, being used 
in the same way essentially.
    Mr. Weisbrod. Let me see if I understand. Are you saying 
that the Antigua Overseas Bank is a correspondent of ours?
    Senator Levin. Right.
    Mr. Weisbrod. I have done considerable due diligence before 
coming here today and I did not note that that was one of our 
correspondents currently, but I will certainly----
    Senator Levin. You were a correspondent bank for them----
    Mr. Weisbrod. Oh, I see, sir.
    Senator Levin [continuing]. After you terminated your 
relationship with the American International Bank. I don't know 
if that relationship still continues or not, but you did have a 
relationship with the Antigua Overseas Bank after you 
terminated your relationship with the American International 
Bank. And all I am saying is that that relationship continued, 
just indirectly. Again, I don't know that you still have that 
relationship. The important point is you had that relationship 
with them after you terminated the relationship with American 
International Bank.
    That is the end of my questions. Thank you.
    Senator Collins. Thank you, Senator Levin.
    I want to thank our witnesses for appearing today. I do 
want to make clear that I believe that both Bank of America and 
Chase have undertaken considerable efforts to tighten up their 
procedures to guard against doing business with foreign banks 
that are facilitating money laundering activities, and I do 
commend you for those efforts.
    I hope you will continue to be diligent, and I believe that 
the investigation done by Senator Levin and his staff has shown 
that there are still many problems and troubling gaps in the 
oversight that American banks give in their correspondent 
banking relationships.
    I would like to thank all of our witnesses this morning for 
their testimony and cooperation. It has been very helpful and 
illuminating.
    Tomorrow morning, the Subcommittee will hear further 
testimony from a panel of expert witnesses knowledgeable about 
international efforts to fight money laundering, and from 
another bank, Citibank, which unfortunately has also 
experienced its share of problems with questionable 
correspondent banking customers.
    The hearing tomorrow will be in room 106, Dirksen Senate 
Office Building. That is a change, so I want to make sure 
everyone who is interested in coming tomorrow is aware of the 
room change.
    Our current witnesses are now excused, and the Subcommittee 
will stand in recess until tomorrow morning at 9:30.
    [Whereupon, at 12:36 p.m., the Subcommittee was adjourned, 
to reconvene at 9:30 a.m., Friday, March 2, 2001.]


  ROLE OF U.S. CORRESPONDENT BANKING IN INTERNATIONAL MONEY LAUNDERING

                              ----------                              


                         FRIDAY, MARCH 2, 2001

                                       U.S. Senate,
                Permanent Subcommittee on Investigations,  
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:37 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Susan M. 
Collins, Chairman of the Subcommittee, presiding.
    Present: Senators Collins and Levin.
    Staff Present: Christopher A. Ford, Chief Counsel and Staff 
Director; Mary D. Robertson, Chief Clerk; Rena Johnson, Deputy 
Chief Counsel; Eileen Fisher, Investigator; Claire Barnard, 
Detailee/HHS; Linda Gustitus, Democratic Staff Director and 
Chief Counsel; Elise Bean, Democratic Deputy Chief Counsel; Bob 
Roach, Democratic Counsel; Laura Stuber, Democratic Counsel; 
Ken Saccoccia, Congressional Fellow; Susan Price, Intern; Ann 
Fisher and Judy White (Senator Cochran); Marianne Upton 
(Senator Durbin); Bob Westbrooks (Senator Akaka); and George 
Schaubhut (Senator Levin).

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. Good morning. The Subcommittee will come 
to order.
    This morning, the Subcommittee continues its examination of 
the complex world of correspondent banking and the extent to 
which correspondent accounts with foreign banks can expose the 
U.S. banking system to money laundering.
    As we heard yesterday, correspondent banking is the method 
by which a bank provides services and products to another bank. 
Without a doubt, correspondent banking is an essential 
component of the international financial system. The Office of 
the Comptroller of the Currency, however, has identified 
international correspondent banking customers as high-risk 
accounts requiring more critical evaluation before the accounts 
are opened, and requiring continuing monitoring for money 
laundering activity thereafter.
    The Subcommittee thus has focused its attention on the 
correspondent relationships that some U.S. banks have formed 
with high-risk international banking customers, such as shell 
banks, offshore banks, and banks in jurisdictions with weak 
anti-money laundering laws. The investigation found that 
although increased due diligence is warranted in dealing with 
such institutions, U.S. banks have often faltered in this 
regard, particularly when they are not extending credit and 
their own funds are not at stake.
    The testimony that the Subcommittee heard yesterday 
illustrates the reasons for our concern. We first heard from 
John Mathewson, the former President of Guardian Bank and 
Trust, a now defunct Cayman Islands offshore bank. Mr. 
Mathewson, who pleaded guilty to charges of attempted money 
laundering and conspiracy to commit international money 
laundering, provided an insider's perspective regarding the 
relative ease with which offshore banks can manipulate the 
products and services that U.S. banks routinely offer, such as 
wire transfers, to move their customers' funds through the U.S. 
financial system in a manner that makes them exceedingly 
difficult to trace.
    Mr. Mathewson opined that the vast majority of Guardian's 
clients were U.S. citizens seeking to avoid paying income taxes 
or to hide assets from their creditors or former spouses. His 
testimony made clear that Guardian Bank would not have been 
able to offer these clients easy access to their funds while 
maintaining the secrecy of their identities without its 
correspondent accounts in U.S. banks. Moreover, and very 
troubling, he described Guardian Bank as a ``run of the mill'' 
offshore bank.
    The Subcommittee heard additional troubling testimony from 
representatives of two major U.S. banks, Bank of America and 
J.P. Morgan Chase. Their testimony made clear that banks were 
not performing adequate due diligence when opening and 
monitoring accounts for international correspondent banking 
customers.
    I want to emphasize that both Bank of America and Chase 
have acknowledged weaknesses in their correspondent 
relationships with international correspondent banking clients. 
To be sure, it would be unfair to hold these banks accountable 
for not knowing, when they opened and maintained correspondent 
accounts for shady institutions such as American International 
Bank and Swiss American Bank, everything that has subsequently 
come to light about these financial institutions.
    Nevertheless, both Bank of America and Chase did have some 
information prior to opening these correspondent accounts that 
should have raised red flags. For example, it appears that 
Chase decided to accept American International Bank as a 
correspondent banking client despite its awareness that AIB may 
well have been sheltering the funds of American tax evaders. 
This is precisely the type of lax oversight that criminals who 
wish to launder their dirty money are quite literally banking 
on.
    Today, we will begin by hearing from three authorities on 
money laundering who will discuss the ways in which 
correspondent accounts can be used to launder the proceeds of 
crime, the difficulties that law enforcement officials 
encounter in tracking down funds that have passed through 
multiple jurisdictions, and measures that U.S. banks might be 
able to take to reduce the abuse of their correspondent banking 
systems by money launderers without drowning the banks in 
unnecessary paperwork or crippling the industry.
    We will then hear from Citibank about its own handling of 
correspondent accounts with three high-risk clients--M.A. Bank, 
Federal Bank, and European Bank. Given some of the questionable 
dealings in which each of these three banks were engaged, I 
look forward to hearing from our Citibank witnesses regarding 
their management of these banks' accounts.
    The controversy engendered by one of the Citibank examples 
recounted in the Minority's Report, the Federal Bank case, 
deserves further comment. A great deal of attention has been 
paid to this Subcommittee investigation in the foreign press, 
particularly in Argentina.
    I want to make clear this morning that the Subcommittee's 
investigation has not been an investigation into money 
laundering in any foreign government. It is unfortunate that 
this Subcommittee's work has acquired such apparent 
significance in another country's domestic political disputes, 
because the investigation's findings are not aimed at 
supporting any charges of high-level money laundering by 
specific foreign officials.
    Moreover, the amount of laundered money identified in the 
Minority Report that relates to Argentina consists of $7.7 
million in drug trafficking proceeds passing through M.A. Bank, 
and $1 million in bribe money passing through Federal Bank from 
an IBM kickback scandal that has been publicly known for some 
time. Argentine press reports that this Subcommittee has 
identified billions of dollars in dirty money involving these 
banks are simply inaccurate.
    At any rate, I look forward to hearing the testimony of our 
witnesses today. Abuse of the U.S. correspondent banking system 
by money launderers and other criminals is a very serious topic 
and deserves our full attention.
    At this time, I would like to recognize the distinguished 
Ranking Minority Member, Senator Levin, who initiated and 
conducted this investigation, for his opening comments.
    Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Madam Chairman, thank you again for 
scheduling these hearings and for your strong support of this 
investigation. I also want to thank you for your clarifying 
statements relative to the purpose of this investigation, that 
we are looking at U.S. banks and we are not carrying on an 
investigation of any domestic activities inside Argentina by 
specified officials. I think it is important that we point that 
out.
    Some of the reports that have been printed in Argentina 
purporting to quote, as a matter of fact, members of my staff 
are made out of whole cloth, literally. Some of those reported 
quotations were never made or anything close to it. I emphasize 
``some'' because I don't want to label the entire media in 
Argentina in that way, but I would say clearly that some of the 
comments attributed to my staff were just simply never made, or 
anything close to them made.
    At yesterday's hearing, we heard from a former offshore 
bank owner and from two leading U.S. banks regarding how high-
risk foreign banks are able to open correspondent accounts at 
U.S. banks and how those accounts can then be used by rogue 
foreign banks and their criminal clients to launder the 
proceeds of illegal drugs, financial fraud, Internet gambling, 
tax evasion, and other criminal conduct.
    Today, we want to shine the spotlight on the decision by 
U.S. banks to open accounts for one particular kind of high-
risk foreign bank, offshore shell banks. Some offshore banks 
have physical facilities either in the jurisdiction in which 
they are licensed or some other country. An offshore shell 
bank, however, is a bank that has no fixed physical presence in 
the country in which it is licensed or in any other country, 
and it is not a branch or a subsidiary of a bank that does have 
a physical presence somewhere. Those shell banks, instead, are 
banks that have no physical office anywhere where customers 
could go to conduct banking transactions or where regulators 
could go to inspect records and observe bank operations.
    The signature features of a shell bank are its 
inaccessibility and its secrecy. These banks are generally not 
examined by regulators, and virtually no one but the shell bank 
owner really knows where the bank is, how it operates, or who 
its customers are. One shell bank owner told us that his bank 
existed wherever he was at the moment. These banks do not fit 
the profile of the financial institution that most Americans 
imagine when they think of a bank. Instead, they exist on the 
bottom rung of the banking world.
    The low status of these banks is on display in the Internet 
advertisements explaining how and where to buy a shell bank 
license. These ads stress how quickly a bank can be purchased, 
and highlight a jurisdiction's lax due diligence and regulatory 
requirements as key selling points.
    One government cited in the advertisements, for instance, 
is Nauru, a remote island in the South Pacific. Nauru is said 
to have issued 400 licenses for shell banks which, if true, 
would apparently constitute the largest number of shell banks 
established by any one jurisdiction. Nauru is also one of the 
15 countries that has been identified by the Financial Action 
Task Force in June 2000 for non-cooperation with international 
anti-money laundering efforts.
    Another oft-mentioned government is Vanuatu, another South 
Pacific island, which confirmed to us that it has licensed more 
than 50 offshore shell banks. Caribbean governments are also 
listed, including Anguilla, which allegedly charges an annual 
bank licensing fee of $3,800 for an offshore bank with a 
physical presence on the island, and $7,600 for an offshore 
bank without one.
    Let's take a closer look at Montenegro, in Europe. This is 
an excerpt here on the screen from Exhibit 35 in our 
exhibits.\1\ This is one of many Internet advertisements for 
opening an offshore shell bank in Montenegro. The bank costs--
you can buy it for $9,999, and the advertisement says that it 
comes with a correspondent bank account included ``in the 
package.''
---------------------------------------------------------------------------
    \1\ See Exhibit No. 35 that appears in the Appendix on page 789.
---------------------------------------------------------------------------
    As we will see on the succeeding pages of this Internet 
advertisement, that means that you buy access with that bank 
license to an already existing correspondent account at a U.S. 
bank. So for $10,000, minus a dollar, anyone can buy access to 
the U.S. banking system in a way which is secret. And the 
purposes of those kinds of bank accounts will again be explored 
today, as they were yesterday, but substantial sums of money 
move through these bank accounts.
    Now, the ad also promises ``no intrusive background 
checks,'' a ``European jurisdiction,'' and ``fast set-up 
time.'' The correspondent account which is advertised is in the 
name of the Bank of Montenegro, which in turn allows the new 
bank--which they are selling the license for--to use the Bank 
of Montenegro's existing correspondent network, which includes 
Citibank, Commerzbank, and the Union Bank of Switzerland. Those 
are the representations which are made. That is what you are 
buying access to, in a way which will be kept totally secret.
    Exactly how many Montenegro shell banks are operating today 
under this arrangement is not known to me.
    The bottom line is that hundreds, if not thousands, of 
offshore shell banks are in existence at this moment, and all 
of them need to get into the international banking system to do 
business.
    Of the four shell banks investigated by the Minority staff, 
all four were found to be operating far outside the parameters 
of normal banking practice, without basic administrative 
controls, without anti-money laundering safeguards, and in most 
cases without paid staff. All four also escaped regulatory 
oversight. They used U.S. bank accounts to transact business 
and to move millions of dollars in suspect funds associated 
with drug trafficking, financial fraud, bribe money, or other 
misconduct.
    Today, we are going to first hear from a panel of experts 
with many years of experience in dealing with high-risk foreign 
banks. Jack Blum, among other accomplishments, is a U.N. 
consultant on offshore banking and has more than once crossed 
swords with shell banks.
    Anne Vitale was the Managing Director of Republic National 
Bank of New York, and spent years designing systems and 
procedures to help that bank decide which foreign banks ought 
to be given U.S. bank accounts.
    Robb Evans is a longtime banker and a former head of the 
California Bankers Association, and in recent years has begun 
assisting Federal and State agencies in recovering funds taken 
from fraud victims, becoming in the process all too familiar 
with shell banks.
    On the second panel will be officials from Citibank, and 
they will focus on Citibank's decision to open and maintain 
U.S. correspondent accounts for two shell banks--M.A. Bank 
which is licensed in the Cayman Islands, and Federal Bank which 
was licensed in the Bahamas. As the Chairman has indicated, a 
third bank is also covered in some detail in our report. 
Federal Bank, by the way, had its license revoked by the 
Bahamas just 2 weeks ago, presumably in response to this 
investigation.
    Far from using the heightened scrutiny that is recommended 
by U.S. bank regulators for offshore banks and is supposed to 
be required in its own internal policies, Citibank seems to 
have done just the opposite. It seems to have relaxed its due 
diligence and monitoring requirements for those accounts 
because of the confidence and the personal regard that Citibank 
officials said that they had for the owners of those offshore 
shell banks.
    This relaxed scrutiny continued for one of these banks, 
M.A. Bank, even after Citibank was served with a seizure 
warrant for $7.7 million in alleged drug proceeds that were 
deposited into the M.A. Bank account in New York as part of the 
Casablanca undercover money laundering sting. Citibank not only 
apparently failed for over a year to recognize that the seizure 
warrant involved illegal drug proceeds, but it also allowed 
M.A. Bank to move an additional $300 million through that 
Citibank account.
    Citibank also engaged in troubling conduct when it provided 
the Central Bank of Argentina with false information about the 
ownership of Federal Bank. Citibank knew that the owner of 
Federal Bank was Grupo Moneta, a large conglomerate of 
companies in Argentina. Yet, when the Central Bank of Argentina 
directly asked Citibank for ``all information'' that it had 
regarding Federal Bank, ``especially the identity of its 
shareholders,'' the President of Citibank Argentina, Carlos 
Fedrigotti, represented to the Central Bank of Argentina that 
the records of Citibank Argentina ``contain no information that 
would enable us to determine the identity of the shareholders 
of the referenced bank.'' Again, he gave this response even 
though Citibank Argentina was then in possession of numerous 
documents related to Federal Bank, including specific documents 
that named Grupo Moneta as the owner of Federal Bank.
    There are reports that Grupo Moneta is denying ownership of 
Federal Bank to this day. That denial, on top of Citibank's 
misleading response to the Central Bank of Argentina, makes 
this matter a very troubling one. It is one of many reasons 
that this matter is a very troubling one, and we hope to get to 
the bottom of that this morning as well.
    The questions that we hope to address today include not 
only Citibank's specific decisions regarding these two shell 
banks, but also Citibank's overall policy on shell banks. In 
response to our correspondent banking survey, Citibank 
initially said that its policy was not to open accounts for 
shell banks, but that it would make an exception for ``an 
existing customer bank's offshore subsidiaries or affiliates.''
    When asked how that exception applied to M.A. Bank and 
Federal Bank, whose parent owners are not banks, Citibank 
submitted a modified statement of its policy and broadened the 
exception, saying a correspondent account could also be opened 
for offshore subsidiaries or affiliates of existing customer 
``financial institutions.'' While Citibank did not define that 
term, Citibank presumably meant to encompass not only banks 
within that phrase ``financial institutions,'' but also 
security firms like Mercado Abierto, S.A., and commercial 
operations like Grupo Moneta, so that M.A. Bank and Federal 
Bank would be considered by Citibank as permissible accounts. 
Now, one concern that I have with expanding the permissible 
affiliation to financial institutions is that financial 
institutions are not subject to the same regulatory regime as 
banks.
    Yesterday, we talked about the legal duty of U.S. banks to 
act as a gatekeeper and to take reasonable measures to keep out 
of the U.S. banking system foreign banks that pose unacceptably 
high money laundering risks. Offshore shell banks pose the 
highest money laundering risks in the international 
correspondent banking industry today.
    Both the Bank of America and Chase Manhattan yesterday told 
us that it is their policy not to do business with offshore 
shell banks, and that was welcome news. If shell banks were 
unable to open correspondent accounts with established banks, 
shell banks would have to close. The hearing today, I believe, 
will show why these shell banks don't deserve a place in the 
U.S. banking system, and why U.S. banks should not extend the 
lifeline, which is the correspondent bank account, that keeps 
those shell banks in business.
    Again, I want to thank you, Madam Chairman, for your 
support and your calling of these hearings.
    Senator Collins. Thank you, Senator Levin.
    As Senator Levin mentioned, our first witnesses today are 
experts in money laundering regulations and laws. Since Senator 
Levin has already given the background of the three witnesses, 
I am just going to welcome Jack Blum, Anne Vitale, and Robb 
Evans, and ask that they stand, since pursuant to Rule VI all 
witnesses are required to be sworn.
    Would you please raise your right hands?
    Do you swear that the testimony you are about to give to 
the Subcommittee will be the truth, the whole truth and nothing 
but the truth, so help you, God?
    Mr. Blum. I do.
    Ms. Vitale. I do.
    Mr. Evans. I do.
    Senator Collins. We will be using a timing system today. 
Please be aware that when you see the yellow light come on, you 
will have one minute to sum up your remarks. You will be given 
10 minutes and your full statement will be included in the 
hearing record.
    Mr. Blum, I would ask that you begin.

   TESTIMONY OF JACK A. BLUM,\1\ PARTNER, LOBEL, NOVINS AND 
                     LAMONT, WASHINGTON, DC

    Mr. Blum. Thank you, Madam Chairman. Thank you, Senator 
Levin, for inviting me here this morning.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Blum appears in the Appendix on 
page 162.
---------------------------------------------------------------------------
    I think I should get right to the heart of the matter. 
Offshore shell banks have no place at all in the world banking 
system, unless it is to be used for tax evasion or other 
criminal activity.
    The shell banking business is a business in which the 
promoters and crooks offer these banks for sale, frequently at 
medical conventions and at meetings of professionals, and sell 
them to the professionals as a vehicle for tax evasion. They 
say, look, if you have a shell bank, you can have this 
marvelous checking account that isn't reported to the Federal 
Government, whose proceeds won't be known by anybody but you 
which is not subject to seizure. And here, by the way, is an 
elaborate structure of trusts through which you can move your 
money to hide it.
    Probably the most notorious of these salesmen is a fellow 
named Jerome Schneider, who has been at it for more than 15 or 
20 years, selling shell banks in places ranging from Vanuatu to 
Montserrat. Each time he is caught someplace, he moves on to 
the next place, but he continues to advertise seminars around 
the world offering these banks for sale.
    Two years ago, ABC News sent some undercover people to one 
of his seminars and they got the full pitch: Hide your money; 
you will have this checking account, in effect, at a Canadian 
bank that would be the correspondent account, and nobody will 
be able to find out whose it is. He saw that and was taken 
aback momentarily, but in a very short space of time was back 
advertising in the Wall Street Journal, with the tag line ``as 
seen on ABC TV.'' This is the kind of thing that is done with 
shell banks.
    Now, there are other uses for shell banks, not just buy the 
bank to have a privileged checking account, but have the shell 
account so that you can hide the proceeds of criminal money or 
get the criminal money in the account. So there are various 
kinds of frauds--advanced fee for loan fraud, securities frauds 
of different kinds, and prime bank instrument fraud. All of 
these really rely on some kind of paper from what looks like a 
bank saying that we will guarantee or we will give you some 
kind of assurance that a bank is involved; if you send us your 
money, we will put it in some kind of high-yield trading 
program that will give you tremendous returns.
    Invariably, what happens is the money goes to this shell 
bank in that kind of scheme, the money disappears, and the bank 
either evaporates or the bank says, well, we sent the money on 
for the further credit of some offshore corporation somewhere 
else.
    The bank is an essential part of the fraud because it is 
what gives the investor the confidence that he is sending the 
money to someplace that is real. And typically the instructions 
will be to send the money to the correspondent account, send it 
to our correspondent account at the Bank of New York. That kind 
of thing builds the confidence of the mark in the legitimacy of 
the fraud that is going on. I have been involved in any number 
of cases where there has been this kind of transmission of 
money to an illegitimate institution through a correspondent 
account of a legitimate institution.
    Then there is the problem of how do you stop the money. 
Under the banking rules, if there is a correspondent banking 
account for a foreign bank, when fraud money or proceeds of 
crime hit that bank account and they are commingled, it becomes 
an incredibly difficult matter to stop the money. At that point 
the money is considered the property of the offshore bank, and 
unless you can prove the whole thing is a fraud and all the 
money in the account is proceeds of crime, for all practical 
purposes the money is outside the United States and there is 
not much that can be done.
    I ran into that in a case where we were chasing Nigerian 
con men and they wanted to have money wired to a bank in 
Beirut, not a shell, but an offshore bank in Beirut, for the 
further credit of some corporation, but wired to the 
correspondent account in New York City. And we were trying to 
figure out how to get the money wired to New York, but held 
there with enough time to arrest the Nigerian con men, and it 
just wasn't possible to organize it. The money, as soon as it 
would have hit the correspondent account, would have for all 
practical purposes been out of the country.
    I have seen enough of the jurisdictions that regulate these 
banks to be able to tell you conclusively that there is no way 
a jurisdiction like Nauru or Vanuatu or St. Vincent or Grenada 
can possibly regulate a stable of offshore banks.
    If you will, just consider the case of a bank in Grenada 
that was capitalized with the appraisal of a ruby. Mind you, 
the Grenadian bank officials never saw the ruby. They got a 
document that said this ruby is worth $30 million. The man who 
got the bank license, a Mr. Van Brink, had been traveling under 
a different name before he came to Grenada and, after his fraud 
with the offshore bank was complete, moved on to Uganda, where 
he is known by yet another name.
    I was in Grenada not long ago and talked to the chief 
regulator of the offshore banking sector, and the conversation 
went something like this: What did you do before you took over 
as bank regulator? He replaced the prior regulator who had 
chartered this ruby-based bank. He said, I sold real estate. Do 
you have any experience in banking? No, but I am trying to 
learn about banks. And what do you do to vet people who apply 
for a bank license? He said, well, we have something of a 
problem with that. For a while we thought about hiring Kroll 
and Associates, a large private detective firm, but we called 
them and they wanted too much money and we couldn't really 
charge the people involving that kind of money for the 
investigation.
    I said, well, you should bill it to them. If they want to 
open a bank, they ought to be able to pay for their own 
approval process. He said, well, we thought that that would cut 
back on the number of applicants we had. Then I said, how about 
using the Internet? How about doing some simple checks on 
Lexis/Nexis to see if the applicants have been convicted? He 
said, well, we have trouble with our Internet connections.
    I submit that this jurisdiction has no business in the 
offshore banking business. And anybody who tells you, yes, we 
are training, there is no way that all the training in the 
world is going to get a jurisdiction like this to the point 
where its ``banks''--and I use that term in quotes--are going 
to be meaningfully regulated. And the same story is true in a 
half dozen other places.
    I want to stress to you that some of the people involved in 
this are people of enormous goodwill. The woman who regulates 
the Cook Islands Financial Center is a wonderful person, a very 
nice person, and she is regulating not only the banking sector, 
the offshore banking sector, but their walking trusts--these 
are trusts which disappear if the police come--their various 
other financial entities, and she is trying to attend all the 
difference conferences and she is trying to learn how bank 
regulation ought to be conducted. It is not possible, it is 
flat not possible.
    It ought to be obvious to everyone involved, the purpose of 
these ``financial institutions'' is to provide a black hole and 
a window to the American financial markets through 
correspondent accounts.
    Having said that, I think it is important to add some 
things to the discussion as it goes forward. We have been 
talking about banks and the vulnerability of correspondent 
relationships that come when banks have correspondent accounts, 
but there are a wide array of offshore financial businesses, 
much like the kind that Senator Levin mentioned in the opening 
statement, that are not regulated at all, like trust companies 
and certain kinds of financial advisory firms that simply sign 
on the dotted line and go into business. And these guys are 
also using various windows into the financial system 
particularly through brokerage accounts to get their business 
done.
    In the United States, we can crack down on banks and say, 
look, you are regulated, here's the rules, due diligence, know 
your customer. In the brokerage business, due diligence 
consists of finding out whether the investments you propose to 
sell to a particular customer are suitable for that customer. 
The due diligence doesn't always include the same level of due 
diligence required in the banking industry. And in this world 
that we are in today, banking and brokerage are so close to 
each other, it is really very, very difficult to distinguish 
between the two. I think it is essential to look at these 
different windows into the U.S. financial system, and essential 
to cut them off.
    I see my time is up. I will be happy to answer questions 
later.
    Senator Collins. Thank you, Mr. Blum.
    Ms. Vitale.

   TESTIMONY OF ANNE VITALE,\1\ FORMER MANAGING DIRECTOR AND 
DEPUTY GENERAL COUNSEL, REPUBLIC NATIONAL BANK OF NEW YORK, AND 
 CURRENT SPECIAL LITIGATION COUNSEL, HSBC USA, INC., NEW YORK, 
                            NEW YORK

    Ms. Vitale. Good morning, Chairman Collins, Ranking Member 
Senator Levin. Thank you for inviting me to testify here today.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Vitale appears in the Appendix on 
page 168.
---------------------------------------------------------------------------
    Having served as an Assistant United States Attorney in the 
Southern District of New York, where I prosecuted money 
laundering, narcotics and organized crime cases for 7 years, 
and then having been Managing Director and Deputy General 
Counsel at Republic National Bank of New York for 9 years, 
where I headed the global anti-money laundering policy and 
procedures for the global corporate network, I have seen money 
laundering issues from both the government's perspective and 
private industry's perspective.
    And in my mind, those two perspectives should not conflict 
with each other. No financial institution wants to be in a 
position where they have dirty money going through that 
institution. So, therefore, I think it is in every financial 
institution's interest to cooperate with law enforcement 
efforts to prevent money laundering through U.S. banks.
    I would like to commend you both for these hearings, also 
for the report that the Minority staff prepared. I found it to 
be comprehensive, diligent, and fair. I think they were quite 
on target in identifying the three areas of vulnerability 
through correspondent banking.
    As a preliminary matter, I want to stress what Senator 
Collins remarked in her opening statement. Correspondent 
banking is a legitimate and indispensable component of the 
global financial network. The report realized this. In my 
experience, all but a small fraction of the payments represent 
legitimate business activity. However, because a small fraction 
of the transactions are meaningful in terms of quantity of U.S. 
dollars, it is incumbent upon banks to establish anti-money 
laundering programs specifically in the correspondent banking 
area.
    This was not always the case, or the realization of this 
was not always the case. It wasn't until late 1997 that wire 
transfer monitoring through correspondent banking activity 
first began to be acknowledged as a high-risk area. I don't 
think the OCC or any other Federal regulator had identified 
this area, so we are in a relatively recent development.
    However, that said, in 1998 and 1999, with the publicity of 
specifically the Bank of New York case, this has been the area 
that banks should be concentrating on, and there is much a bank 
can do to prevent money laundering through correspondent 
banking accounts.
    Two basic things: one is at the account-opening process, 
and the second is at the monitoring of transactions process. 
You can't be successful if you have one without the other; you 
need both. At the account-opening stage, it is important for a 
correspondent bank to obtain information from its respondent 
bank, and the information should be the location of the bank; 
the license and the regulator of the bank that is applying for 
an account; the number of employees, branches, and their 
locations.
    Why is this important? Why is number of employees, branches 
and locations important? Quite frankly, I submit to you that if 
a bank doesn't have many employees, if a bank doesn't have 
operations, that bank does not have any wherewithal to monitor 
transactions and to open accounts. So you need to know the 
numbers, or else whatever that bank tells you about its money 
laundering policy is not going to be objective reality.
    You also need to know the identities of the owners and 
managers, the asset size and the financial reports, the 
financial products being sought by the client, other 
correspondent relationships that bank has, the nature of the 
client's business and customers, the due diligence the client 
performs on its customers, whether the client is acting as a 
correspondent bank for its clients, the country's reputation 
for anti-money laundering measures, and a statement from the 
relationship manager as to why he or she recommends that the 
account should be opened.
    And I think that statement cannot rely on this bank is 
generally well-known or the management is generally well-known. 
You need objective reality. You need to know who audits the 
bank, who audits the sub. You need to know the number of 
employees, who is doing the monitoring, and where they are 
doing it. Those are some of the factors to consider at an 
account-opening stage.
    As far as monitoring is concerned, you must look at the 
flow of funds. Now, you can't do this in real-time; you can't 
look at every single wire transfer that passes through your 
institution. So you have to use a triage system and identify 
what I think is the most effective way, which is patterns of 
activity. Set a threshold level and identify what transactions 
you are going to look for.
    At Republic National Bank, we had the average threshold 
level of $500,000 in 1 month passing through a bank if it was 
from the same originator to the same beneficiary, or from the 
same originator to ten or more beneficiaries, or from ten or 
more originators to one beneficiary. There are different 
parameters that can be utilized. And you need systems for this, 
but once a system identifies the transactions that may be 
suspicious, you need to have a staff that is trained to look at 
the transactions and to see if they can find, as Jack Blum 
said, from databases or from other public information whether 
there is any information that will say that these transactions 
represent normal business activity. The question is: Is this 
legitimate business activity?
    Thereafter, if there is no information found or if the 
information that is found raises a question, the transactions 
that have been identified must be funneled up to a senior 
officer, not in the business area but in the anti-money 
laundering area, for that person to make a decision on what to 
do with the account, what to do with the transactions.
    If there is a suspicious activity--and suspicious activity 
means that there is no legitimate business reason that is 
obvious in the transaction--if that can't be determined, you 
must file an SAR, a suspicious activity report. That decision 
is best made by anti-money laundering or legal, or some 
combination of both.
    Thereafter, the senior officer in anti-money laundering 
must talk to a senior business manager as to what to do with 
the correspondent account. Do you just block transfers of 
certain originators and beneficiaries from that account, or is 
the pattern so pervasive through that account that you close 
the account? These are some of the things you must consider 
throughout.
    The other factor that I want to stress is the role of 
training and the role of audit and the role of the commitment 
of senior management. I think it is imperative that training be 
ongoing through all areas of the bank, but specifically since 
the area of correspondent banking is both new in terms of the 
focus, there has to be ongoing training for correspondent 
bankers, as well as for analysts and those who are monitoring. 
Correspondent banking and the anti-money laundering program 
should be evaluated by audit to see whether the controls are in 
place.
    And finally, and what I think is most important, there has 
to be direction from the CEO and the board of directors that 
sends a message that anti-money laundering may be as important, 
if not more important, than profits. And this is something that 
I learned from the former Chairman of Republic.
    Thank you.
    Senator Collins. Thank you very much, Ms. Vitale. Your 
testimony was extremely helpful.
    Mr. Evans, would you proceed?

 TESTIMONY OF ROBB EVANS,\1\ MANAGING PARTNER, ROBB EVANS AND 
               ASSOCIATES, SUN VALLEY, CALIFORNIA

    Mr. Evans. Thank you. I really do appreciate the invitation 
to appear today. I would like to associate myself with the 
remarks of my colleagues on the panel, with not quite 
everything they have said, but I think they have got almost 
everything bang on.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Evans appears in the Appendix on 
page 172.
---------------------------------------------------------------------------
    I have looked at this issue from a different perspective in 
recent years. Up until 10 years ago, I had been a commercial 
banker on both sides of the correspondent banking fence, if you 
will, both managing correspondent banks and being the 
correspondent bank from an offshore location. My view in the 
past decade has changed dramatically.
    Ten years ago, I was asked to manage the liquidation of 
BCCI in the United States, first by the California 
Superintendent of Banks, and later by the Department of 
Justice. And so I got deeply involved in that for a number of 
years, and as a consequence got involved in a number of other 
unrelated cases where I was brought into them by the Securities 
and Exchange Commission or the Federal Trade Commission or the 
Department of Justice to recover funds that had been stolen or 
the subject of fraud. That was an eye-opening experience.
    In the Minority report, you have talked about one case, 
European Bank in Vanuatu. I am the Federal Receiver in that 
case, and so that is one I know a great deal about. I learned a 
good deal more just reading your report that I did not know 
before. The case illustrates a number of points.
    First of all, the recommendation regarding the offshore 
banks that you focused on in your report, that they should be 
driven out of the U.S. banking system, is correct. The shell 
banks issue is an absolute a no-brainer. The other offshore 
banks, I believe, also should either be barred from the U.S. 
correspondent banking system or, if allowed to remain, only 
with very stringent requirements. There is simply no benefit 
for anyone other than their proprietors, but they are only one 
link in a long chain of illegality.
    The case that you cite in your report is of a gentleman by 
the name of Kenneth Taves, who is now incarcerated and has pled 
guilty just in the last few weeks to money laundering, fraud 
and other charges, where the flow of the money is quite 
important in understanding the fraud. The offshore banks play a 
critical role in the movement of stolen funds--they are only a 
link in the chain. Breaking that link is very important.
    In this case, the Taves-European Bank case, what happened 
is this chap was able to open merchant banking accounts for 
credit card processing with two small banks in the United 
States, banks that specialized in processing credit cards.
    Now, the credit card business can be very high volume. By 
hook or by crook, this chap was able to get a number of credit 
card numbers, and over a 24-month period, managed to steal $40 
million at $19.95 at a clip, processing them through these two 
banks. The money was transferred regularly, trying to keep it 
in not massive amounts, from those two small merchant banks in 
the United States, one in California and one in Missouri, to a 
major U.S. bank in Nevada, where the funds were concentrated.
    From that bank in Nevada, it was transferred to a bank 
called Euro Bank in the Cayman Islands. And from that bank, it 
was then transferred all around the world, including right back 
to the United States, where it bought real estate, had big 
accounts with brokerage houses, and so on and so forth. None of 
this was cash, by the way; it was all electronic.
    In January 1999, the Federal Trade Commission, responding 
to a number of consumer complaints, was able to get a freeze 
order on the company and I was appointed the receiver of the 
company. We walked in unannounced and were able to seize the 
company. They put up a vigorous defense. The funds were frozen; 
they were under a Federal court injunction not to move any 
money and to turn over all records, wherever located.
    There were literally no records on the premises and almost 
no records anyplace at all. So my colleagues and I spent a 
number of weeks basically dumpster-diving to try and figure out 
where the money went. But we were able to trace the money, one 
way or another, to the Cayman Islands, to Euro Bank.
    We went to the Cayman Islands with the documentation of the 
theft and the money laundering. The Cayman Islands authorities 
promptly closed Euro Bank, which was a major break for us in 
that case because by placing Euro Bank into receivership, we 
were able to, through court action, get access to the records 
of the bank. From there, we were able to find out where the 
money went from Euro Bank, which was to many locations, from 
Liechtenstein to Vanuatu. And we started the task of tracing it 
from one location to another, from one bank to another, item by 
item.
    We were able to perfect our claims to a large amount of 
money in the Cayman Islands, and we are confident that the 
funds will be returned to us for repayment to victims. It is a 
slow process because the bank there is in liquidation, and so 
we have to stand in line with all the other depositors to get 
the stolen money back. But we will get the money back, and we 
have had good cooperation there.
    But tracing the money onward between the offshore banks was 
challenging. Ultimately, what we found happened is that after 
the freeze order was imposed by the courts and the crook knew 
he was caught, he told the bank in the Cayman Islands to open a 
new account for him in Vanuatu, which Euro Bank had told him 
was a neat place to do business, with secrecy, all the other 
good stuff.
    The bank in the Cayman Islands had a working relationship 
with the bank in Vanuatu; they had referred business before. 
They faxed European Bank in Vanuatu and told them to open up an 
account in a corporate name. A trust company affiliated to 
European Bank in Vanuatu opened a corporate account by 
incorporating a new Vanuatu corporation called Benford Ltd., 
which is referred to in your report.
    The only information they had to open that account was a 
name which they assigned it, the name of an alleged beneficial 
owner, which was an acquaintance of the villain, and a copy of 
a British passport and a London address. They asked no 
questions. The business of the company just said ``business,'' 
nothing else, nothing beyond that. The bank in the Cayman 
Islands transferred $100,000 to European Bank's account in New 
York to get the ball rolling. That money was used to open an 
account with European Bank in Vanuatu for Benford Ltd. Within 
in a matter of weeks, over $7 million flowed into that account.
    When we found out about these transfers, the bank in the 
Cayman Islands was in the hands of liquidators. So with their 
cooperation, we and the liquidators in the Cayman Islands 
immediately informed European Bank in Vanuatu that this was 
stolen money and they were, in fact, holding it in trust for 
the victims and they should return it.
    Then commenced a war which goes on to this day to try and 
recover those funds. One must remember in a small country like 
Vanuatu, $7 million is a very large amount of money. This was 
far and away the largest customer of the bank. The victims of 
this crime had more money in that bank than the owners of the 
bank or any other deposits.
    The opportunity for these offshore banks and the incentive 
for offshore banks to deal with villains is immense. If you 
stop to think about it, if you are going to steal money, who is 
the best person to steal it from? Obviously, a thief. If 
villains open accounts with offshore banks, which they do with 
regularity, the offshore banks hope the bad guys get caught 
because guess who gets the money then if it is not properly 
traced? So it is a tremendous incentive.
    In this case, in Vanuatu, I honestly don't know what was 
driving motivations for the offshore bank to try and hang on to 
this stolen money. I sent people to Vanuatu without luck. I 
went there personally, accompanied by the FBI, with all kinds 
of documentation. The bottom line is they just wanted to keep 
that money. In a small country like Vanuatu, $7 million is a 
lot of money. If they could confiscate the money, keep it, if 
the bank could keep it, even freeze it, paying no interest on 
it, it would do tremendous things for both the country and the 
bank. But the bottom line is it is other people's money.
    My point, and I see my time is up, is that I would like to 
make a plea to this Subcommittee. First of all, you are on the 
right track in terms of banning these accounts. Additionally, 
in my view, I think that much better tools can be given to 
people like myself whose mission it is to recover stolen funds 
from offshore banks. We need better legal standing. That can be 
achieved, and I would urge this Subcommittee to consider those 
issues to help us recover stolen funds from abroad. I discuss 
this point in greater detail in my prepared remarks. I urge the 
Subcommittee's consideration.
    Thank you very much.
    Senator Collins. Thank you, Mr. Evans.
    There appears to be widespread agreement that U.S. banks 
should not be opening correspondent accounts for shell banks. I 
would like to pursue with each of you in further depth the 
issue of whether they should be providing services to offshore 
banks.
    Yesterday, a former owner of an offshore bank in the Cayman 
Islands explained to us that at his bank, which he described as 
a typical run-of-the-mill Cayman Island bank, 95 percent of the 
customers were Americans, and he opined that there was no 
legitimate reason for an American citizen to have an account in 
an offshore bank, particularly given the very high fees that 
the bank assessed for its services and products.
    I first want to ask whether you would agree with that 
assessment that there is generally no legitimate reason for an 
American citizen to have an account in an offshore bank, and 
then I want to ask you about the implications if you do agree.
    Mr. Blum.
    Mr. Blum. I would say there is no legitimate reason. If you 
want an account offshore and, for example, you have a vacation 
home or you are living in another country, you can do business 
with the banks of that country. Remember that the offshore bank 
is an institution that only deals with foreigners.
    Now, I visited Mr. Mathewson in 1994 in his bank. I had a 
hidden camera and tape recorder from Public Broadcasting. The 
show was on ``Frontline,'' and he made a very persuasive pitch 
about how it was possible to hide my money and all the things 
he would do to keep it out of sight for me. His due diligence 
consisted of ``you are not a drug dealer, are you?'' And I said 
no and the conversation continued, and that tape is available.
    Senator Collins. Ms. Vitale.
    Ms. Vitale. I am hesitant to say there is no legitimate 
reason. I can tell you I don't know of one, but I am always 
willing to listen to see if someone can come up with one. That 
is for American citizens to have accounts at offshore banks.
    I think my answer is different to the second question. 
There are legitimate reasons to have offshore banks. I know 
Republic had banks in offshore jurisdictions. Offshore 
jurisdictions may be high-risk jurisdictions, but that doesn't 
mean that legitimate activity can't be conducted there.
    I think when you do have an offshore bank either as a 
customer or even as your own--part of a sub or an affiliate of 
your own bank, you have to have monitoring procedures in place 
and use a belt-and-suspender approach to make sure that those 
transactions are legitimate transactions.
    Senator Collins. Mr. Evans.
    Mr. Evans. Well, as far as offshore banks, I think for 
these purposes we should define them as not including the 
offshore subsidiaries of regulated institutions.
    Senator Collins. Correct. I am talking about offshore 
banks.
    Mr. Evans. OK. With that clarity, I can say there are lots 
of good reasons for people to be operating offshore in the 
regulated world. In the unregulated world, I can't think of a 
reason that is proper for an individual American. I can think 
of reasons for citizens of other countries, but not for an 
American.
    The problem is that the vast majority of Americans who want 
to open offshore accounts are doing so for tax evasion. Tax 
evasion is not a crime in many countries. The problem exists 
that those of us that are trying to recover money of 
universally accepted crimes, such as theft, are put in the same 
category as those that are trying to recover tax evasion or 
divorce settlement or other kind of civil actions. That is part 
of the problem.
    Senator Collins. To me, a bank in a country that does not 
allow its own citizens to deal with that bank or to do business 
with that bank is inherently suspect, but I want to make sure 
that as we attempt to go forward and devise solutions to this 
problem that we do not overreact and, in fact, inhibit 
legitimate commerce. I think it is a difficult balance to 
strike, but certainly offshore banks appear by their very 
nature to be questionable when defined as you and I have 
discussed.
    Ms. Vitale, I want to go back to an issue that you raised 
in your statement. You said, and I think it is a critically 
important point, that to be effective, anti-money laundering 
procedures must have the support and the commitment of a bank's 
senior management.
    The testimony that we heard yesterday was very interesting 
on that point. I think it was Mr. Christie, of Bank of America, 
who testified that correspondent banking used to be a part of 
the bank where you knew you weren't going to get ahead if you 
were assigned to correspondent banking, that it was considered 
a very routine part of the business and not a way to advance 
your career.
    That implies to me that it didn't receive years ago, at 
least, the kind of scrutiny and priority that you suggest is 
needed. I think that has changed, to be fair. I think it has 
clearly changed in the banks that we have talked about, 
including Citibank that we are going to be discussing later 
today.
    But do you think that was typical, what Mr. Christie told 
us, that it just was not an area of the bank that received much 
attention from top management, and thus was more vulnerable to 
money laundering?
    Ms. Vitale. I think it received attention from top 
management in terms of profitability in the early 1990's. But 
quite frankly, in the early 1990's when I first got to 
Republic, I didn't pay much attention to correspondent banking, 
the wire transfers through correspondent banking, and that was 
because the amount of wire transfers through correspondent 
banking is so vast, you can't monitor every one.
    It was only in 1997 when two things happened. One was an 
account officer came to me, and he was one of the only account 
officers who reviewed statements of his accounts, and he said, 
Anne, take a look at this. And I looked at the activity and I 
said is this common? And then we started, by hand, manually, 
looking at different account statements, and I went to the 
Chairman, Walter Weiner, and I said we have got a problem, we 
can't have this. And then he said, design a system, and I got 
the funds and I worked with our systems people and we 
identified high-risk.
    At the same time, the OCC came to me and they had received 
a tip about a certain Russian bank, and we took a look at the 
activity in those banks and accelerated our systems 
development. And once we developed a system where we could 
monitor large transactions or high-risk transactions, we were 
then able to make a dent in the correspondent banking area. But 
it has been a gradual process. But I think today it should get 
the attention of every CEO.
    Senator Collins. Thank you.
    Mr. Evans, you told us a very interesting case study 
involving European Bank, in which you had been very involved in 
investigating, and you recounted that when it opened an account 
for Benford, which, I think was incorporated as Benford Ltd., 
European Bank knew very, very little about its clients. Indeed, 
the occupation listed was simply ``business.''
    Given the nearly complete lack of information about the 
beneficial owner of Benford, is the only reason that European 
Bank opened this account was that it was profitable? I mean, is 
it simply a matter of money being the motivation here?
    Mr. Evans. I can't imagine what else it could have been, 
and I also can't imagine a reason why a bank sitting in Vanuatu 
could think that there would be a legitimate reason for that to 
happen. I mean, we have an individual who is supposed to be--
lady who is supposed to be living in London. Why would they 
open an account in Vanuatu, other than to hide the money?
    And maybe there are legitimate reasons to hide money, at 
least legitimate in the laws of that country, from a spouse, 
from a creditor, from whatever. But the mere act of wanting to 
open an account and providing absolutely no information to a 
bank who asked absolutely no questions--there can be no 
conclusion that I can figure out, other than everybody knew it 
was crooked money and there was a good way to make money off of 
that.
    Senator Collins. Do you have any recommendations on how we 
could encourage countries with lax controls to either tighten 
their laws or otherwise cooperate with international efforts to 
combat money laundering?
    Mr. Evans. Well, there are some good precedents I have 
heard of in the drug control issue where there has been good 
international cooperation. I would like to see that cooperation 
extended into not only money laundering, but the recovery of 
money laundering. If we have stronger tools to recover money, 
it will make it much less profitable for marginal banks to deal 
with villains.
    You have got to keep in mind that the criminal process 
works very slowly, and that is never going to change, in my 
view. You have procedures, you have processes to go through 
that make getting criminal convictions a slow and tedious 
process.
    Most recovery of stolen money from abroad is done through a 
civil process. It is by actions brought civilly by the 
Securities and Exchange Commission or the Federal Trade 
Commission or another regulatory agency. We need better tools 
to move civilly. I believe those can be negotiated so we have 
reciprocal rights with other countries for the return of money 
to victims that can enhance that and allow those of us trying 
to recover funds to move with much greater speed than we can 
now. The money moves too fast. In a heartbeat, the money is 
gone. We need to be able to move faster.
    Senator Collins. Mr. Blum.
    Mr. Blum. I would like to chime in on that. I agree that we 
need the tools. At the moment, U.S. citizens who try to take a 
U.S. judgment to a foreign court are in a terrible position 
because we don't sign on to the international conventions about 
enforceability of judgments. Our posture in the international 
law setting is really a 19th century posture and we have got to 
change that, and change it quickly.
    Senator Collins. Ms. Vitale.
    Ms. Vitale. I think one of the areas that needs some help 
is the ability to freeze certain funds within a correspondent 
account. And I am not advocating seizing the entire account, 
but if you identify funds within the account that there is 
probable cause to believe are the proceeds of a crime, those 
funds should be susceptible to seizure.
    Senator Collins. Thank you.
    Senator Levin.
    Senator Levin. Thank you, Madam Chairman.
    You have all agreed that you see no legitimate purpose for 
shell banks, and I couldn't agree with you more. In our 
investigation, we have been unable to find a legitimate purpose 
for a shell bank either, but your experience is a lot vaster 
than ours and that testimony is extremely helpful. I would 
think if we did nothing else, and we hope to do a lot more, but 
ban shell banks, or at least correspondent accounts with shell 
banks, we would be doing a real service.
    We hope to go beyond that, but would you agree if we could 
just end the accounts with shell banks that they have with U.S. 
banks that we would be performing a service? Do you agree with 
that?
    Mr. Blum. Absolutely.
    Ms. Vitale. Yes, sir.
    Mr. Evans. Oh, yes. If that is all you do, you should be 
ashamed of yourself.
    Senator Levin. I agree with that, too, but it is a good 
starting point.
    Mr. Evans. Absolutely.
    Senator Levin. Now, one of the arguments against it that we 
are going to face is that, well, they will just open accounts 
in other countries, banks in other countries. What is the 
answer to that?
    Mr. Blum. The answer is they have to use the U.S. wire 
transfer system. They have to have access to U.S. markets. The 
second answer is we have to work with the other major countries 
that have large banks and are in the bank regulatory system. I 
think right now the countries of Europe, the OECD countries, 
would agree. And this is an issue which our Treasury should be 
tabling in the context of the G-7 and say that, look, these are 
what the rules have to be.
    Ms. Vitale. I think it is harder to find, but you can find 
it, and I am talking about nested correspondents and when the 
foreign bank has as one of its correspondents a shell bank. You 
can't find that when you open an account for your legitimate 
correspondent bank. However, you can see that at least in some 
occasions when you do wire transfer monitoring.
    I know at Republic I remember quite clearly several 
instances, what really is standing out in my mind is where we 
had a correspondent bank that had a shell bank in Nauru and 
that was the originator of many wire transfers. First, we tried 
to do some due diligence to find out what this bank and who 
this bank was. We found nothing on the bank. We even contacted 
the bank, our correspondent, who couldn't tell us very much. 
And then what we did, we used the OFAC filter to block all wire 
transfers from the shell bank. So we didn't close the 
legitimate correspondent bank, but we blocked all transfers 
from then on of the offshore bank.
    Senator Levin. Do any of our banks say that we will not 
accept an account from a foreign bank if it accepts deposits 
from shell banks? Is there any reason why we couldn't just tell 
our banks you may not allow this kind of nesting in your 
depositors? Why not do it that way?
    Ms. Vitale. How do you enforce that?
    Senator Levin. It may be tough to enforce.
    Ms. Vitale. OK.
    Senator Levin. But at least when you are accepting the 
deposit, you would be telling the depositor that if they do 
that, that is the grounds for ending the account, and indeed 
money could be seized if it were illegal money coming through 
that, just the way you described just a few moments ago, if we 
allow for the seizure of a portion of an account as you 
recommend.
    But is there any reason why, as part of a reform, we should 
not tell U.S. banks you must not accept a deposit from a bank 
that you have not informed may not, in turn, accept a deposit 
from a shell bank?
    Mr. Blum. I think that works.
    Mr. Evans. I think you are on the right track there, 
Senator. I think the way to do it is probably have some kind of 
certification by the correspondent bank that they, in turn, 
will not maintain nested accounts that do not meet the 
standard. And then they would be subject during routine bank 
examination to finding out whether the certifications were done 
properly.
    Senator Levin. Should we not require that U.S. banks that 
accept correspondent accounts require any bank that wants to 
open a correspondent account to provide a list of the banks 
that they, in turn, have as correspondents? With computers, it 
is a fairly quick thing, I think, to do that. Now, if it is 
cumbersome and bureaucratic, it may not be doable, but what do 
you think, Mr. Blum?
    Mr. Blum. I think it is quite feasible and not very 
difficult to do.
    Ms. Vitale. There is a problem with updating the lists, and 
also with what do you do when you have this list, then? I mean, 
do you just have a list of all the names or do you then have 
more due diligence that you have to do about all these banks 
that may be very small? I think that might be asking too much, 
unless it appears, of course, on your monitoring transactions 
as suspicious activity. Then you have the obligation to do 
more.
    Senator Levin. If it is combined with that required 
certification that they do not accept depositors from shell 
banks, then they would be worried because they have to disclose 
who their bank depositors are, in turn, and if they have to 
certify that they don't accept any deposits from shell banks, 
they would be easily caught. Our U.S. bank would then have the 
certification from the correspondent bank; we do not accept 
deposits from shell banks. They would have the list from the 
depositor as to what banks they accept deposits from. And I 
think any depositor would be very worried, then, that those two 
pieces of paper could be easily put together and see whether or 
not the certification is accurate or not.
    Mr. Evans, do you have a comment on that?
    Mr. Evans. No. I just think that you have got to be so 
careful on how that is crafted because we could have unintended 
consequences if we don't do it right. The burden should be on 
the foreign bank. If it is a major foreign bank that is 
maintaining nested accounts, the burden should be on them. They 
are subject to examination. The burden should not be on the 
U.S. correspondent, other than to require the certification.
    Senator Levin. All right. It would be very helpful if you 
would give us any further thoughts on that subject for the 
record so that we could consider that as I am drafting 
legislation. I would like to have all the help we can get.
    Now, what about banks that are licensed in jurisdictions 
that are known for poor anti-money laundering controls? Should 
we treat them differently automatically? Maybe we do already 
tell our U.S. banks you may not accept any deposits from banks 
which are in the countries that are on that international list. 
Are our banks allowed to accept deposits from those countries' 
banks?
    Mr. Blum. Yes, we do accept those deposits. I think we have 
to do business with some banks in these countries. For example, 
some of the Caribbean Islands and the Pacific Islands 
legitimately need banking connections.
    But the way I would put it would be this: If you picked a 
small town in Michigan or Maine--let's say South Haven, 
Michigan, and suddenly they decided they wanted to be home for 
35 banks, you would probably say wait a minute, there is 
something wrong here. And even if the law said we are going to 
do everything in the world to stop money laundering, you would 
know that in a small town you simply don't have the resources 
to monitor and do everything that needs to be done.
    So I would say that any jurisdiction that obviously hasn't 
got the resources to do the job, no matter what laws they pass, 
should be put on notice that if they go into any form of 
offshore banking center business, we are not going to deal with 
them and make them toe the mark. And I think there are a 
variety of things underway at the moment. The OECD has begun an 
exercise in looking at harmful tax practices. The FATF has 
developed a list which is focused on who is and who is not 
obeying the ground rules of the game.
    I think we have to really consolidate the way we look at 
the problems. We should say, wait a minute, this just isn't 
going to work no matter what rules we put in place. Let's be 
realistic and say we are not going to let you play if this is 
the business you choose to be in.
    Senator Levin. Let me go back to the question again of 
shell banks. This was a letter that we got from the legal 
counsel of Citibank.\1\ It says, ``We have been reflecting on 
the concerns stated by you and your staff about establishing 
relationships with offshore banks that have no physical 
presence in the offshore jurisdiction. We remain uncertain 
about whether attaching significance to physical presence is 
meaningful when one considers the nature of offshore banks. . . 
. Offshore affiliates typically service the existing customers 
of the parent institution.'' So the affiliates we are not 
worried about, but then they go on to say this: ``Their 
function is to serve as registries or booking vehicles for 
transactions arranged and managed from onshore jurisdictions.''
---------------------------------------------------------------------------
    \1\ See Exhibit No. 21 that appears in the Appendix on page 734.
---------------------------------------------------------------------------
    Is there a compelling business justification for shell 
banks, for example, as registries or booking vehicles?
    Mr. Blum. The whole idea of a booking vehicle leads you to 
the heart of this problem. When you go offshore, you are 
evading some rule, some tax, or some requirement of a 
regulatory agent or a government somewhere else. The principle 
of international law that has been on the table for many years 
is one government won't help enforce the governmental interests 
of another government. That principle evolved in the 19th 
century, the early 20th century, and it is a principle which I 
think needs very careful reexamination as we integrate the 
world economy in the 21st century.
    This idea of being able to book a transaction outside the 
reach of the regulators somewhere else, of the tax authorities 
somewhere else, is at the heart of the matter, and it is the 
thing that we really have to debate in a coherent way. It is 
not just the issue of money laundering. When they say book 
somewhere else, they are talking about reserve requirements and 
the cost of money.
    In the United States, if you are a bank, you have to keep 
reserves for liquidity, reserves against various risks. If you 
move the money offshore, there are no reserve requirements. You 
are on a net/net basis. The cost of money goes down, but they 
are evading the basic reserve requirement regulation.
    So what we have to do is begin to focus on how this works 
internationally and where regulation should be permitted to be 
changed so that everything is, in fact, onshore and done in a 
straightforward way.
    Senator Levin. Ms. Vitale, I think you have testified that 
having a physical presence and employees is both meaningful and 
important.
    Ms. Vitale. Yes.
    Senator Levin. So we have that testimony, I think, in 
response already to my question. Is there anything further that 
you want to add to that?
    Ms. Vitale. I think when you have no physical presence 
anywhere, you are not a bank. You may be a wire transmitter of 
some sort, but you are not a bank.
    Mr. Blum. You are a checking account, is what you are.
    Senator Levin. Mr. Evans.
    Mr. Evans. Well, Senator, I do have to diverge a little bit 
here from my colleagues. I think there are very legitimate 
reasons to have these offshore booking and registration 
centers. Now, maybe that is the vagaries of international law 
now, but there is no major international insurance company that 
is not operating in that fashion largely through Bermuda. The 
same way with ship registries. That is the way the world is.
    Now, it shouldn't be that way, mind you, but it is legal, 
it is proper, and if you are going to be in that arena, that is 
what you have to do to compete. We shouldn't mix that up with 
this, in my view. That is a very legitimate business under 
today's rules of the game and we shouldn't screw around with 
it. I mean, if we want to screw around with it, that is a 
different issue than money laundering. Don't cross the two.
    Senator Levin. I have further questions, but my time is up.
    Senator Collins. Why don't you proceed?
    Senator Levin. Thank you.
    On the question of seizing suspect funds, Ms. Vitale, I 
believe, has already addressed that issue and I don't know if 
our other two witnesses have. But the question here is whether 
or not we should make it easier for U.S. law enforcement to 
seize suspect funds which are deposited in a U.S. correspondent 
account belonging to a foreign bank.
    Right now, to seize those funds, the U.S. has to show, or 
our prosecutors or law enforcement have to show that a foreign 
bank was somehow part of the wrongdoing. It is not enough to 
show that those assets are there. You have got to show that 
somehow or other the bank is part of the wrongdoing, they are a 
wrongdoer, and that is not a requirement which applies to 
seizures from other types of U.S. bank accounts. So it is just 
the correspondent account that we have a very tough standard to 
meet, and I don't see that it is a particularly logical way to 
approach it any more than it would be with our onshore 
accounts.
    Now, I think we have had the story from you, Mr. Evans, 
about the Taves credit card fraud, but let me ask you briefly, 
all of you, if you can, would you agree--I guess, Ms. Vitale, 
you have already addressed it--that we ought to allow for the 
seizure of funds in a correspondent account in the same way we 
would in a regular bank account?
    Mr. Blum. I agree. In my prepared statement and in my 
remarks, I mentioned the case of Nigerian fraud with the money 
that we wanted to try to stop in a New York correspondent 
account before it went off to Beirut and couldn't do it. I 
think it is ridiculous that a correspondent account from a 
shell bank should have privileged status in the sense that it 
is in a better position than the account of an ordinary 
American bank.
    Senator Levin. Thank you. Do you have anything more to add?
    Mr. Evans. No. I agree with you.
    Senator Levin. Thank you.
    I want you to take a look at a description which was 
contained in a Citibank document relative to the purpose of an 
offshore bank, and this is Exhibit 37.\1\ This memo refers to 
Federal Bank, which was an offshore bank licensed in the 
Bahamas with no physical location. Citibank calls it a booking 
vehicle.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 37 that appears in the Appendix on page 805.
---------------------------------------------------------------------------
    The memo refers to Banco Republica, which is an offshore 
bank located in Argentina, and Federal Bank is supposed to be 
its offshore arm for Banco Republica's private banking 
customers. I will read this to you. I don't know if you have 
the exhibits in front of you. Do you have those exhibits in 
front of you?
    Mr. Blum. Yes.
    Senator Levin. Good. Here is what the memo says about the 
purpose or the function of the Federal Bank: ``The existence of 
this vehicle is justified in the group's strategy because of 
the purpose it serves . . . to channel the private banking 
customers of Banco Republica to which they provide back-to-
backs and a vehicle outside Argentina where they can channel 
their savings, which are then replaced in Banco Republica by 
Federal Bank.'' So what the memo says is the depositors in 
Banco Republica send their money to Federal Bank and then 
Federal Bank deposits that money back in Banco Republica.
    Can any of you see the purpose of that?
    Mr. Blum. Well, back-to-back transactions are frequently 
used by money launderers. A deposit is made in one place. The 
money then becomes collateral for a loan and goes back into the 
hands of the person who sent the money originally, and that is 
a great way of concealing or making it look like the money came 
legitimately from a foreign source.
    Senator Levin. Are there other purposes that might be 
legitimate purposes for that? Can you offhand see what a 
legitimate purpose would be for that? We will give Citibank 
obviously an opportunity to testify on that. But just looking 
at it with your experience, would that raise an alarm bell if 
you saw those kinds of transfers back and forth?
    Ms. Vitale. It is probably--if it is legitimate, it is tax 
evasion.
    Mr. Evans. Yes. I can't think of a reason. It would have to 
be a local Argentine thing in which I have no experience, but 
that would be the first question I would ask.
    Senator Levin. Finally, let's take a look at Exhibit 23,\1\ 
and I want to just get your reaction to a series of 
transactions that occurred among three entities with a common 
owner and a correspondent account in Citibank, in New York.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 23 that appears in the Appendix on page 742.
---------------------------------------------------------------------------
    These three entities now have the same owner, and the 
movement of money among three Citibank New York correspondent 
accounts are the three entities owned by Grupo Moneta--Banco 
Republica, which is the actual bank located onshore in 
Argentina, and then American Exchange which is a Panamanian 
company apparently operating out of Uruguay, and Federal Bank 
which is the offshore bank which is one of the banks that we 
are looking at, also owned by that same group, Grupo Moneta.
    Now, as you can see, there are numerous same-day transfers 
of significant amounts of money from Banco Republica to 
American Exchange, to Federal Bank. These are all owned by the 
same group. Can you see any particular reason, from your 
experience, why money would move like that? Is that movement--
same day, three entities owned by the same group--a normal 
business practice from your experience?
    Ms. Vitale. I can't answer the question, if it is a normal 
business practice, but it raises questions. And I think if you 
see a pattern such as this, you should ask some questions and 
get answers that will explain it. But the rule is sort of the 
mathematical rule, the shortest distance between two points is 
a straight line. Here, you have it going a round-robin sort of 
transaction, which is an indicia of high-risk activity that may 
be suspicious. So I would definitely ask some questions about a 
pattern like this.
    Senator Levin. Do either of the other witnesses want to 
respond?
    Mr. Evans. Ask the questions, for sure. I can think of 
reasons why that would be quite proper in foreign exchange 
markets and the like where you deal in those kind of numbers 
and you deal with them on a same-day basis. But the questions 
deserve to be asked.
    Senator Levin. Among entities which are owned by the same 
group?
    Mr. Evans. It could be.
    Senator Levin. OK.
    Mr. Evans. I honestly don't know. I don't know enough about 
it, but the questions--it is a legitimate question.
    Senator Levin. One other fact. I am informed they are all 
U.S. dollar accounts.
    Mr. Evans. I could think of reasons why it could be.
    Senator Levin. OK, fair enough.
    Mr. Blum. I come to the same conclusion. You have to ask 
questions, and the question is why. Always, where offshore 
banking is involved, there is the question of why have you gone 
to this added extra expense. Why are you going through multiple 
transfers when you can do it straightforwardly and simply?
    Senator Levin. Thank you all. You have been a great help.
    Senator Collins. Ms. Vitale, just one final question for 
you, since you have helped banks set up anti-money laundering 
procedures. You said in looking at the transfers that Senator 
Levin just brought to your attention that you can't conclude 
anything without asking questions, but that, in fact, they 
raise questions.
    Would the kinds of money laundering systems that you would 
advise a bank to have in place trigger a review of a pattern 
that is similar to this?
    Ms. Vitale. Yes.
    Senator Collins. Thank you. I want to thank all of you for 
your testimony today. It was extremely helpful, and we look 
forward to continuing to work with you. Thank you.
    Mr. Blum. Thank you.
    Mr. Evans. Thank you.
    Senator Collins. Our second panel of witnesses this morning 
consists of three individuals representing Citibank: Jorge 
Bermudez, Executive Vice President and Head of e-Business for 
Citibank; Carlos Fedrigotti--you can see my Spanish is not very 
good here--President and Country Corporate Officer for Citibank 
Argentina and Latin American South Region Executive; and Martin 
Lopez, who was formerly with Citibank Argentina and is 
currently a Vice President and Corporate Bank Head for Citibank 
in South Africa.
    I appreciate all of these witnesses being here today. At 
least I hope they are here. I am a little concerned that they 
haven't appeared at the table. I would ask the Chief Clerk to 
locate the witnesses and bring them forward.
    [Pause.]
    Senator Collins. Gentlemen, would you remain standing so 
that I can swear you in?
    Would you please raise your right hand? Do you swear that 
the testimony you are about to give to the Subcommittee will be 
the truth, the whole truth, and nothing but the truth, so help 
you, God?
    Mr. Bermudez. I do.
    Mr. Fedrigotti. I do.
    Mr. Lopez. I do.
    Senator Collins. First, I want to express my appreciation 
for our witnesses being here today. I know two of you have 
traveled a considerable distance to be here.
    We will be using a timing system today. You will be given 
10 minutes to make your opening statements, but your complete 
written statements will be included in the hearing record.
    We are going to start with Mr. Bermudez. Please move the 
mike close to you so that we can hear you well. Thank you.

TESTIMONY OF JORGE A. BERMUDEZ,\1\ EXECUTIVE VICE PRESIDENT AND 
     HEAD OF E-BUSINESS, CITIBANK, N.A., NEW YORK, NEW YORK

    Mr. Bermudez. Good morning, Madam Chairman and Senator 
Levin and Members of the Permanent Subcommittee on 
Investigations. My name is Jorge Bermudez. I am an Executive 
Vice President of Citibank and Head of e-Business, a business 
unit of Citigroup's Global Corporate Investment Bank. E-
Business is the organization responsible for delivering 
Internet-based solutions to the corporate marketplace and for 
providing cash management and trade services to our global, 
regional and local customers.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Bermudez with attachments appears 
in the Appendix on page 180.
---------------------------------------------------------------------------
    I am pleased to testify before you this morning and share 
with you what Citibank is doing to fight the risk of money 
laundering in the markets in which we operate, including our 
correspondent banking funds transfer services which are so 
crucial to the international payment systems. This is an 
extremely important topic.
    Citibank is a truly global institution providing a broad 
range of products and services to corporate and financial 
institution customers in more than 100 countries around the 
world. We are keenly aware, however, that with this global 
presence comes the tremendous responsibility of setting and 
following high standards to fight money laundering in each of 
the countries in which we operate.
    As a leader in the financial services industry, we have 
taken, and will continue to take, a prominent role in the fight 
against money laundering. That fight is far from over. While we 
are constantly working to improve our anti-money laundering 
controls, the reality is that it is difficult for the industry, 
as well as law enforcement, to keep up with the latest schemes 
employed by money launderers.
    Citibank welcomes the effort of this Subcommittee to assist 
the financial services industry in identifying areas of 
vulnerability and developing strategies to avoid the unwitting 
facilitation of money laundering. Thanks, in part, to the 
Subcommittee's work, the financial services industry has been 
able to identify areas of risk that had not been fully 
appreciated, which has in turn provoked an industry-wide 
reassessment of the adequacy of anti-money laundering controls 
for correspondent banking.
    As you know, the New York Clearing House Association, of 
which Citibank is a member, is undertaking to develop a code of 
best practices that will help the industry respond to the 
weaknesses identified by your staff. The Federal Reserve has 
acknowledged the challenges involved in balancing the 
importance of anti-money laundering controls with the 
importance of maintaining an effective and efficient 
international payment system. The Federal Reserve has indicated 
its willingness to consult with the Clearing House in its 
effort to develop a code of best practices.
    In addition, the Wolfsberg Group, of which Citigroup is 
also a participating member, is taking up the issue of money 
laundering in correspondent banking. Like the Wolfsberg Anti-
Money Laundering Guidelines for Private Banking issued last 
year, the Group intends to develop another set of guidelines 
that reflect the Group's recognition that money laundering in 
international banking cannot be solved by one institution or by 
any one country.
    In a 1995 report, the Office of Technology Assessment found 
that hundreds of thousands of wire transfers move trillions of 
dollars on a daily basis. Citibank, for example, executes 
approximately 145,00 wire transfers that permit customers and 
third parties to make $700 billion in payments everyday. Any 
monitoring program would have to be carefully designed to avoid 
impairing the smooth functioning of the national and global 
economy, particularly in view of the fact that less than one-
tenth of 1 percent of the total volume of wire transfers is 
estimated to involve money laundering.
    Citibank's response to this complicated problem has been to 
strive continuously to improve an anti-money laundering program 
that couples thorough and ongoing due diligence on its own 
financial institution customers with the latest technologies 
for monitoring transactions between financial intermediaries.
    Citibank has always conducted due diligence on its 
financial institution customers. Recently, however, we have 
implemented an enhanced ``know your customer'' due diligence 
procedure applicable to relationships with financial 
institutions in the emerging markets. Once an account is opened 
for a financial institution, the activity in the account is 
monitored in several ways which I have described in my written 
statement.
    In addition, the investigative analysts in our Tampa Anti-
Money Laundering Unit employ various methods to monitor U.S. 
dollar fund transfers for suspicious activity on an ongoing 
basis, and we have established a specialized compliance unit to 
coordinate and improve communication between the Tampa Anti-
Money Laundering Unit, the country compliance officers, and the 
business relationship managers.
    As criminals have become increasingly more sophisticated at 
laundering money, and as the volume of fund transfers has 
continued to grow, we have made efforts to improve our 
monitoring techniques. Over the past year, we have also 
significantly increased the amount of training resources 
dedicated to anti-money laundering education.
    Furthermore, we work with local governments and banking 
leaders to raise compliance standards and protect against money 
laundering risks. To that end, we have led almost monthly anti-
money laundering seminars for foreign bankers and banking 
regulators.
    Although the pattern monitoring that our Tampa Anti-Money 
Laundering Unit undertakes is important to identify unusual 
patterns of activity, it is only a limited line of defense. As 
the Chief of FinCEN's Systems Development Division has said, 
sifting through the volume of wire transfers for suspicious 
activity is like looking for a needle in a stack of other 
needles.
    In our experience, the most effective monitoring comes from 
the use of law enforcement tips, press reports, or other 
specific information that identifies names of institutions or 
possible customers of financial institutions that have come 
under suspicion of money laundering. Citibank is developing a 
formalized system to gather such information. We feel it would 
be particularly useful if U.S. Government agencies could devise 
methods of sharing with the banking industry and foreign 
regulatory agencies information about institutions that have 
been suspected of money laundering.
    We also have implemented a centralized system for tracking 
all subpoenas and seizure orders Citibank receives on financial 
institution accounts. If a subpoena or seizure order relates to 
money laundering or similar issues, the matter is referred to 
our Tampa analysts for follow-up.
    The Minority staff has suggested a number of measures to 
assist banks that offer correspondent banking services in 
guarding against money laundering, including the identification 
of certain types of relationships that warrant greater care 
when deciding whether to accept a financial institution as a 
correspondent banking customer. Citibank has been studying 
these recommendations with great care, and we will be working 
with the New York Clearing House Association in the coming 
months to formulate an industry code of best practices to 
respond to the issues involved.
    As one of the world's largest global institutions, Citibank 
knows that it plays a unique and important role in the fight 
against money laundering. We are dedicated to the fight against 
money laundering and to using our global presence to increase 
international awareness of the problem. Thanks, in part, to the 
Subcommittee's important work, U.S. financial institutions are 
now more aware than ever of the vulnerabilities they face when 
they establish correspondent relationships with smaller, less 
well-known financial institutions that want to participate in 
the global economy.
    Thank you for the opportunity to testify before you today. 
I am pleased to answer any questions you have.
    Senator Collins. Thank you.
    Mr. Fedrigotti.

   TESTIMONY OF CARLOS FEDRIGOTTI,\1\ PRESIDENT AND COUNTRY 
 CORPORATE OFFICER, CITIBANK ARGENTINA, BUENOS AIRES, ARGENTINA

    Mr. Fedrigotti. Good morning, Madam Chairman. I have 
submitted a written statement for the record that I would like 
to summarize here.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Fedrigotti appears in the 
Appendix on page 223.
---------------------------------------------------------------------------
    Madam Chairman, Senator Levin, and Members of the Permanent 
Subcommittee on Investigations, my name is Carlos Fedrigotti. I 
am the President of Citibank Argentina. I have held that 
position since April 1996. I have been an employee of Citibank 
since I graduated from Columbia University in 1977. As the 
President and Country Corporate Officer for Citibank Argentina, 
I am the institutional representative for Citibank in the 
country. I am responsible for Citibank's corporate banking 
operations in Argentina.
    Since 1914, Citibank has been an active and important 
member of the Argentine business community. In 1999, the U.S. 
State Department commended the branch for its outstanding 
corporate citizenship, its innovation, and its exemplary 
international business practices. Last year, the Argentine 
Minister of the Economy praised the constructive role that the 
branch played in connection with the passage of anti-money 
laundering legislation in Argentina. Citibank has had a long 
and distinguished history in Argentina. I am proud to lead this 
institution.
    Citibank Argentina has long been aware of the need to 
scrutinize closely the financial institutions with which it 
does business. First, in terms of credit risk, Citibank must 
have a complete picture of the financial soundness and 
stability of its financial institutions customers. Second, the 
branch must perform thorough due diligence to ensure that its 
customers have the utmost integrity, and that these customers 
fully appreciate their responsibility to prevent and detect 
money laundering and other illegal activity.
    Citibank has strived to limit its target market to the most 
reputable and financially robust institutions. For this reason, 
Citibank avoids doing business with offshore banks that are not 
affiliated with well-established onshore parent financial 
institutions.
    In January of last year, Citibank Argentina further limited 
its target market. We closed correspondent accounts that we had 
maintained for offshore institutions that, although affiliated 
with Argentine onshore parents, were not reported to the 
Central Bank on the parent institutions' consolidated financial 
statements. None of the accounts for these non-consolidated 
offshore affiliates was closed because suspicious activity was 
detected.
    Among the accounts that were closed was a correspondent 
account for Federal Bank, which the Minority Staff's Report has 
criticized Citibank for opening and which would not have been 
opened under the redefined target market criteria.
    In 1992, Citibank Argentina's Financial Institutions Unit, 
or the FI Unit, as we call it internally, requested that a 
correspondent account be opened in New York for Federal Bank 
Ltd. It was the understanding of the FI Unit that the Moneta 
Group--a group of financial institutions and investment 
companies owned by Raul Moneta, his uncle Jaime Lucini, and 
their families, owned Federal Bank--and that Federal Bank was 
the offshore affiliate of the Group's flagship bank in 
Argentina, Banco Republica.
    The members of the FI Unit in Argentina who requested the 
opening of a correspondent account for Federal Bank felt 
comfortable doing so because the branch in Argentina had had a 
long banking relationship with its sister institution, Banco 
Republica, and its owners which dated to the late 1970's.
    In addition to this banking relationship, Citibank and the 
Moneta Group were also co-investors in an investment holding 
company called CEI, created in the early 1990's to hold equity 
in Argentine companies acquired through the Argentine 
Government's debt-for-equity swap program.
    Although the Buenos Aires branch had no legal documentation 
in its files proving as a matter of law that Federal Bank was 
owned by the Moneta Group, the FI Unit considered it to be an 
affiliate of Banco Republica and treated it as such. As you 
have seen from the FI Unit's records, members of the FI Unit 
regularly discussed Federal Bank with Banco Republica's 
management and analyzed Federal Bank as part of their overall 
credit analysis of Banco Republica and its affiliates.
    In April 1999, I received a letter from the Central Bank of 
Argentina requesting information regarding Federal Bank, 
particularly information about the identity of Federal Bank's 
shareholders. The Central Bank's request was based on the fact 
that Federal Bank maintained a New York account with Citibank. 
I passed the request on to my deputy and asked him to prepare a 
response in consultation with the bank's general counsel.
    Because the files in Buenos Aires contained no records from 
which Federal Bank's ownership could be determined as a matter 
of law, my deputy and my general counsel prepared a letter for 
my signature informing the Central Bank that such information 
was not available in the files in Buenos Aires. The letter also 
directed the Central Bank to New York, where documentation for 
Federal Bank's New York-based account would be maintained, and 
offered the branch's assistance in helping the Central Bank to 
obtain information in New York.
    I later revisited the branch's response to the Central 
Bank's inquiry regarding Federal Bank when the Subcommittee 
subpoenaed information regarding Banco Republica. In July 2000, 
when I was made fully aware that the working materials in the 
branch's files for Banco Republica contained informal, 
internally-generated information about Federal Bank, I 
determined that the Buenos Aires branch should offer that 
information to the Central Bank of Argentina. On July 27, I 
sent a letter to the Central Bank making this offer, and in 
September, at the request of the Central Bank, the branch 
provided this material.
    While the branch's initial response to the Central Bank was 
legally correct under Argentine law, Citigroup's policy is to 
do more than comply with the legal requirements of the 
jurisdictions in which we operate. It is Citigroup's policy to 
cooperate fully with regulators in all circumstances, which 
means going beyond our basic legal obligations. Although the 
branch's initial response to the Central Bank was correct under 
Argentine law, we should have done more and supplied the 
additional information which, in fact, we did last year.
    This matter has been taken very seriously by me and 
Citigroup's management, and I have in turn reemphasized to the 
employees under my supervision that full cooperation with 
regulators is mandatory in all circumstances, and that full 
cooperation may require them to go beyond what is strictly or 
legally sufficient to fulfill their obligations.
    I can personally assure you that as the senior executive in 
the country, I have reinforced the awareness of Citibank 
Argentina regarding the policy of having a fully collaborative 
relationship with the Central Bank in all respects.
    Thank you for the opportunity to testify today. I would be 
pleased to answer any questions you might have.
    Senator Collins. Thank you.
    Mr. Lopez.

   TESTIMONY OF MARTIN LOPEZ,\1\ VICE PRESIDENT AND CITIBANK 
   CORPORATE BANK HEAD FOR CITIBANK, REPUBLIC OF SOUTH AFRICA

    Mr. Lopez. Chairman Collins, Senators Levin, and Members of 
the Permanent Subcommittee, good morning. My name is Martin 
Lopez and I have worked for Citibank since 1985. In 1985, I 
became a Relationship Manager in the Financial Institutions 
Unit in Buenos Aires, and in 1997 I became the Head of the 
Unit. I left Buenos Aires in June 2000, and after a brief 
assignment in Malaysia, I have been in charge of the Citibank 
Corporate Bank in South Africa since November of last year.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Lopez appears in the Appendix on 
page 233.
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    As an employee of Citibank, I want to assure you that I am 
committed to doing whatever I can to help Citibank make its 
correspondent banking services less vulnerable to money 
laundering.
    Among the ten cases the Minority staff has examined over 
the past year, two cases center on correspondent relationships 
with offshore banks that are affiliated with Argentine 
financial institutions. I would like to say a few words about 
each.
    Citibank's decision to open correspondent banking accounts 
for Mercado Abierto and its affiliates was based primarily on 
our experience with the parent institution, Mercado Abierto. 
Although I was never the relationship manager responsible for 
this relationship, I can tell you that Mercado Abierto was one 
of the largest and most important brokers on the Buenos Aires 
Stock Exchange.
    The Minority staff has focused most of its attention on 
M.A. Bank. M.A. Bank is the Mercado Abierto Group's offshore 
affiliate. M.A. Bank provides sophisticated Argentine investors 
with access to international financial markets.
    The Minority Staff Report refers to M.A. Bank as a shell 
bank, but M.A. Bank was affiliated with the Mercado Abierto 
Group, which maintained a physical presence in Argentina and 
was regulated by the Comision Nacional de Valores, the 
Argentine version of the Securities and Exchange Commission in 
the United States.
    In 1999, I learned that the U.S. Customs Service had 
launched an undercover investigation that implicated Mr. 
Ducler, one of the owners of Mercado Abierto, and two of 
Mercado Abierto's vehicles, M.A. Bank and M.A. Casa de Cambio, 
in the laundering of narcotics proceeds.
    After I learned of the grounds of the seizure, Citibank 
blocked these accounts in December 1999 and formally ended its 
relationship with the entire Mercado Abierto Group in February 
2000. I have since learned that the U.S. Customs Service 
settled its claim against Mercado Abierto, and that neither 
Mercado Abierto nor its principals has been found guilty of any 
wrongdoing.
    The Minority Staff Report concludes that Citibank should 
have more promptly realized that the seizure warrant it 
received for the Mercado Abierto accounts was related to money 
laundering. Unfortunately, this is a well-deserved criticism. 
Citibank now has procedures in place to ensure that warrants 
like the one Citibank received for Mercado Abierto are properly 
handled.
    The Minority Staff Report asserts that Citibank permitted 
M.A. Bank to engage in highly suspicious activities for more 
than 1\1/2\ years after assets in its account were seized for 
illegal activity. That is simply not true. What the Minority 
staff observed was a significant level of activity among the 
various Mercado Abierto vehicles which is, in fact, consistent 
with the various securities markets in which the Mercado 
Abierto Group traded and the Group's purchase and sale of 
securities within and outside Argentina.
    I would now like to say a few words about Citibank's 
relationship with Banco Republica and Federal Bank. Citibank's 
relationship with Banco Republica dates back to 1978, when its 
owners, Raul Moneta and his uncle Benito Lucini, established a 
financial company that later became Banco Republica, a 
wholesale bank located in Buenos Aires. I understand that in 
1992, Mr. Moneta and Mr. Lucini incorporated Federal Bank, an 
offshore affiliate of Banco Republica. That same year, Citibank 
established a New York-based correspondent banking account for 
Federal Bank.
    The relationship between Banco Republica and Federal Bank 
was, I believe, well known in the Argentine financial 
community, particularly among those banks that loaned money to 
Republica Holdings, the Moneta family's offshore holding 
company.
    The Subcommittee has noted that $4.5 billion moved through 
Federal Bank's correspondent account at Citibank. In my 
experience, $4.5 billion in credits, which averages to 
approximately $50 million per month, or $2.5 million per day, 
over 7\1/2\ years, is consistent with Federal Bank's purposes 
and would not be unusual for a bank of this size.
    Much of the interest in Banco Republica and Federal Bank 
appears to stem from confidential and secret examination 
reports for Banco Republica by the Central Bank of Argentina. 
When the Minority staff made these reports available to me, I 
found two things that concerned me.
    First, the reports pointed out that Banco Republica did not 
have written anti-money laundering procedures, as required by 
the Argentine Central Bank. Given the length of Banco 
Republica's relationship with Citibank, the relationship 
managers, myself included, relied on oral assurances that Banco 
Republica maintained written anti-money laundering procedures 
as required by the Argentine Central Bank.
    I was therefore surprised to learn that Banco Republica 
failed to comply with this requirement. But under Citibank's 
enhanced due diligence procedures for U.S. accounts, 
relationship managers will be required to assess the anti-money 
laundering controls that Citibank's clients have in place. I 
understand that Citibank Argentina is now reviewing the anti-
money laundering practices of all of its financial institution 
customers.
    Second, I was surprised to learn that Pablo Lucini denied 
that Federal Bank was affiliated with Banco Republica. As you 
can see from our files, although we cannot legally prove that 
Federal Bank was affiliated with Banco Republica, we certainly 
believe that it was.
    In April 1999, the Central Bank of Argentina sent a letter 
requesting information about Federal Bank, particularly about 
its owners, to the Buenos Aires branch of Citibank. Because I 
believed that Federal Bank's affiliation with Banco Republica 
was known in the Argentine financial community and I knew that 
the Central Bank's examiners had a great deal of expertise in 
this market, I thought that they already had grounds to believe 
that these entities were affiliated.
    I therefore concluded that the Central Bank must have been 
looking for legal proof, undeniable evidence that the Moneta 
Group owned Federal Bank. And while our files contained a lot 
of internally-generated documents that reflected our 
understanding of the relationship, we did not have the legal 
proof that I thought the Central Bank was looking for.
    I was also concerned when I reviewed the Central Bank's 
letter that we were being drawn into the middle of a matter 
between the Central Bank and one of our customers. When I was 
interviewed by the Minority staff, I used an imprecise 
expression to describe this situation. When I said that I 
believed the Central Bank was playing ``some kind of game,'' I 
merely meant to express my concern that we were being put in 
this uncomfortable position. I did not intend in any way to 
suggest disrespect to the Central Bank, which has done an 
excellent job supervising the Argentine financial system, and I 
fully appreciate that it is Citibank's policy to cooperate 
fully with requests from regulators.
    I thank you for the attention that you are giving to 
correspondent banking and its vulnerability to money 
laundering, and for giving me the opportunity to testify before 
you, and I am willing to respond to any questions that you 
have.
    Senator Collins. Thank you, Mr. Lopez.
    Senator Levin, would you like to lead off the questions?
    Senator Levin. Madam Chairman, thank you.
    We are going to focus today on two shell offshore banks 
that Citibank New York has had a correspondent relationship 
with, and those are the M.A. Bank and the Federal Bank. Both of 
those offshore shell banks were licensed in the Caribbean, but 
their customers were in Argentina. They didn't have offices in 
the Caribbean countries; all they had was a registered agent.
    They were licensed as offshore banks, so they were not 
allowed to do business with anyone residing in the 
jurisdictions in which they were licensed. Both of these banks 
were affiliated with larger commercial entities known to 
Citibank. In the case of M.A. Bank, it was owned by Mercado 
Abierto, a large securities company in Argentina, and in the 
case of Federal Bank, it was owned by Grupo Moneta, which is a 
large conglomerate or holding company in Argentina.
    As far as we can determine, neither of those banks had a 
physical location in any country, no brick-and-mortar location 
that a customer of those banks could go to to make deposits or 
withdrawals. Neither of those banks were licensed to do 
business in Argentina. That means that the bank isn't supposed 
to take deposits or allow for withdrawals. But for the 
association with larger commercial entities, those banks were 
offshore shell banks.
    Now, both of those banks kept all of their money 
exclusively, as far as we can determine, in correspondent 
accounts; in other words, accounts in other banks. So, 
basically, these accounts are nothing more than their 
correspondent accounts at Citibank New York. I believe it is a 
fact--and, Mr. Fedrigotti, you can correct me if I am wrong--
that these banks have never been examined by an independent 
bank examiner. And if that is not correct, to your knowledge, 
you can just interrupt me at any time.
    If those two banks were affiliated with a bank in Argentina 
and if the Central Bank of Argentina were well aware of that 
fact, the Central Bank would bring the affiliate bank within 
their purview and examination. So if these two banks were 
affiliated with a bank in Argentina and if your Central Bank, 
your regulatory body, were aware of that fact, then the Central 
Bank would bring the affiliate bank within their purview and 
examination.
    First, is that true, Mr. Fedrigotti, and, second, it didn't 
happen in this case, did it?
    Mr. Fedrigotti. Senator, at some point in time, during the 
last few years, the Central Bank requested all Argentine banks 
which had affiliated entities to consolidate them in their 
reporting, and thus the consolidated entity would fall under 
the regulatory environment in Argentina. Neither of these 
affiliated entities were ever consolidated in that sense, and 
therefore they did not fall within the regulatory environment 
of Argentina.
    Senator Levin. If the Central Bank of Argentina knew when 
you wrote them the letter saying you had nothing in your files 
relating to the Federal Bank what they knew later, would they 
have then brought that bank within their purview?
    Mr. Fedrigotti. What happened when the regulations changed 
was that Argentine banks proceeded to start the process of 
consolidation, and whenever there was awareness that these 
entities were still not being consolidated, there was an action 
plan as to by when, by a certain time, this would have taken 
place.
    In the case of Banco Republica, like with many others, I 
take it that there was a plan, an action plan, in place and 
there were interactions between people in Banco Republica and 
members of the FI Unit staff that addressed that concern and 
were working jointly towards that goal. It is also my 
understanding that at some point Banco Republica or one of its 
entities approached the Central Bank in connection with this 
procedure. That is what I have gathered from reading notes in 
the files. So at the end of the day, that consolidation never 
took place.
    Senator Levin. Did the Central Bank of Argentina know at 
the time that we are discussing that the Federal Bank was 
connected through common ownership to Banco Republica?
    Mr. Fedrigotti. It would have taken steps to----
    Senator Levin. No. Did it know?
    Mr. Fedrigotti. I don't know, Senator.
    Senator Levin. Well, it asked you, didn't it?
    Mr. Fedrigotti. It asked Citibank for evidence of 
ownership, correct.
    Senator Levin. And you told them that you had none in your 
files?
    Mr. Fedrigotti. We told them that we did not have evidence 
of ownership in our files.
    Senator Levin. And so presumably they didn't know or wanted 
to know when they wrote you that letter. But, in fact, Federal 
Bank did share common ownership with Banco Republica because 
they had common ownership, is that not correct?
    Mr. Fedrigotti. Senator, we had our own internal 
understanding of the relationship between the principals and 
the relationship between these entities. When that first letter 
was sent, we should have done more and we should have supplied 
the additional information that we had in our files reflecting 
that understanding that we had of that relationship.
    Then we noticed that while the letter was legally correct 
and accurate, it was incomplete from an internal policy 
standpoint, and that we should have supplied that information 
originally. When I became aware of that when I revisited the 
issue and I was made aware of the type of information and the 
nature of the working papers that we were dealing with, I made 
the decision to then supply that information.
    Senator Levin. You say that your letter was accurate but 
not complete, and I want to look at that request to you and 
your response to it. The request is Exhibit 32b.\1\ This is the 
way it reads, and this is from the Central Bank, which is the 
regulatory body.
---------------------------------------------------------------------------
    \1\ See page 2 of Exhibit No. 32 that appears in the Appendix on 
page 760.
---------------------------------------------------------------------------
    ``This is in reference to a proceeding to determine if 
there is any sort of economic link between financial entities 
subject to the control of this Superintendence and Federal Bank 
Limited, a company established on March 1992, under the laws of 
the Commonwealth of the Bahamas. . . .''
    ``By means of transfers from and to Federal Bank Limited, 
the Argentine financial entities receive and pay deposits of 
residents abroad. The transfers are made with debits and 
credits to the account of Federal Bank Limited in Citibank New 
York. . . .''
    ``In light of the importance of the aforementioned 
transfers,'' they are requesting ``all information that Branch 
may have about Federal Bank Limited, especially the identity of 
its shareholders.'' The superintending bank there is requesting 
all information that you may have about Federal Bank Limited, 
especially the identity of its shareholders. ``Likewise, we 
also request your intercession with the house in New York so 
your headquarters will provide the requested information.''
    Your response to them, which you said was accurate--and 
that is Exhibit 32d.\2\--says that, ``Pursuant to the request 
in your letter of April 20, 1999, this is to advise that our 
records contain no information that would enable us to 
determine the identity of the shareholders of the referenced 
bank.''
---------------------------------------------------------------------------
    \2\ See page 4 of Exhibit No. 32 that appears in the Appendix on 
page 760.
---------------------------------------------------------------------------
    Now, in fact, your records contained a lot of information 
showing common ownership, did it not?
    Mr. Fedrigotti. Yes, they did, sir.
    Senator Levin. So how can you say it is accurate to tell 
your regulatory body that your records contain ``no 
information'' that would enable you to determine the identity 
when you had so much information in your files very clearly 
showing the identity of the owners and showing that the 
identity was exactly the same as Banco Republica? How can you 
say that is accurate?
    Mr. Fedrigotti. Senator, the whole information in the files 
should have been provided at the original request. As I have 
been able to reconstruct events and discuss with the people who 
participated in the preparation of that response, they focused 
on the fact that we could not legally prove ownership, and 
therefore that was the nature of the response that was 
prepared.
    And in addition to that, they were then directing the 
Central Bank to New York where the account was, in fact, 
domiciled. The information for an account domiciled in New York 
would rest in the files pertaining to that account, so the 
Central Bank was directed to that location.
    Nevertheless, while that was the interpretation of those 
who worked in preparing that response, upon the second instance 
when I was fully involved and understood the nature, then 
looked back at the original request, understood the nature of 
the informal internal information, it was my decision that that 
information should be provided to the Central Bank in that form 
so that then they could themselves reach their own conclusions 
as to the relationship between these entities.
    Senator Levin. Now, the money laundering case that we were 
looking at related to a deposit of bribe money in Federal Bank, 
which is an offshore bank which is licensed by one of the 
Caribbean islands, is that correct?
    Mr. Fedrigotti. Senator----
    Senator Levin. Have you read our report?
    Mr. Fedrigotti. Yes, I have.
    Senator Levin. OK, and you are aware of the fact, then, 
that the specific money laundering issue that we were looking 
at relative to the offshore bank called Federal Bank, which was 
owned by the same folks that owned Banco Republica, was some 
money which we believe was identified indeed as bribe money 
that was deposited in Federal Bank. Is that correct?
    Mr. Fedrigotti. I am aware of that.
    Senator Levin. All right.
    Mr. Fedrigotti. Senator, you did say that that money was 
identified as bribe money. I am not aware of that, but I am 
aware of the concern or the investigation surrounding that.
    Senator Levin. All right, and the allegation----
    Mr. Fedrigotti. Exactly.
    Senator Levin [continuing]. Which I believe was 
acknowledged, as a matter of fact, at some point. But without 
getting into that, nonetheless you were aware of the fact that 
that, at least in your eyes, was suspected?
    Mr. Fedrigotti. There is controversy around that, correct.
    Senator Levin. OK. Now, I just want to go back again to see 
if I can understand really what the motivation is here now 
because your bank is a partner, is it not, with the same people 
who own Banco Republica and Federal Bank? Is that correct?
    Mr. Fedrigotti. Senator, the way we work internally in the 
bank is that in the branch, in Citibank Argentina, we manage 
the relationship with Banco Republica and the bank affiliates. 
There is a separate unit in the bank that manages the 
relationship with the Grupo Moneta in connection with the 
investment in CEI, where indeed the Grupo Moneta is co-
investors with Citibank in that group.
    Senator Levin. My question is that Citibank in Argentina is 
a partner with Grupo Moneta in another entity, is that correct?
    Mr. Fedrigotti. In CEI.
    Senator Levin. In CEI?
    Mr. Fedrigotti. Correct.
    Senator Levin. And that partner of yours, Grupo Moneta, 
owns both Banco Republica and Federal Bank, is that correct?
    Mr. Fedrigotti. They are part of the same economic group.
    Senator Levin. And that information was in your files when 
it was requested by your regulatory body that there was common 
ownership of Banco Republica and Federal Bank by Grupo Moneta. 
Is that correct?
    Mr. Fedrigotti. They asked for evidence of ownership 
between these entities.
    Senator Levin. And you had it in your file?
    Mr. Fedrigotti. I already described the nature of the 
information.
    Senator Levin. Let me show you the exhibits which were in 
your file so that we just cut right to the chase. If we could 
look at Exhibit 25 \1\ which was in your file at the time, if 
you look at the owner's name, it says ``owner''--literally, in 
your file you have a document that says ``owner name.'' Raul 
Moneta, 33 percent; Benito Lucini, 33 percent; Monfina, 33 
percent; and another gentleman, 1 percent. In your file that is 
the way it is described, and then it shows that Grupo 
Republica, which is the same as Grupo Moneta, owns Banco 
Republica and Federal Bank.
---------------------------------------------------------------------------
    \1\ See page 2 of Exhibit No. 25 that appears in the Appendix on 
page 749.
---------------------------------------------------------------------------
    If you look at the furthest box on the left--it is the box 
under Grupo Republica or Grupo Moneta--it says ``Federal Bank 
Offshore.'' So in your file, you have a document showing the 
owners and showing that they, in fact, own what amounts to 
Grupo Moneta, renamed, and that that group owns common 
ownership of Banco Republica and Federal Bank Offshore.
    Now, I am trying to figure out why, when asked--and maybe 
we can find out from one of the other gentlemen here--why, when 
asked by your regulator--now, this is our bank; this is a U.S. 
bank. I want everyone to be real clear about this. We are 
looking at a U.S. bank.
    Why a U.S. bank, when asked by a regulator if there is 
anything in their file which might be information relative to 
the owners of a group, because they are looking to see--and you 
know it--whether or not there are any links between Banco 
Republica and Federal Bank--you then write a letter which is 
false. Your bank wrote a letter which is false.
    You can say here that it was accurate. It is not accurate. 
There is no way that any fair reading of your letter, which 
says ``This is to advise that our records contain no 
information that would enable us to determine the identity of 
the shareholders of the referenced bank''--there is no way that 
that can be described as anything other than false. The word 
``owner'' is right in your files, ``owner name.''
    I am trying to determine--and I think maybe we will have to 
just let this go for the moment--but as to why an American bank 
would write a regulator a letter like that, and as to whether 
or not it has any relationship to the fact that our bank, our 
U.S. bank, was a partner with Grupo Moneta in that CEI holding 
company.
    Now, I don't understand why that would provide a 
motivation, but I am trying to figure out how it is possible 
that anybody could actually look at that document and say to 
themselves that is not legal proof. They didn't ask for legal 
proof. They said is there anything in your file, anything which 
shows economic links, and they tell you they are interested. It 
is a proceeding to determine if there is any sort of economic 
link between financial entities. They are looking for that 
link.
    This superintendent, your regulator, requests ``all 
information'' that you may have--all information; it doesn't 
say legally provable beyond a reasonable doubt. It says all 
information that you may have about that entity and about its 
owners. And you consciously reach a conclusion--you look at 
those documents, apparently, and decide that that didn't 
constitute legal proof. Somebody actually looked at those 
documents, then, and said that is not legal proof, that is not 
what they are after.
    I can't buy it. I don't buy it. I am sorry. I don't know 
what the motive is. I don't know that yet. We may never know 
it. Maybe down in Argentina it could be determined, but I just 
can't buy it.
    I don't know if you are aware of the fact that Mr. Moneta 
to this day denies ownership of Federal Bank, to this day, at 
least according to press reports.
    Now, why would he be denying? Do you have any idea why 
would Mr. Moneta be denying ownership of that bank? Can you 
help us on that? And I will give you a chance to respond to my 
comments, also, and then my turn is up here for the time being.
    Mr. Fedrigotti. Senator, I do not know why Mr. Moneta would 
be denying that ownership. I have no way. In connection with 
your comments and, yes, the nature of the documents that you 
are pointing out which are working papers which reflect the 
work that was being done in analyzing the group as a whole as 
part of the routine work that is done in the bank, it was the 
interpretation of general counsel who prepared that letter that 
that was the appropriate response and that it is legally 
correct and it did not violate Argentine laws or regulations, 
but----
    Senator Levin. Excuse me for interrupting. The question 
here is whether or not our U.S. bank responded the way we 
expect our banks to respond, which is honestly, to a request of 
a regulator. Now, this isn't a legal question. This is a 
question of whether our bank has responded honestly to a 
regulator, and there is no way that I think I can figure out 
any interpretation which would say that that is an honest 
response to a regulatory body.
    So I interrupted you, but keep going.
    Mr. Fedrigotti. Senator, we should have done more. We 
should have provided that information in the first instance. 
When I reviewed this matter when I became involved, when I 
realized that there was an inconsistency with our policy of 
full openness and cooperation with the regulatory body, I took 
the decision to provide this information to the Central Bank.
    Senator Levin. Let me ask you and Mr. Lopez a final 
question on this element, if I can ask the indulgence of our 
Chair.
    Mr. Lopez, do you know, or, Mr. Fedrigotti, do you know 
whether or not there was any contact between Mr. Moneta and 
Citibank relative to the response, or Grupo Moneta or their 
agents, with Citibank relative to how that letter would be 
responded to? Can you tell us?
    Mr. Lopez. Not to me.
    Senator Levin. You don't know of any contact with Grupo 
Moneta?
    Mr. Lopez. No.
    Senator Levin. Mr. Fedrigotti?
    Mr. Fedrigotti. I was never contacted by anyone in this 
respect.
    Senator Levin. Thank you.
    Senator Collins. Mr. Bermudez, you mentioned in your 
testimony the importance of banks and law enforcement officials 
working together to prevent money laundering. You also said 
that you welcomed leads from not only the media but law 
enforcement officials about any suspicious activity.
    In view of that statement, I want to talk to you about 
seizure warrants which Citibank received in May 1998 for $7.7 
million in M.A. Bank's correspondent account and $3.9 million 
in another M.A. account. These seizure warrants made very clear 
references to the United States anti-money laundering laws, and 
so it seems to me that was a clear lead from law enforcement 
that there was suspicious activity involving M.A. Bank.
    Could you explain to the Subcommittee why Citibank waited a 
year-and-a-half after receiving these seizure warrants before 
launching a full-scale investigation of Citibank's relationship 
with M.A. Bank?
    Mr. Bermudez. Senator Collins, one of the issues that we 
have with this particular example is that there was a breakdown 
in our communications internally. It is an embarrassment, it is 
something that we have since corrected. But the reality is that 
when the warrant came into the bank, it was reviewed, it was 
analyzed. We took the action of submitting the funds to the 
U.S. Customs, as I was directed.
    But, unfortunately, there was a breakdown in the 
communication between our New York unit that received the 
warrant and our business unit in Argentina which should have 
taken further action at the time. We have since, however, 
corrected our internal processes so that this kind of situation 
does not occur again.
    We have created a centralized unit in New York that 
receives all seizure warrants, all subpoenas that come in, so 
that they can be logged into a centralized database. Those that 
are of a suspicious nature are then sent to our Anti-Money 
Laundering Unit in Tampa for further processing. It is that 
Unit's responsibility then to submit those to the compliance 
officers, anti-money laundering compliance officers that we 
have in-country, and the relationship manager or business 
manager in that country for further action.
    We feel that given what happened to us and the lesson that 
we have learned out of that particular situation, we have now 
created a process that is extremely robust and should allow us 
to not have a repeat of that embarrassing situation, but it was 
an embarrassment.
    Senator Collins. So you would certainly agree that those 
seizure warrants should have triggered a full review of 
Citibank's relationship with M.A. Bank, and you have now 
changed your procedures so that kind of review would 
automatically be triggered. Is that fair?
    Mr. Bermudez. That is correct. That is exactly what has 
happened at this point.
    Senator Collins. Mr. Lopez, I am puzzled how M.A. Bank came 
to be a correspondent customer of Citibank. Could you please 
describe for us the ``know your customer'' efforts that you 
made before you recommended opening M.A. Bank's correspondent 
accounts?
    Mr. Lopez. Well, this account was opened many years ago, 
and at that time Mercado Abierto was, and thereafter was, a 
very important security and brokerage house in Argentina. So 
the people that took the decision to open that account--I never 
managed that account personally--measured that account against 
our target market and measured that relationship against our 
target market to try to operate with the top people in the 
country.
    They also made a review of who are the owners. The owners 
are people who have a reputation in Argentina. And they didn't 
open the account with M.A. Bank immediately. This account was--
or this relationship started years ago and they opened the 
correspondent banking account when the customer was dealing 
with other products in the bank and knew very well the 
customers. It was not the first day that the customer arrived 
to the bank.
    Senator Collins. Let me ask you a very specific question.
    Mr. Lopez. Yes.
    Senator Collins. Did you yourself, or did you direct 
another Citibank employee to review M.A. Bank's written anti-
money laundering procedures before opening the account?
    Mr. Lopez. The account was opened in the early 1990's, and 
I think at that time we were not so strict in looking for that. 
Thereafter we looked at those procedures and it seems to be in 
line with----
    Senator Collins. But at the time, did anyone from Citibank 
review M.A. Bank's anti----
    Mr. Lopez. I was not there. I was not the one opening it, 
so I cannot--but during my management of the unit, yes, they 
reviewed it.
    Senator Collins. I am sorry. Would you repeat the last----
    Mr. Lopez. During my management of the unit that started in 
1987, I think that, yes, they reviewed all the policies. They 
talked about the policy with the customer, and it seems to be 
correct.
    Senator Collins. That was many years after the account was 
opened?
    Mr. Lopez. Yes. I don't have information before my----
    Senator Collins. Mr. Fedrigotti, could I have you turn your 
attention to Exhibit 19? \1\ I want you to take a look at this. 
It appears to be a withdrawal form that is used by M.A. Bank. 
Have you found it in the exhibit book?
---------------------------------------------------------------------------
    \1\ See Exhibit No. 19 that appears in the Appendix on page 731.
---------------------------------------------------------------------------
    Mr. Fedrigotti. I am looking at it.
    Senator Collins. I have to say this isn't like any 
withdrawal form that I have ever seen--or actually I think it 
is a deposit form because it says that ``We have received 
today.'' There is no letterhead stating the name and the 
address of the bank.
    You have been in banking for a very long time, for some 24 
years. Does this appear to be the kind of form that a bank 
should be using for deposits?
    Mr. Fedrigotti. Is this a deposit form? [Laughter.]
    Senator Collins. It is. I think your question answers my 
question. Does it trouble you that one of Citibank's 
correspondent banks was using a form that had this little 
information on it?
    Mr. Fedrigotti. Senator, if this is all there is--I don't 
know what other information they would gather. On the basis of 
simply this form, I have to agree with your inference.
    Senator Collins. When you stepped in as President of 
Citibank Argentina, did you conduct a review or see that a 
review was conducted of existing correspondent accounts to make 
sure that you were dealing with banks and clients that Citibank 
would want to be dealing with?
    Mr. Fedrigotti. Yes, Senator. This area of activity has 
always been the focus of attention both from a credit 
standpoint as well as from the fact that there might be risks 
related to money laundering that we would not be willing to 
accept or to take.
    So the unit constantly focused on trimming down, narrowing 
the target market, and working only with those people who the 
unit deemed to be of impeccable track record and a good 
reputation. That is the essence of understanding who you are 
dealing with and feeling comfortable with the fact that they 
have policies and procedures that enable them to manage their 
own bank the way we manage ours.
    Senator Collins. Mr. Bermudez, Citibank has maintained that 
it now has corrected a lot of the problems that clearly have 
been embarrassing for the bank and have been difficult for the 
bank to deal with. I want to show you an E-mail that is from 
Citibank Argentina's relationship manager for M.A. Bank, and it 
is Exhibit 20 \1\ and it is the latter part of that exhibit.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 20 that appears in the Appendix on page 732.
---------------------------------------------------------------------------
    What troubles me about this E-mail is that it was sent just 
a little over a year ago. In this E-mail, Citibank Argentina's 
relationship manager for M.A. Bank inquired about how 
Citibank's anti-money laundering procedures were being 
implemented, and in part she says, ``What procedures does 
Citibank New York have for control of AML? Are these controls 
being implemented? Is the AML Unit in Tampa in charge of doing 
it, or each division in New York?''
    I am troubled by this because if Citibank is doing a good 
job on training its employees to be sensitive to money 
laundering, shouldn't the relationship manager for M.A. Bank 
have known the answers to these questions?
    Mr. Bermudez. I would agree with you, Senator Collins, that 
the relationship manager at the time should been aware of what 
that Anti-Money Laundering Unit in Tampa does and performs. It 
is a unit that was in place at the time and it is a unit that 
is staffed with over 50 people, 14 of which are just assigned 
to the volume through our funds transfer networks. And they 
have the analysts necessary to conduct the type of reviews of 
the flows that should highlight any kind of suspicious or 
incorrect type of volumes that go through it.
    There was a confusion here. The relationship manager should 
have understood that that took place in Tampa because at that 
time we already did have the unit operating. I don't know the 
exact situation; I don't know the individual who sent this. We 
do spend an incredible amount of time and effort in educating 
all of our business managers, all of our relationship managers, 
in the anti-money laundering process. This is an ongoing review 
that we have, ongoing seminars that we have at local, regional, 
and on a global basis.
    And why this particular individual might have been 
confused, I don't know the reason, but I can assure you that 
the education that we bring to our relationship managers is 
very real and it is constant. It is not just a one time 
introduction when they enter the bank; it is actually refreshed 
on an annual basis in every country.
    Senator Collins. I have no doubt that Citibank has made a 
genuine effort to beef up its compliance units, as well as its 
training and education. But that E-mail from a key person 
suggests to me that there is still considerable work to be done 
because it is so recent; it is the end of 1999.
    Mr. Bermudez. If I may--and this is a conjecture in some 
ways, but what may have happened here is a confusion that we do 
have and did have at the time a servicing unit for 
correspondent banking in New York. And there may have been 
confusion whether that service unit in New York was also 
conducting AML practices as part of the services that they did. 
They do not. They refer everything to Tampa, and I am just 
assuming, reading this, that that may have been the confusion 
that this relationship manager may have had.
    Senator Collins. Let me ask you one final question, and I 
want to refer to Exhibit 23.\1\ This is an exhibit that Senator 
Levin referred to with our previous panel and it is a pattern 
of wire transfers. Each of the experts on our previous panel 
said that while you couldn't conclude necessarily that these 
wire transfers were indicative of money laundering that they 
certainly were suspicious, that the pattern is such that it 
would warrant a thorough review.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 23 that appears in the Appendix on page 742.
---------------------------------------------------------------------------
    Under the current procedures that Citibank has in place, 
would this pattern of wire transfers trigger an in-depth 
review?
    Mr. Bermudez. Looking at this, I would say that--and given 
the type of bank and the size of bank that Banco Republica was, 
this would not necessarily trigger a review for suspicious 
action. And the reason for that is that, again, many 
institutions, many banks, I believe, in Argentina and other 
locations use offshores as a means of managing their liquidity, 
and this could be very valid liquidity management between a 
treasurer of a bank onshore with its offshore vehicle, 
transferring liquidity back and forth. And that doesn't 
necessarily trigger a suspicious action, but the one thing 
that----
    Senator Collins. But you don't know that.
    Mr. Bermudez. No, I know that, but the one thing----
    Senator Collins. So why wouldn't it trigger you to ask 
questions? There may be a legitimate explanation, but there is 
also a very real possibility that this suggests money 
laundering. So I am troubled by your answer.
    Mr. Bermudez. Absolutely, and the one thing that I was 
going to mention that causes me in reviewing this to maybe 
alert us that we should look into it is the fact that they are 
going through an intermediary here.
    Senator Collins. Exactly. They are not directly 
transferring the funds.
    Mr. Bermudez. Exactly, which is why it may very well 
trigger that, but I was trying to highlight to you that the 
flows are not the ones that may necessarily trigger the 
analysis of this, but it is the fact that it does appear to go 
through an intermediary which would be the one that would 
highlight some action on this.
    I haven't been clear?
    Senator Collins. Well, the problem is that your first 
answer was, no, that it wouldn't trigger a review, and then 
after we----
    Mr. Bermudez. Based on simply the flows.
    Senator Collins. But I have shown you very specific wire 
transfers that are large amounts of money over a 6-week period 
where in each case the bank is going through an intermediary 
rather than transferring the money directly, and it seems to me 
that should be a red flag. There may be a reasonable, 
legitimate explanation, but if this isn't an automatic red 
flag, I don't know what is.
    Mr. Bermudez. I am sorry. In my response, I was referring 
initially to the flows and I then added on that the one thing 
that would raise a flag here is the fact that it is going 
through an intermediary. If these are credits that are going 
through this particular intermediary, then that should be a 
reason for review.
    Senator Collins. Senator Levin.
    Senator Levin. Just on that last point, you said three 
different things--``not necessarily,'' ``maybe''' and ``would'' 
because of the intermediary. And we are talking here about 
triggering a review or not. I just want to ask you a simple 
question, which I hope is a simple question.
    Shouldn't it trigger a review, given the intermediary?
    Mr. Bermudez. Given the intermediary, yes.
    Senator Levin. Does your mechanism at your bank trigger a 
review?
    Mr. Bermudez. It should.
    Senator Levin. Does it?
    Mr. Bermudez. I would hope so. I mean, you are asking me a 
question that I would like----
    Senator Levin. You are familiar with your bank mechanisms, 
aren't you?
    Mr. Bermudez. Absolutely.
    Senator Levin. Does it or doesn't it trigger a review? If 
you don't know, you can just say you don't know.
    Mr. Bermudez. I have to assume that it does, but it would 
be up to the analysts looking at this particular situation.
    Senator Levin. They wouldn't even see it, would they, 
unless it was triggered automatically?
    Mr. Bermudez. Oh, no. They would see this.
    Senator Levin. So it would be pulled out?
    Mr. Bermudez. Yes, it would.
    Senator Levin. All right, so at least you know that this 
flow would trigger an analysis by somebody under your 
methodology, is that correct?
    Mr. Bermudez. It should, yes.
    Senator Levin. Did it?
    Mr. Bermudez. Not at this time.
    Senator Levin. All right.
    Mr. Bermudez. This is back in, as I see here, 1996.
    Senator Levin. Correct.
    Back to the Federal Bank. Mr. Lopez, I want to ask you one 
question about that. You told our staff that when you heard 
about the request from the Central Bank for information on the 
ownership of the Federal Bank, you thought that the Central 
Bank of Argentina was ``playing games.'' What did you mean by 
that? Why would the Central Bank, the regulatory body down 
there, be playing games?
    Mr. Lopez. Senator Levin, in my opening statement I wanted 
to clarify that that was a bad expression that I----
    Senator Levin. That was a what?
    Mr. Lopez. It was a bad expression. It was not an 
expression that I should have used in that interview. What I 
meant there was that in my understanding there were a lot of--
Banco Republica had an action plan to change Federal Bank and 
to open a new vehicle, called Republica Bank in the Caymans, 
and also that the people that were working with Banco Republica 
were people that have experience in the market. So my 
understanding was that the Central Bank had the knowledge of 
the relationship, and what they were looking for was legal 
proof.
    Senator Levin. Let me ask you a question, Mr. Fedrigotti, 
that follows on the request that I made of you about whether 
there was any conversation between Citibank and Grupo Moneta 
relative to the response to the request from the Central Bank 
for information in your files, and you said that there was no 
conversation.
    Was there any conversation between you or your bank with 
anyone at Citibank New York about that response?
    Mr. Fedrigotti. Senator, not that I can recall, but could 
you be precise as to the point in time you are asking, between 
the time----
    Senator Levin. Before you responded.
    Mr. Fedrigotti. No conversations with New York on this 
subject, not personally.
    Senator Levin. Can we agree, Mr. Lopez, that, in fact, the 
Federal Bank and Banco Republica had no anti-money laundering 
program that you said in your records that they did have?
    Mr. Lopez. We checked with them and they said they were 
complying with the rules of Central Bank in that respect. What 
happened there is that then I realized when I saw the 
confidential report from the Central Bank during the interview 
with your staff that that was not true.
    Senator Levin. You agree that they lied to you?
    Mr. Lopez. Yes.
    Senator Levin. If we could put Exhibit 37 \1\ up there, 
this is a memo, Mr. Lopez, where you describe the purpose of 
Federal Bank and you say here that the purpose is to channel 
the private banking customers of Banco Republica, to which they 
provide back-to-backs and the vehicle outside Argentina, where 
they can channel their savings which are then re-placed in 
Banco Republica by the Federal Bank, which then constitutes one 
of the bank's most stable sources of funding.
---------------------------------------------------------------------------
    \1\ See Exhibit No. 37 that appears in the Appendix on page 805.
---------------------------------------------------------------------------
    Now, wasn't Banco Republica at that time under a 
restriction by your Central Bank as to both what it could own 
and what it could lend to certain groups?
    Mr. Lopez. I was not aware of that restriction.
    Senator Levin. All right. The purpose, then, according to 
your memo here is to say that liquid assets that Banco 
Republica wanted went from Banco Republica to Federal Bank 
offshore and then came right back to Banco Republica. And I 
don't understand what the legitimate business rationale is for 
that movement of money.
    Can you explain that to us?
    Mr. Lopez. The customers of Federal Bank deposit their 
money in Federal Bank, and the risk of that customer is in 
Federal Bank's balance sheet and there is no Argentine risk 
because Federal Bank is outside the borders of Argentina. Then 
what Federal Bank does with the money, they deposit in Banco 
Republica, is nothing that the customer decides to do in that. 
It is Federal Bank that is deciding, and Federal Bank must 
respond with their own net worth to the customer in that case.
    Senator Levin. I am trying to figure out what legitimate 
business purpose there would be for Banco Republica to take its 
deposits, send them to Federal Bank and then have them 
immediately come right back to Banco Republica.
    You say in your analysis of the bank that that is one of 
its purposes. ``The existence of this vehicle is justified in 
the group's strategy because of the purpose it serves.'' Can 
you give me a legitimate business purpose for that strategy?
    Mr. Lopez. Yes. The explanation is that some customers of 
Banco Republica want to have their deposits outside Argentina.
    Senator Levin. But it comes right back to Banco Republica.
    Mr. Lopez. OK, but Federal Bank deposits the money, not the 
customers, and even if----
    Senator Levin. It is their money.
    Mr. Lopez. OK, but----
    Senator Levin. You don't say it is Federal Bank. The 
depositor in Banco Republica--that money immediately goes to 
Federal Bank and immediately comes right back to Banco 
Republica. What is the legitimate purpose in that?
    Mr. Lopez. I am talking about Federal Bank depositing their 
own money.
    Senator Levin. No. I am talking about your words, ``to 
channel the private banking customers of Banco Republica, to 
which they provide back-to-backs and a vehicle outside 
Argentina where they can channel their savings''--that is the 
depositors--``which are then re-placed in Banco Republica.'' So 
the depositors' money ends up in Banco Republica. It goes 
outside and then comes back in almost instantaneously.
    Can you give us the legitimate business purpose for that?
    Mr. Lopez. I am saying that Federal Bank placed money in 
Banco Republica. Then even if some of the depositors have a 
diversified portfolio of investment in Federal Bank and want to 
place some of this in Banco Republica, I see nothing strange in 
that.
    Senator Levin. I do, but let me go to Mr. Bermudez quickly 
on a letter that we received from your counsel, Jane Sherburne, 
who describes the benefits and operations of offshore shell 
banks, and this is Exhibit 21.\1\ ``Offshore entities that are 
primarily booking entities requiring minimal personnel or 
physical operations often are managed from a location that is 
closer to the jurisdiction of the parent institution than the 
offshore jurisdiction. Your staff have indicated skepticism 
about the legitimacy of such `back offices' and inquired about 
the kinds of activity in which one might expect them to engage. 
Indeed, there seems to be some sense that a test of legitimacy 
might be whether a back office has the capacity to print and 
mail statements. The need to print and mail statements will 
depend on the customer base of the off-shore and the nature of 
the business, and may defeat the purposes of offshore banking--
confidentiality and tax planning.''
---------------------------------------------------------------------------
    \1\ See page 3 of Exhibit No. 21 that appears in the Appendix on 
page 734.
---------------------------------------------------------------------------
    And this is the line I am intrigued by: ``Mailing 
statements for activity in the private bank account of a 
customer, for example, risks breaches in the confidentiality as 
well as triggering a taxable event.'' Now, I am really 
surprised by that sentence, that mailing a statement would 
trigger a taxable event.
    Mr. Bermudez, this is to you. How does the presence or 
absence of a bank statement trigger a taxable event? Don't you 
owe the tax even though you conceal it?
    Mr. Bermudez. I think that would depend on where the source 
of the revenue, the income was coming from for that particular 
investment and the tax laws of a given country.
    Senator Levin. So that you might not owe the tax, and 
having a statement about an account might subject you to a tax 
you don't owe?
    Mr. Bermudez. The statement itself should not trigger a 
taxable event.
    Senator Levin. That is just what I said. It is the opposite 
of what your counsel says. Your counsel writes this 
Subcommittee that the statement may trigger a taxable event.
    Mr. Fedrigotti. Senator, may I give it my own try, attempt, 
at interpreting this. I believe that if someone were to provide 
a service such as mailing statements, that would be a business 
activity that would generate--should generate revenues and thus 
a taxable event. That is my interpretation of this line.
    Senator Levin. We are going to have to ask the counsel to 
explain that statement because other counsel that we have 
talked to says there is absolutely no basis for that statement 
whatsoever. So we will give her an opportunity--she is not 
here, I don't believe--to respond to that.
    On the M.A. Bank issue--and this goes to the seizure of the 
account at Citibank, and the Chairman has referred to this--in 
your testimony, Mr. Lopez, you stated to us that the Minority 
staff report asserts that Citibank permitted M.A. Bank to 
engage in highly suspicious activity for more than a year-and-
a-half after assets in its account were seized for illegal 
activity, and that is simply not true. This morning, you have 
modified that, is that correct?
    Mr. Lopez. Yes.
    Senator Levin. You agree that that should have triggered--
--
    Mr. Lopez. It should trigger, yes.
    Senator Levin. Now, these are some of the other things that 
happened. In addition to the seizure of that asset that should 
have triggered an investigation by Citibank, these are some of 
the other events that occurred that didn't trigger anything.
    Exhibit 22a.\1\ This is a memo from an investigator at 
Citibank's Anti-Money Laundering Unit in Tampa. ``According to 
an article taken from the Miami Herald dated March 1, 2000, 
Alejandro Ducler, a former vice minister of finance for 
Argentina, allegedly transferred $1.8 million in drug cartel 
proceeds. Ducler is one of the owners of the Argentine 
financial holding group known as Mercado Abierto, which owns 
M.A. Casa de Cambio. . . . All four held accounts with 
Citibank. The FTN Team of the AML Unit has reviewed the 
transfers. . . . After reviewing the funds transfer activity . 
. . from April 1997 through March 2000, a total of $84 million 
were transferred to the entities mentioned below. The 
consecutive whole dollar amounts transferred and the nature of 
the business contributed to the rise in suspicion and ongoing 
monitoring.''
---------------------------------------------------------------------------
    \1\ See page 1 of Exhibit No. 22 that appears in the Appendix on 
page 740.
---------------------------------------------------------------------------
    So you got that memo. They had identified, the anti-money 
laundering unit, $84 million in suspicious transactions that 
moved through the accounts of the four M.A.-related entities. 
When we looked at the records associated with that 
investigation, over $22 million of those suspicious funds 
involved transactions that went through the M.A. Bank, and they 
occurred in 1999, after the seizure warrant had been issued.
    We also have learned that Citibank did file a suspicious 
activity report on the entire $84 million worth of 
transactions. Is that correct? Anyone can answer.
    Mr. Bermudez. That is correct. But, Senator, if I may just 
add something, the Tampa investigator has told the staff that 
this figure was not correct.
    Senator Levin. The $22 million?
    Mr. Bermudez. The $84 million.
    Senator Levin. All right, but it is correct that $22 
million came after the seizure of those assets. Is that 
correct?
    Mr. Bermudez. Could you----
    Senator Levin. That the $22 million came after the seizure 
of the assets.
    Mr. Bermudez. I am not aware. I am sorry.
    Senator Levin. All right.
    Mr. Bermudez. That information I don't have.
    Senator Levin. By the way, would you ask your Tampa 
investigator to, for the record, let this Subcommittee know why 
it is incorrect, if it is, because he or she never told us that 
it was incorrect?
    Mr. Bermudez. Yes.
    Senator Levin. A lot of signals, and I want to go into 
those signals, after the seizure, between May 1998 and March 
1999, which should have revealed the fact that the seizure was 
related to money laundering and drug trafficking. As you have 
acknowledged to our Chairman, that should have been known just 
by the seizure warrent itself. It cited a number of statutes 
that the assets were being seized under, and two of those 
statutes were money laundering statutes.
    Here are some additional red flags: The press gave 
widespread attention to the indictments and warrants that were 
served on numerous U.S. and foreign banks as a result of 
Operation Casablanca, which was the drug laundering undercover 
effort. Citibank was identified as a recipient of some 
warrants, so Citibank didn't follow up on that.
    In June 1998, M.A. Bank wrote to Citibank and asked that 
Citibank ``furnish us a report on the origin, cause, and 
authority acting on the attachment order received.'' So you got 
from your customer a request, what is the authority for that 
attachment order, and asked you to provide them with a copy of 
documentary evidence attesting to the existence of such 
judicial order and of the transfers or other actions taken by 
you as a consequence.
    You can find no communication that even responded to M.A. 
Bank's inquiry. The preparation of a response to that bank 
would likely have informed Citibank that the seizure warrant 
was related to money laundering. Nothing there, silence, blank.
    The Customs Service subpoenaed records of another M.A. 
account for the same drug money laundering matter, and Citibank 
prepared a chronology of the incident that shows that Citibank 
officials in Argentina met with or communicated with M.A. Bank 
officials at least six times about this matter between May 1998 
and March 1999. M.A. Bank told you they were hiring a lawyer in 
the United States. They told you Customs would likely subpoena 
the records of the M.A. Bank account. They told you they were 
going to meet with the Customs Service in Argentina.
    You instructed, according to the conversation with our 
staff, that your relationship manager should find out from M.A. 
Bank what the situation was about, but M.A. Bank never told her 
what was going on. Another red flag. M.A. Bank did not tell 
your own relationship manager. So then it became clear that the 
Customs Service was investigating the matter, and still no 
request or demand to your client to tell you what this was all 
about.
    So we have all of these red flags, in addition to the 
seizure of the funds, and it seems to me that this is a lot 
more negligent, at best, than just simply failing to respond to 
a seizure order. I mean, you have public notices, you have 
meetings with your client demanding explanations, you have 
conversations with Customs officials. There are all kinds of 
bells going off in the public press and with your staff, and 
yet nothing in terms of your anti-money laundering efforts with 
this client.
    So I would hope as you go through your anti-money 
laundering efforts and procedures that you would not only look 
at the failure to respond, to even know what is in a seizure 
order that is served upon you, but that you instruct or require 
your staff folks who have all this information to transmit it 
to your anti-money laundering efforts. I mean, this is one 
failure after another. It is just not a failure; it is one 
failure after another relative to those funds of M.A. Bank.
    So I will leave it at that. I know we have reached a time 
when the hearing is supposed to end. I do have a short closing 
statement that I would like to make, if that is all right, 
Madam Chairman.
    Senator Collins. Why don't you proceed with your closing 
statement, Senator Levin? We do need to adjourn very shortly, 
however.
    Senator Levin. These 2 days of hearings have confirmed what 
the Subcommittee's investigation revealed, that U.S. 
correspondent banking provides a significant gateway for rogue 
foreign banks and their criminal clients to carry on money 
laundering and other criminal activity in the United States and 
to benefit from the protections afforded by the safety and 
soundness of the U.S. banking industry.
    This investigation's findings have been confirmed in these 
hearings that shell banks, offshore banks, and banks in 
jurisdictions with weak anti-money laundering controls carry 
high money laundering risks, and they use their correspondent 
banking accounts to conduct their banking operations.
    Next, U.S. banks have routinely established correspondent 
relationships with these high-risk foreign banks because many 
U.S. banks don't have adequate anti-money laundering safeguards 
in place to screen and monitor such banks. This problem is 
longstanding, widespread and ongoing.
    Next, U.S. banks are often unaware of legal actions related 
to money laundering, fraud, and drug trafficking that involve 
their current or prospective respondent banks.
    Next, U.S. banks have particularly inadequate anti-money 
laundering safeguards when a correspondent relationship does 
not involve credit-related services.
    Next, high-risk foreign banks that may be denied their own 
correspondent accounts at U.S. banks can obtain the same access 
to the U.S. financial system by opening correspondent accounts 
at foreign banks that already have a U.S. bank account. U.S. 
banks have largely ignored or failed to address the money 
laundering risks associated with nested correspondent banking.
    In the last 2 years some banks in the U.S. have begun to 
show concern about the vulnerability of their correspondent 
banking to money laundering and are taking steps to reduce the 
money laundering risks. But the steps are slow, incomplete, and 
they are not industry-wide.
    If U.S. correspondent banks were to close their doors to 
rogue foreign banks and to adequately screen and monitor high-
risk foreign banks, the United States would reap significant 
benefits. By eliminating a major money laundering mechanism 
which frustrates ongoing efforts to look into criminal 
activity, we would reduce illicit income that fuels offshore 
banking and we would deny criminals the ability to deposit 
illicit proceeds in U.S. banks with impunity and profit from 
the safety, soundness and investments that are made possible 
and available to them in the U.S. banking and financial system.
    Next Tuesday, we are going to discuss with the Department 
of Justice and the Department of the Treasury ways to close the 
door to these money laundering opportunities.
    I again want to thank our Chairman for having these 
hearings. I think they have been extremely helpful. I want to 
thank our witnesses today, and look forward to their supplying 
us with additional information, as they have committed to do.
    Senator Collins. Thank you, Senator Levin.
    Our current witnesses are now excused. I want to thank all 
of our witnesses for their participation today.
    The Subcommittee stands in recess until Tuesday, March 6, 
at 9:30 a.m., when we will reconvene in room 342 of the Dirksen 
Senate Office Building.
    [Whereupon, at 12:38 p.m., the Subcommittee was adjourned.]


  ROLE OF U.S CORRESPONDENT BANKING IN INTERNATIONAL MONEY LAUNDERING

                              ----------                              


                         TUESDAY, MARCH 6, 2001

                                       U.S. Senate,
                Permanent Subcommittee on Investigations,  
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10:04 a.m., in 
Room SD-342, Dirksen Senate Office Building, Hon. Susan M. 
Collins, Chairman of the Subcommittee, presiding.
    Present: Senators Collins and Levin.
    Staff Present: Christopher A. Ford, Chief Counsel and Staff 
Director; Mary D. Robertson, Chief Clerk; Rena Johnson, Deputy 
Chief Counsel; Eileen Fisher, Investigator; Claire Barnard, 
Detailee/HHS; Elise Bean, Democratic Deputy Chief Counsel; Bob 
Roach, Democratic Counsel; Laura Stuber, Democratic Counsel; 
Jamie Burnett (Senator Gregg); and Bob Westbrooks (Senator 
Akaka).

              OPENING STATEMENT OF SENATOR COLLINS

    Senator Collins. The Subcommittee will come to order.
    This morning, the Subcommittee concludes its examination of 
the vulnerabilities of correspondent banking to international 
money laundering activities. As we have seen, correspondent 
accounts allow banks to have a presence in jurisdictions in 
which they do not have a branch or other physical presence, as 
well as to offer services that they themselves may have too few 
resources to provide. For these reasons, foreign banks that 
have correspondent accounts with U.S. banks possess a powerful 
means of attracting customers.
    Last week, the Subcommittee heard troubling testimony from 
a convicted criminal who has seen the role of correspondent 
banking in money laundering ``from the inside.'' He testified 
about the crucial importance of correspondent banking 
relationships to shady offshore money laundering institutions, 
such as the one he ran for a number of years in the Cayman 
Islands.
    We also heard testimony from three U.S. banks whose 
correspondent accounts appear to have been used at various 
points by unscrupulous individuals to launder the proceeds of 
questionable, and sometimes outright criminal, activity. Their 
testimony showed that lapses in due diligence on the part of 
some U.S. banks may have unwittingly helped criminals launder 
their ill-gotten gains by passing them largely undetected 
through correspondent accounts.
    To make matters worse, jurisdictions in which several of 
the foreign banks were located not only made due diligence 
efforts more difficult for the U.S. banks, but also actually 
hampered efforts by law enforcement and regulators to track 
down the crooks and to find and recover their illicit funds.
    Additionally, the Subcommittee received testimony from 
three witnesses who have extensive knowledge of the complexity 
of money laundering. They helped outline the scope of the 
international money laundering problem, as well as the types of 
steps that correspondent banks might be able to take in order 
to better vet prospective clients and to monitor and detect 
suspicious activity by respondent banks after relationships 
have begun.
    One expert also described the difficulties of tracking 
down--and recovering for victims--the proceeds of fraudulent 
schemes that are laundered through correspondent accounts in 
U.S. banks. These experts' testimony also highlighted how 
important it is for the United States to help lead 
international efforts to detect and facilitate the recovery of 
stolen and laundered funds.
    Today, in our final day of hearings on correspondent 
banking, the Subcommittee will hear testimony from Arthur 
Jacques, who will describe the operations of British Trade and 
Commerce Bank, an offshore bank licensed in Dominica through 
which the Minority staff's investigation indicated that 
millions of dollars in fraud proceeds have been funneled. Given 
BTCB's lack of cooperation with authorities in making 
restitution to the victims of these frauds, I was interested to 
read in the Miami Herald not long ago that the Government of 
Dominica has finally revoked BTCB's license.
    To finish up our hearings on money laundering and 
correspondent banking, we will also hear testimony from 
representatives of the U.S. Department of Justice and the 
Department of the Treasury. They will discuss the Bush 
Administration's commitment to fighting international money 
laundering and outline the efforts that have been made by their 
respective agencies to combat foreign banks' use of U.S. 
correspondent accounts to aid and abet money launderers.
    I look forward to hearing the testimony of all of our 
witnesses this morning, and at this time I would like to 
recognize the Subcommittee's distinguished Ranking Minority 
Member, Senator Levin, who led and initiated this 
investigation, for his opening statement.
    Senator Levin.

               OPENING STATEMENT OF SENATOR LEVIN

    Senator Levin. Thank you very much, Madam Chairman. As you 
have pointed out, through the Minority staff's year-long 
investigation, and its 450-page report, that report's very 
close look at 10 high-risk foreign banks, its survey of 20 
major U.S. correspondent banks, and through this Subcommittee's 
hearings last week with experts and correspondent banking 
participants, we are getting a good understanding of the role 
of U.S. correspondent banking in money laundering.
    Drug traffickers, defrauders, bribe-takers, and other 
perpetrators of crimes can do indirectly through a foreign 
bank's correspondent account with a U.S. bank what they can't 
readily do directly, which is to have access to a U.S. bank 
account. The stability of the U.S. dollar, the services our 
banks perform, and the safety and soundness of our banking 
system make access to a U.S. bank account an extremely 
attractive objective for money launderers. It is up to us--the 
Congress, the regulators, the banks--to try to stop money 
launderers from reaping the benefits of the prestigious banking 
system and stable economy that we have worked so hard to 
achieve.
    It boils down to the quality of the regulatory scheme under 
which a foreign bank operates. To achieve entree into the U.S. 
banking system, a foreign bank should be subject to the same 
quality of regulation and periodic examination as U.S. banks. 
Whether banks are subject to such regulation seems to be a 
defining factor in whether their due diligence and anti-money 
laundering controls are adequate.
    I know that you, Madam Chairman, have been a leader in food 
safety issues. The situation with correspondent banking has 
some similarities to the problem this country faces in 
importing food. The United States has developed a highly 
effective food safety system, and as our Chairman has 
effectively argued, we don't want contaminated food from abroad 
slipping into our food supply. So, for example, when it comes 
to meat, we accept only that meat from countries which have 
inspection systems that meet our standards, and that is how we 
protect ourselves. Why not apply a similar standard to foreign 
banks? We don't want contaminated food and we shouldn't accept 
contaminated banks.
    That is why all the experts that we have heard and several 
officers of our Nation's largest banks have said that shell 
banks should be banned from U.S. correspondent accounts, 
period. Shell banks are banks with no physical presence, 
oftentimes no staff and no real regulation. If such a 
prohibition were in place, all 400 of Nauru's shell banks would 
lose their access to U.S. dollar accounts. So would the more 
than 50 Vanuatu shell banks, so would the many shell banks 
licensed in the Caribbean and operating in Latin America, so 
would the Montenegro shell banks using the Bank of Montenegro's 
correspondent accounts, so would all the shell banks being sold 
on the Internet. That alone would be a significant 
accomplishment.
    Offshore banks and banks in jurisdictions that don't 
cooperate with anti-money laundering efforts are two more 
categories of banks that raise contamination concerns. The 
hearings showed that these types of high-risk foreign banks 
were able to open correspondent accounts at major U.S. banks, 
including Bank of America, Chase Manhattan Bank, and Citibank.
    Each of these U.S. banks opened and kept open accounts for 
these foreign banks, despite high money laundering risks and 
even after being confronted with disturbing evidence of 
misconduct or suspicious transactions. They also acknowledged 
that they should have done a better job in screening and 
monitoring the correspondent accounts that they opened for 
high-risk foreign banks.
    When we looked at Citibank's relationship with Federal Bank 
and M.A. Bank last week, we heard Citibank say that they knew 
the parent entities of those banks extremely well. In fact, 
with respect to Federal Bank, Citibank was a major business 
partner with its parent in a holding company called CEI. Yet, 
in both of those cases, the offshore banks were not subject to 
examination and each bank had serious problems with anti-money 
laundering controls.
    Citibank said it was surprised when it heard that one of 
the banks, Federal Bank, had no anti-money laundering controls. 
The relationship manager for Citibank said that Federal Bank 
lied to him. Citibank had claimed, in their words, ``profound 
knowledge'' of how the offshore bank operated. But the absence 
of a strong regulatory hand with regular or periodic 
examination of Federal Bank puts everything in doubt.
    Today, I will explore with witnesses whether we should ban 
or much more strictly control correspondent accounts of 
offshore banks not affiliated with U.S. banks and of offshore 
banks not subject to examination in the jurisdiction in which 
they are licensed.
    Another matter that merits legislative attention is the 
ability of injured parties and governments to seize illicit 
funds in correspondent accounts. Unlike a regular bank account 
where law enforcement authorities and plaintiffs in civil suits 
can freeze or seize the funds at issue, in a correspondent 
account, because the owner of the account is the respondent 
bank and not the clients of the respondent bank, persons trying 
to seize or freeze funds unlawfully obtained by a client of the 
respondent bank are required to chase the bank abroad. That is 
not only a tough job, that can be an impossible job.
    Showing that the illegal funds are in a correspondent bank 
account is not enough. The consequence of this situation is 
that the depositors in foreign banks with accounts in U.S. 
banks have greater protection than U.S. depositors in U.S. 
banks. And where U.S. citizens are victims of illegal activity, 
they may be denied recovery even though the money sits in a 
U.S. bank. That anomaly should be fixed.
    These issues are not an academic concern that only banking 
circles need to examine. Money laundering finances crime. It 
provides the funds needed to conduct illegal drug operations, 
financial scams, and Internet gambling. It provides the means 
for corrupt public officials to enjoy their ill-gotten gains. 
It safeguards the profits that reward criminals and organized 
crime.
    Stopping money laundering takes the profit out of crime. It 
helps in the fights against criminal enterprise, corrupt 
politicians, and the local con man who steals a person's 
savings. Shell banks, offshore banks, and banks in non-
cooperative jurisdictions are major money laundering 
mechanisms, and there is much that can and should be done to 
dismantle them.
    Today, we will hear from a representative of one group that 
has not yet spoken at these hearings and that is the victims of 
the money laundering that goes on through correspondent 
accounts. Sometimes the victim is a specific individual taken 
in by a financial fraud, someone whose savings have disappeared 
into an offshore bank never to be recovered. Sometimes the 
victim is a class of individuals subject to the same 
wrongdoing, such as the 700,000 credit card holders who 
collectively got socked with $40 million in illegal credit card 
charges by a criminal who sent the stolen funds to offshore 
banks with U.S. correspondent accounts.
    Today, we will also discuss with the Treasury Department 
and the Department of Justice their experience with the various 
problems involved in correspondent banking, their reaction to 
our proposed reforms, and any proposed fixes that they may have 
in mind. The prior administration placed a high priority on 
stopping money laundering and it made some progress. Hopefully, 
the current administration will maintain that priority and 
continue the battle.
    I look forward to the testimony and again want to thank our 
Chairman for her efforts in this matter, for calling today's 
hearings and last week's hearings, and for supporting this 
investigation.
    Thank you.
    Senator Collins. Thank you, Senator Levin.
    I am pleased to welcome our first witness this morning. He 
is Arthur Jacques, of Jacques Little in Toronto, Canada. Mr. 
Jacques went to great difficulty to get here to these hearings. 
His flights were canceled yesterday and he has interrupted a 
very busy schedule to be here, so we very much appreciate his 
efforts. He will discuss the case of British Trade and Commerce 
Bank, yet another case study of how correspondent accounts in 
legitimate banks can be used by questionable financial 
institutions and their customers to launder the proceeds of 
fraudulent activities.
    Pursuant to Rule VI, all witnesses are required to be 
sworn, so I would ask, Mr. Jacques, that you stand so I can 
swear you in.
    Do you swear that the testimony that you are about to give 
to the Subcommittee will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Jacques. I so swear.
    Senator Collins. Thank you.
    Mr. Jacques, we are going to be using a timing system 
today. You will see in front of you a device with three lights. 
You will have 10 minutes to give your oral presentation. Your 
complete written statement will be included in its entirety in 
the record. When you see the yellow light come on, you have 
about a minute to wrap up your comments.
    So if you would please proceed.

  TESTIMONY OF ARTHUR O. JACQUES, ESQUIRE,\1\ JACQUES LITTLE 
      BARRISTERS AND SOLICITORS, TORONTO, ONTARIO, CANADA

    Mr. Jacques. Thank you, Madam Chairman. I will try to be as 
brief and non-technical as possible to assist you in your 
deliberations.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Jacques with attachments appears 
in the Appendix on page 241.
---------------------------------------------------------------------------
    By way of background, I would like to emphasize that the 
client that I represent or the group of clients that I 
represent was an unwilling victim in terms of issues that they 
had no control over, and at all material times until the actual 
event occurred they were completely unaware of British Trade 
and Commerce Bank being the asset protection bank domiciled in 
Dominica, as well as any role that First Union National Bank, 
its correspondent bank in Florida, portrayed.
    By way of background--and I will be very, very brief in 
terms of the structure--my clients in Canada attempted to 
borrow significant funds based in U.S. dollar denominations, 
and they tried to borrow $15 to $25 million to exploit a 
certain kind of technology. It was a very high-risk technology 
and Canadian banks had no enthusiasm for this form of venture 
capital.
    Through an intermediary in Toronto, Canada, our client was 
introduced to a party by the name of Chatterpaul, who is 
referred to in the Minority report, who indicated that he could 
provide the funding. Letters of intent were executed. A 
contract was executed in the fall of 1999 to borrow US$15 
million, and my client as a condition precedent of that 
borrowing agreement put forward a deposit of $3 million.
    The $3 million was then placed in a segregated trust 
account, in a lawyer's trust account in a Canadian bank. A 
condition of the loan--i.e., the draw-down of the $15 million--
was the deposit would remain--the $3 million would remain in 
the attorney's segregated account until the full loan was 
advanced. The loan was never advanced. The request was made for 
the return of the money. It is at this point that I am 
introduced to the problem.
    A demand is made on the attorney for the return of the $3 
million and it is not forthcoming. Legal proceedings are 
implemented in Ontario. The law firm is placed into a very 
restricted kind of receivership. Other parties are added, and 
then we find out the existence of British Trade and Commerce 
Bank being this asset protection bank in Dominica.
    And we find out that the flow of funds went from Toronto, 
$3 million, into a correspondent bank in South Florida, being 
First Union National Bank. We find that because of American 
bank secrecy laws and Dominican bank secrecy laws that when we 
make demands on the respective entities, we are told ``we can't 
speak to you.''
    We are compelled at this point--we have implemented 
receivership and we have all kinds of technical restraining 
orders in Canada, and we are then compelled to retain attorneys 
in Florida. We retain a reputable law firm, Steel, Hector and 
Davis, and letters of request are issued by the Ontario court 
to the Floridian court. And we then find out that this $3 
million goes from Toronto to Florida, and then on the advice of 
British Trade and Commerce Bank, who is the named account in 
Florida, the funds are then transferred all over the world.
    I provided a few days ago a chart to your secretariat and I 
don't know if you have that chart available to you. The long 
and the short of that chart is simply that the funds flow from 
Florida into Idaho, into China, into India, possibly into the 
United Kingdom, into Oklahoma, back to Dominica.
    We attempt upon issuing subpoenas in Florida through our 
attorneys, and there are stumbling blocks on a procedural and a 
substantive basis in finding the answers, but as we sit here 
today my client is out approximately $6.5 million. 
Consequential damages are growing on a daily basis and we 
estimate at a point in time that our damages will be 
approximately $10 million-plus.
    Senator Collins. Mr. Jacques, excuse me for interrupting, 
but could you take a little extra time and take us through the 
chart that you have referred to?
    Mr. Jacques. Do you want me to address the chart from here?
    Senator Collins. Yes.
    Senator Levin. If I could just interrupt for a second, this 
is our staff's redo of your chart to, we thought, make it a 
little simpler, but I am not sure we have. We took your 5 pages 
and tried to put it on one page, is what we did.\1\
---------------------------------------------------------------------------
    \1\ See Exhibit No. 47 that appears in the Appendix on page 824.
---------------------------------------------------------------------------
    Mr. Jacques. The flow of funds is really from the law firm 
to the Bank of Montreal in Toronto, which is simply the 
domiciled account for the law firm, a segregated trust account. 
A $3 million wire transfer then goes to First Union National 
Bank and stops, and then within a period of ``x'' number of 
days goes to Idaho, back into Ontario; New Delhi, India; 
Florida; Abu Dhabi; Dominica; Hong Kong; Switzerland; Colorado, 
Nassau, Nevis, California, and it goes all over.
    We attempted--and I want to emphasize one thing that my 
client is of commercial means but doesn't have unlimited means, 
and every time we are making an application in a foreign 
jurisdiction to compel--emphasis added--to compel the 
penetration of bank secrecy laws, it costs us US$25,000 to 
$40,000 to do it. At a point in time, financial resources are 
completely exhausted, and you make an assessment--you will 
pardon the metaphor--is the game worth the candle. How far do 
you get involved in litigation which is defensive, mechanical?
    We concentrated our efforts in Florida for a whole host of 
reasons and we were relatively successful, with high degrees of 
information coming back in terms of the routing of the funds. 
As we now speak, as of this day, I can tell you the following 
in terms of the status of the return of the monies.
    Aggressive litigation has been commenced in Ontario and the 
trial started on Monday. It is adjourned today and it resumes 
when I return tomorrow. As a result of your February 5 report, 
I believe an inordinate amount of pressure, productive 
pressure, positive pressure was exerted on British Trade and 
Commerce Bank by the regulatory agency in that island.
    The Ministry of Finance of Dominica purported to cancel the 
license of British Trade and Commerce Bank, and as we speak the 
bank there--and I use ``bank'' in parens--finds itself in a 
form of receivership. That receivership is being appealed. 
There is a receiver in sort of a quasi-stay in terms of its 
status, and the receiver, if its status is maintained by the 
appellate jurisdiction, will then proceed to attempt to 
discover assets wherever it may find them, either in Dominica 
or elsewhere in the world. It is conjecture whether there will 
be any return for anyone with respect to British Trade and 
Commerce Bank.
    And that is the story.
    Senator Collins. Thank you very much, Mr. Jacques.
    Senator Levin.
    Senator Levin. Originally, we were going to call as a 
witness this morning two individuals who were associated with 
the offshore bank that you have referred to, British Trade and 
Commerce Bank, and that bank, as you have pointed out, is 
described in detail in our Minority staff's report.\2\
---------------------------------------------------------------------------
    \2\ See Exhibit No. 45 that appears in the Appendix on page 816.
---------------------------------------------------------------------------
    The report describes numerous instances of money laundering 
and suspicious activity associated with the bank, including $4 
million that a self-confessed money launderer, Bill Koop, 
admitted moving through the bank in connection with financial 
frauds, another $4 million associated with Ben Cook, who is 
currently being prosecuted in Arizona for fraud and money 
laundering, as well as millions of dollars associated with 
illegal Internet gambling and other questionable activities. 
Two weeks ago, on February 15, the Dominican Government finally 
revoked the bank's license and seized its records.
    The Subcommittee issued two subpoenas to obtain documents 
and sworn testimony from two persons involved with this bank. 
The first subpoena was to Rodolfo Requena, the long-time 
president and part owner of BTCB. We sent the subpoena to the 
U.S. Marshal Service in Miami to serve on Mr. Requena, a 
Venezuelan citizen who lives in a suburb of Miami, owns a house 
there, and has a Florida driver's license. Mr. Requena took 
steps to avoid service of the Subcommittee's subpoena rather 
than answer questions about this bank.
    The second subpoena was served by the U.S. Marshal in 
Oklahoma on John Long, who helped form the bank and we believe 
was its majority shareholder. Mr. Long did accept service, but 
at his deposition in response to questions about his 
involvement with BTCB, Mr. Long invoked his Fifth Amendment 
privilege 15 times and declined to answer the questions posed 
to him about the bank. Based upon his statement that he would 
invoke his Fifth Amendment privilege at this hearing, we 
decided it was pointless to call him as a witness this morning.
    From the evidence we were able to gather, BTCB appeared to 
be a bank that was owned by an American, run by Americans, and 
used to launder money associated with frauds committed against 
Americans and others. It was highly dependent upon U.S. banks 
to conduct its business, and its business was replete with 
examples of suspicious transactions.
    So in place of those two people, we have asked you to come 
this morning, Mr. Jacques, and we very much appreciate your 
being here representing a victim, one of the many of this bank. 
This was a victim, as we understand your testimony, of a 
classic advance fee for loan fraud who had the $3 million you 
referred to disappear into the jaws of this offshore bank, and 
who has so far, despite your best efforts, not been able to pry 
that money loose, despite over a year of legal action.
    Now, after you took over the representation of your client, 
I assume you contacted BTCB first and got no assistance from 
them. Did you then contact the Government of Dominica, and what 
was their response? Were they helpful?
    Mr. Jacques. No. They were indifferent. We attempted to 
communicate with them.
    Senator Levin. They were indifferent?
    Mr. Jacques. Right. We attempted to communicate by 
telephone. For a whole host of reasons, we never put our 
requests in writing. We were moving very, very quickly. We had 
a great deal of difficulty with the levels of sophistication 
there. It is a tiny island, and I don't mean in the pejorative 
sense. It is a banana republic. It is primarily agricultural 
and its mean income is relatively low.
    We got the sense from a whole host of indirect sources that 
BTCB was a very effective lobby in Dominica. It had exerted 
commercial relationships, professional relationships, and 
people were extremely reserved in attempting to talk to us when 
we tried to make inquiries about them. And when we indicated 
that we had difficulties there, they said, well, why don't you 
solve your difficulties in Canada? I said, well, we will 
probably do that.
    The only communication that I have had directly with BTCB 
is when we first got involved. Because of immediate access in 
terms of telephone and Internet, we communicated with BTCB and 
I personally on at least three occasions have spoken with 
George Betts. Mr. Betts is a defendant--emphasis added--a 
defendant in a Canadian action as a codefendant with BTCB.
    We sued BTCB and Mr. Betts. I am modestly pleased to tell 
you that yesterday we obtained judgment in Canada against BTCB 
and Mr. Betts. Now, it is simply conjecture whether that 
judgment will have any value. Mr. Betts, by his own admission 
in terms of the BTCB Website, is a member of the accounting 
community, a former member of an international accounting firm, 
and he seems to, by the way he operates, to be very 
sophisticated in certain issues in terms of regulatory aspects 
of banking, both domestic and international.
    Senator Levin. Did you try to find out from Dominica who 
owned BTCB?
    Mr. Jacques. No. We made inquiries there, but the quality 
of the recordkeeping in terms of intermediaries who had access 
to it did not respond in any positive sense. We sensed--and I 
want to emphasize one thing that in a very simplistic fashion 
an ordinate amount of information which may in the first 
instance sound as though it is hearsay was gleaned from the 
Internet, the Internet sites of BTCB.
    We used a variety of search engines and we found an 
inordinate amount of information about BTCB and associated and 
affiliated entities, one being First Equity Corporation of 
Florida. And through the various search devices we used, we 
pieced together what we thought was a matrix of shareholdings, 
and we had a sense, albeit inaccurate, that possibly Mr. Long 
was a shareholder either directly or indirectly in terms of 
either a beneficial interest or a legal interest. I personally 
have never spoken to Mr. Long, though.
    Senator Levin. Is Dominica a bank secrecy jurisdiction, do 
you know?
    Mr. Jacques. Yes, it is.
    Senator Levin. And that means that they do not disclose 
bank ownership, is that correct?
    Mr. Jacques. That is correct, and Mr. Requena in his 
testimony exhibited some kind of card with respect to Dominican 
bank secrecy laws and refused to disclose the kind of 
information that we wanted. And we always had the sense he was 
using that as a shield, a complete shield.
    Senator Levin. Dominica itself will not, as I understand 
it, disclose the ownership of banks because of its own laws, so 
that if you wrote Dominica asking for the owners of that bank, 
it is my understanding, and correct me if I am wrong, that you 
could not receive a list.
    Mr. Jacques. That is correct, and we had informal advice 
from local barristers in Dominica that if we were to attempt to 
bring proceedings in Dominica, it would be a complete waste of 
time.
    Senator Levin. And that is a major problem because here you 
are trying to find out the owners of a bank, presumably so you 
can bring suit against them if they commit a wrongdoing.
    Mr. Jacques. That is correct.
    Senator Levin. But you can't find out from the licensing 
jurisdiction who those owners are. Is that correct?
    Mr. Jacques. That is correct.
    Senator Levin. We are going to put Exhibit 34c.\1\ on the 
screen, and I think those exhibits are in front of you in a 
book. This is a purported list of shareholders of BTCB. Now, we 
were able to obtain this from the U.S. bank where they opened 
their account. That is where we obtained this as part of our 
investigation.
---------------------------------------------------------------------------
    \1\ See page 3 of Exhibit 34 that appears in the Appendix on page 
784.
---------------------------------------------------------------------------
    This exhibit says, on BTCB stationery, that the beneficial 
interest of 15,000 shares, which is half of the authorized 
shares, are held by Mr. John Long, and 3,000 by Mr. Rodolfo 
Requena.
    Did you ever see a document like that? Were you ever able 
to get possession of this kind of a document?
    Mr. Jacques. No, sir. I know this information. We have 
pieced it together, but I have never been given this from 
British Trade and Commerce Bank. I would--
    Senator Levin. Now, as I indicated--go on. I interrupted 
you.
    Mr. Jacques. I would have to ask my friend and colleague, 
Mr. Lindsay, when he deposed Mr. Requena whether he had this 
information given to him.
    Senator Levin. All right.
    Mr. Jacques. There are outstanding stipulations of the 
Florida court with respect to information obtained on 
depositions, but I know this information.
    Senator Levin. Now, assuming then that one way or another 
you identified a Mr. John Long as being an owner or alleged 
owner of the bank, my last question--my time is up for this 
round--is did you bring suit against him, and if not why not?
    Mr. Jacques. To date, we haven't brought suit against him, 
for the very simplistic reason that how long is a piece of 
string? I mean, we can commence litigation on an indefinite 
basis, and quite candidly my client doesn't have infinite 
resources to do that.
    We were shocked when we found out in terms of the flow of 
funds that it appeared when we obtained information from First 
Union National Bank, we saw information indicating that some of 
our funds went to Mr. Long for his own--he received it. What he 
did with it I don't know.
    Senator Levin. Thank you. My time is up.
    Senator Collins. Mr. Jacques, I want to go back to some of 
the basic facts of this case just to make sure that they are on 
the record.
    It is my understanding that your clients wished to borrow 
and agreed to borrow money from TriGlobe International Funding, 
Inc., is that correct?
    Mr. Jacques. That is correct.
    Senator Collins. And was the amount that they intended to 
borrow about $12 million?
    Mr. Jacques. Ultimately, it was reduced to $12 million.
    Senator Collins. And as part of the agreement for borrowing 
this $12 million, it is my understanding that your clients had 
to post 25 percent of the loan amount as a cash collateral 
account. Is that correct?
    Mr. Jacques. That is correct.
    Senator Collins. So that is where the $3 million that we 
are talking about comes from?
    Mr. Jacques. That is right, that is correct.
    Senator Collins. Your clients later learned that the $3 
million had been wired to the BTCB account at First Union Bank, 
is that correct?
    Mr. Jacques. That is correct. We discovered that in April 
of 2000.
    Senator Collins. Did your clients ever directly engage in 
business with BTCB?
    Mr. Jacques. Up until the receipt of information that the 
money had gone to the BTCB account in Florida, my client did 
not know of the existence of BTCB, other than when we became 
extremely aggressive in terms of our demands. We were told that 
the money went to an offshore bank in the Caribbean.
    Senator Collins. It is my understanding that in September 
of last year, BTCB's president filed an affidavit with the 
Canadian court in which he admitted that BTCB had possession of 
your client's $3 million. Is that accurate?
    Mr. Jacques. That is relatively accurate. The allegations 
asserted by BTCB was that the money, however received by them, 
went into a managed account.
    Senator Collins. And this was an investment that was 
scheduled to mature in December of last year. Is that accurate?
    Mr. Jacques. That is correct, and just as a footnote to 
your question, when we became aggressive in terms of our 
litigation, in October, at the end of October, in Ontario, 
British Trade and Commerce Bank deposited its own letter of 
credit for US$3 million to the credit of our action with a 
maturity date of December 15, 2000. On December 15, 2000, we 
sat anxiously in court to be notified that the funds had 
cleared. The funds did not clear and the bank defaulted on its 
own letter of credit.
    Senator Collins. So BTCB defaulted on the letter of credit, 
and I assume that your client still has not received any money. 
Is that accurate?
    Mr. Jacques. That is correct.
    Senator Collins. And it is my understanding that BTCB now 
claims not to have the $3 million. Have you been able to 
ascertain where the money is now?
    Mr. Jacques. I can only speculate that--and I am not being 
facetious--it is someplace in the world, but I don't think it 
is recoverable.
    Senator Collins. And it has most likely been divided up and 
wired all over the world, based on the Minority's exhibit?
    Mr. Jacques. Well, if I refer to the chart there, $3 
million was disbursed to multiple payees and, in essence, this 
is a Ponzi scheme.
    Senator Collins. And it greatly complicates your ability to 
recover the money for your clients?
    Mr. Jacques. Almost impossible.
    Senator Collins. Your clients obviously were in need of 
borrowing funds. They still have ongoing obligations. Do you 
know how much additional money they have lost just as a result 
of the monthly interest charges while the dispute continues?
    Mr. Jacques. This is part of the court record in Ontario. 
Interest accrues--the $3 million that was given to BTCB was 
borrowed from the Toronto Dominion Bank in Toronto at a prime 
plus 1 percent over commercial rate. Interest accrues floating 
on a basis of, say, $35,000 to $40,000 a month, so in excess of 
$500,000, plus, has accrued on that U.S.-dollar loan. There are 
administrative charges, there are obvious legal fees, there are 
disbursements.
    We have maintained litigation in three jurisdictions--
Ontario, Florida, and Idaho. We had the same difficulty in 
Idaho in terms of when we attempted to--I think it was a major 
American bank resisted, and we issued letters of request and we 
then got involved in mechanistic delays and adjournments. And 
simply, we ran out of gas and, we are not going to spend more 
money chasing our tail.
    Senator Collins. Thank you.
    Senator Levin.
    Senator Levin. Thank you.
    The letter of credit that you made reference to and the 
Chairman made reference to is Exhibit 34e,\1\ I believe. Could 
you just take a look at that in your exhibit book?
---------------------------------------------------------------------------
    \1\ See page 5 of Exhibit 34 that appears in the Appendix on page 
784.
---------------------------------------------------------------------------
    Mr. Jacques. I know it all by heart, Mr. Senator.
    Senator Levin. It is etched.
    This, I take it, is a letter of credit that this rogue bank 
wrote on itself. Is that basically it?
    Mr. Jacques. That is correct, and we took no position when 
they offered the letter of credit because, quite candidly, it 
was a joke. And the letter of credit is in standard 
international banking terms. There is nothing unusual about 
this document. It is used hundreds of times a day in 
international banking.
    Basically, it is a clean letter of credit issued under 
international documentary terms, nothing untoward about it. 
When you examine the letter of credit, however, though, you 
ascertain a couple of things. One, it is not confirmed by a 
bank other than BTCB. They issued their own letter of credit. 
So, in essence, this is a promissory note; ``I will pay on 
demand on December 15th.''
    When this letter of credit was tendered to us, I was 
obviously jaundiced with respect to its ultimate success in 
terms of cashing. But I went through the ritual of attempting 
to have a Canadian bank either confirm it or discount it, and I 
was asked if I was a fool.
    Senator Levin. You were asked what?
    Mr. Jacques. If I was a fool.
    Senator Levin. In other words, they were familiar with what 
was going on here?
    Mr. Jacques. That is correct.
    Senator Levin. The legitimate banks?
    Mr. Jacques. That is correct.
    Senator Levin. So we have got a rogue bank issuing a letter 
of credit on itself which is worthless.
    Then in Exhibit 33,\1\ let's take a look at some of the 
other things that this bank did, British Trade and Commerce 
Bank. This is an advertisement for certificate of deposit 
investments. The return rates are from 16 percent for $25,000, 
all the way up to a 79-percent return rate if you will give 
them $3,500,000. That is an annual return rate of 79 percent.
---------------------------------------------------------------------------
    \1\ See Exhibit 33 that appears in the Appendix on page 782.
---------------------------------------------------------------------------
    Mr. Jacques. Well, these are urban tales, Senator.
    Senator Levin. These are what?
    Mr. Jacques. Urban tales. These are fictions. These return 
rates are impossible, in a realistic banking community, in a 
legitimate banking community, to obtain.
    Senator Levin. Of course.
    Mr. Jacques. No one has these rates.
    Senator Levin. But this is the tout, this is the come-on, 
this is the promise that a rogue bank makes. You give us money, 
you will get this kind of return. But apparently some people 
must have been taken in. There are a lot of other victims here 
beside your client, but anyway this is the representation of 
this bank, up to a 79-percent return rate for a $3.5 million 
certificate of deposit.
    Mr. Jacques. That is correct. In this kind of marketing or 
enticement, there are victims both in the United States and 
Canada and the United Kingdom. There are institutions, 
charitable institutions; the Boy Scouts of the United States 
was defrauded. There was a charitable institution in Chicago 
many years ago. And these come-ons are basically an enticement 
to go into a high-yield investment program, and these high-
yield investment programs are myths. They do not exist in the 
legitimate investment and/or banking communities worldwide.
    Senator Levin. Then if we could turn to Exhibit 34d.\2\ 
This is a letter which apparently the president of the bank 
issued to creditors and it was reprinted in an offshore 
business newsletter.
---------------------------------------------------------------------------
    \2\ See page 4 of Exhibit 34 that appears in the Appendix on page 
784.
---------------------------------------------------------------------------
    Have you ever seen this letter before?
    Mr. Jacques. Yes, Senator, I have.
    Senator Levin. Okay. This is one of the things that this 
letter says that, ``The bank is unable to meet its obligations 
with its depositors and creditors. As President of the bank, it 
is my responsibility to bring this matter to your attention and 
outline to you the causes and the measures that management is 
implementing to re-capitalize the bank, rebuild its liquidity, 
and meet its obligations with its depositors and creditors.''
    And then point 1 states: ``In May of this year, the major 
shareholder of the bank retired from the organization due to 
severe health problems. The retirement resulted in a large 
withdrawal of deposits from the bank due to the close 
relationship of the depositor with the shareholder,'' the close 
relationship presumably being the same person. Is that the way 
you would read that?
    Mr. Jacques. That is correct.
    Senator Levin. That is a fairly close relationship indeed.
    Mr. Jacques. And I believe the inference there ultimately 
is that is Mr. Long.
    Senator Levin. That is Mr. Long, so that they are actually 
stating here--this is a hint as to where these monies went. If, 
in fact, it is Mr. Long, what they are actually saying is a 
large withdrawal of deposits went to Long.
    Mr. Jacques. That is correct.
    Senator Levin. Yet, you are still dubious that he is a 
potential source of recovery?
    Mr. Jacques. All I can say is that in terms of the kind of 
strategies that are underway, we recognize he has been there, 
but we just haven't dealt with that issue.
    Senator Levin. Do you think it is possible the word 
``depositor'' there, is a shell company owned by Mr. Long 
rather than he himself? Would that be at least a possibility 
there?
    Mr. Jacques. I have no specific knowledge, but if I were 
speculating, I would agree with you.
    But it is paragraph 2 which I found in that letter of 
November 9th to be the most disturbing when Requena indicates 
that, referring to our action in Ontario, and he states, ``The 
bank was never involved in or aware of those actions. . . . The 
lawyers for the plaintiffs''--that is my client--``convinced 
the Canadian Court that BTCB was part of the action.'' That is 
correct.
    ``The lawyers for the plaintiffs spread all kinds of 
erroneous information and allegations against the bank.'' That 
is incorrect. They circulated private and confidential 
information--for example, you can buy this letter on the 
Internet for $10. This is within the public domain.
    The irony of this letter, which is dated November 9th, is 
that at the end of October they came to the Ontario court and 
deposited their letter of credit.
    Senator Levin. Their worthless letter of credit?
    Mr. Jacques. That is correct. Nine days later, they issue 
this statement here which is basically a declaration that they 
are incapable of paying their liabilities as they normally fall 
due.
    Senator Levin. So that it is lie followed by lie, followed 
by misrepresentation, followed by another tout for certificates 
of deposit, followed by more lies, and it just goes on and on, 
basically. Is that a fair summary of this bank?
    Mr. Jacques. You are being very polite, sir.
    Senator Levin. Unintentionally.
    The goal of Congress and of our regulators has got to be 
that our legitimate banks, our U.S. banks, not in any way, 
directly or indirectly, aid and abet this kind of an 
enterprise. And in order to do that, we are going to have to 
have tighter money laundering laws to look at these accounts 
that come from these banks, these foreign banks, so that our 
banks are not misused as part of either a fraudulent bank or by 
a money launderer. That is our goal, and your testimony is very 
helpful in our achieving that goal here today.
    I just would close by asking whether you have any advice 
for people who are potential victims or who are the actual 
victims of this bank. You have now been through it. You have 
seen your client lose money both in the original deposit with 
that law firm and then also in trying to seek recovery.
    What advice would you have both for current victims seeking 
to recover money and for potential victims of this kind of a 
bank?
    Mr. Jacques. Well, I think if I may dissect your question 
into a couple of components, the historical victims of the 
frauds fit into at least two categories: Those that are totally 
innocent and who are simply being aggressive with respect to 
the return or the promised return, and these people come 
forward time and time again.
    One of the goals of an asset protection bank--and I am 
talking generically as opposed to a specific bank, i.e. BTCB, 
but one of its mandates is an attempt on an offshore 
jurisdiction to shelter assets, to make those assets judgment-
proof in the home jurisdiction. If I have a judgment against 
Mr. Brown, I can't get his assets in the United States. He has 
basically placed all his assets beyond the reach of the United 
States; he has placed them offshore. And there are certain 
functional advantages in terms of asset protection banks.
    The other component of an asset protection bank is simply a 
return is being made and it is being sheltered, and it is 
probably not being disclosed in any jurisdiction in terms of 
income. That kind of situation I am now talking to. There are 
hundreds and hundreds of victims throughout North America, 
probably thousands, and it goes throughout the rest of the 
world.
    For example, there is an agency in the United Kingdom 
called the International Chamber of Commerce which I believe 
you are familiar with. They have a tracking system where they 
are tracking this on a worldwide basis, and they have hundreds 
of instances that are occurring on a daily basis.
    Does education work? Probably not. Does notoriety work? 
Probably, yes. Do lawsuits work? Yes, but they are highly 
individualistic. I would believe that probably the best 
attempt--and emphasis on the word ``attempt''--would be to have 
effective legislation whereby these entities can't operate 
effectively but for the media of correspondent banking. If they 
don't have a transportation system under which to move the 
funds into any jurisdiction, they are shut down. Look at the 
example of your report on February 5 and then 10 days later an 
inordinate amount of pressure is obviously exerted domestically 
in Dominica and the license is canceled. That is very 
effective.
    Senator Levin. I do have one additional question, and that 
is are you familiar with the Canadian banking laws and 
regulations relative to correspondent accounts in your 
legitimate banks? Are you more strict than our banks? Are you 
familiar with that area of law and regulation?
    Mr. Jacques. I am more than a student, but I am not an 
expert. I can only tell you--and I took the liberty of bringing 
down a statute which I will give to your Subcommittee, which is 
an attempt by the Canadian Government. It is called the 
Proceeds of Crime Money Laundering Act, and this statute came 
into effect in October of 2000.
    We have the same problem. Obviously, our economy is a tenth 
the size of the United States, so you use that factor. But I 
would assume that, yes, money laundering does take place in 
Canada. I know that. I shouldn't say ``assume''; I know it 
takes place. Are we any better than you are? Probably not in 
terms of how we effectively police it.
    Toronto would probably be a magnet for it by virtue of its 
position in the Canadian economy in terms of what goes on 
there. But banks in Canada are very, very vigilant. I have a 
commercial practice, a commercial corporate practice, and 
occasionally I am asked by clients to transfer funds directly 
or indirectly to other jurisdictions. I can say to you that on 
a number of occasions when these funds are leaving my firm's 
trust account, I am confronted by a bank officer asking us the 
personality of the funds. Then I get into these issues of 
solicitor-client relationships and I have that issue with the 
bank. But I can tell you the banks in my country are observant, 
vigilant, and they are attempting to enforce it.
    Senator Levin. Thank you. Thank you, Madam Chairman.
    Senator Collins. Thank you very much, Mr. Jacques. I very 
much appreciate your assisting the Subcommittee with this 
important investigation.
    Mr. Jacques. Thank you.
    Senator Collins. I wish you a good and safe and easier trip 
back home.
    Our next panel of witnesses for this hearing will be 
representatives of the Departments of Treasury and Justice. At 
this time, I would like to ask Joseph Myers from the Treasury 
Department and Mary Lee Warren from the Criminal Division of 
the Department of Justice to come forward.
    These two civil servants will highlight for the 
Subcommittee the current status of U.S. anti-money laundering 
efforts with regard to correspondent banking, and will describe 
for us the two Departments' commitment to protecting the 
American banking system from abuse by money launderers and 
other criminals.
    I would note that I had the opportunity yesterday morning 
to discuss these hearings with Secretary O'Neill and I was very 
impressed with his knowledge of our hearings and his commitment 
to helping stem the tide of money laundering that these 
hearings have disclosed.
    I am going to ask both witnesses to stand, since pursuant 
to Rule VI all witnesses who testify are required to be sworn.
    Do you swear that the testimony you are about to give to 
the Subcommittee will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Myers. I do.
    Ms. Warren. I do.
    Senator Collins. Mr. Myers, we are going to start with you, 
if you will proceed, please.

   TESTIMONY OF JOSEPH M. MYERS,\1\ ACTING DEPUTY ASSISTANT 
    SECRETARY (ENFORCEMENT POLICY), U.S. DEPARTMENT OF THE 
                    TREASURY, WASHINGTON, DC

    Mr. Myers. Madam Chairperson, Senator Levin, I am pleased 
to appear before you today to discuss the issues raised in your 
Minority staff's February 5 report ``Correspondent Banking: A 
Gateway to Money Laundering.''
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Myers appears in the Appendix on 
page 250.
---------------------------------------------------------------------------
    I would like to submit my full written testimony for the 
record and highlight a few points, if I may, orally.
    Senator Collins. Both of your written statements will be 
included in the record in their entirety.
    Mr. Myers. Thank you.
    I would like to begin by congratulating the Subcommittee 
and the Minority staff for its impressive work on this report 
and in gathering a factual record for this hearing. In our 
view, the report and the hearing raise serious issues. We are 
studying them very closely. It is a complex area and a 
difficult one.
    I think the work that you have done here has already had 
real consequences, and I congratulate you for that. We have 
seen rogue banks closed. We have seen changed policies in the 
Bahamas and the Cayman Islands with respect to shell banks, and 
I think you have done an impressive job of drawing the 
attention of the domestic banks and the public to this 
important area.
    As you know, the Treasury and Justice Departments have 
jointly issued two national money laundering strategies to meet 
our obligations under the Money Laundering and Financial Crimes 
Strategy Act of 1998. In last year's National Money Laundering 
Strategy, we acknowledged that correspondent banking accounts 
and other international financial mechanisms, such as payable 
through accounts, private banking, and wire transfers, all are 
important features of the international banking system, and yet 
they are potential vehicles for money laundering. The strategy 
thus recognized the need for further examination of these 
mechanisms and to find ways of addressing potential abuses 
without disrupting legitimate economic activity.
    The interagency community has substantially accomplished 
the goals articulated in last year's strategy in this area. In 
September 2000, the Office of the Comptroller of the Currency 
of the Treasury Department issued the Bank Secrecy Act Anti-
Money Laundering Examination Handbook. This handbook identifies 
high-risk products and services, including international 
correspondent banking relationships, special use accounts, and 
private banking, and establishes examination procedures to 
address these subjects, including specialized procedures for 
foreign correspondent banking.
    In addition, the OCC has initiated a program to identify 
banks that may be vulnerable to money laundering and examined 
those banks using agency experts and specialized procedures. 
Some of those examinations have already focused on foreign 
correspondent banking.
    We have also made a great deal of progress in addressing 
the risks involved in international correspondent banking 
through our active support of the Financial Action Task Force's 
project to identify non-cooperative countries and territories.
    Of the eight foreign jurisdictions involved in the case 
studies highlighted in the Minority staff's report, six of them 
are on the FATF list of 15 non-cooperative countries and 
territories, and seven of them are the subject of formal 
advisories from the Treasury's Financial Crimes Enforcement 
Network, or FinCEN. The FinCEN advisories alert U.S. financial 
institutions of specific deficiencies identified by the FATF 
review and confirmed by our own analysis, and they encourage 
our institutions to apply enhanced scrutiny to transactions 
involving those jurisdictions. Twenty-three of the 29 FATF 
member countries have issued similar warnings to their domestic 
financial institutions.
    As a result of the FinCEN advisories, the OCC implemented a 
program to review the anti-money laundering programs in all 
banks with significant exposure to one or more of the non-
cooperative countries and territories. The OCC is currently in 
the process of evaluating these banks to determine whether 
their systems and processes are adequate to control the anti-
money laundering risks associated with the non-cooperative 
countries and territories.
    We have also been working with our allies and with 
officials from these jurisdictions to correct deficiencies in 
law, regulation, and practice that aggravate the risk 
associated with international correspondent banking business.
    In response to these efforts, 7 of the 15 countries 
listed--the Bahamas, the Cayman Islands, the Cook Islands, 
Israel, Liechtenstein, and Panama--have already enacted most, 
if not all, of the legislative or regulatory changes necessary 
to bring their systems into line with international standards. 
These jurisdictions are now developing and discussing with the 
FATF and with the U.S. bilaterally specific plans to implement 
these changes, and we are working on a timetable that will 
allow those that take appropriate remedial measures to be de-
listed at the earliest possible time.
    I want to highlight that not only has the list and the 
FinCEN advisories prompted movement within these jurisdictions; 
they have also increased the quantity and quality of suspicious 
activity reports filed by U.S. financial institutions.
    The Financial Crimes Enforcement Network has begun to 
analyze the SAR filings related to the 15 NCCTs. The findings 
from their work will be incorporated fully into the second 
review of SAR filings that the interagency community expects to 
publish jointly with the American Bankers' Association in 
April. This report will show, among other things, that since 
the issuance of the advisories last July through November 2000, 
U.S. financial institutions, including foreign banks operating 
in the U.S., roughly doubled the rate of filings of suspicious 
activity reports for most non-cooperative countries and 
territories.
    A preliminary analysis of December 2000 data confirms this 
trend, and the majority of these findings describe wire 
transfer activity either to or from the country in question. 
Dollar amounts involving wire transfer activity tend to be 
high, frequently in the millions of dollars.
    The remaining suspicious activity reports described for the 
most part structuring of cash and monetary instrument 
transactions involving money orders, traveler's checks, and 
cashier's checks. In most instances, financial institutions in 
the United States are a link in the chain of international 
transactions, as opposed to the originating or end point in the 
movement of suspicious funds.
    Although further FinCEN analysis is needed with respect to 
these suspicious activity reports, it is apparent that 
international correspondent account activity of the type 
discussed in the Minority staff's report has been and continues 
to be noted. Such correspondent account activity was also 
identified in a separate study of domestic U.S. shell company 
activity that was summarized last fall in the initial issue of 
the SAR activity review.
    The challenge we now face is to make effective use of this 
information, both in investigations and in providing feedback 
to the financial services community. I want to emphasize that 
the FATF project and our support for it are works in progress. 
There is a second round of review currently underway and we 
expect to be in a position to put additional jurisdictions on 
the list in June.
    As I have indicated, we are also actively involved in 
helping jurisdictions respond to the concerns. Unfortunately, 
some of them have shown very little progress. The FATF 
indicated its special concern about the relative lack of 
progress in the Russian Federation, Lebanon, the Philippines, 
and Nauru. Each has its own particular obstacles to address, 
but the international community is expecting a positive 
response to the concerns identified. The FATF is planning in 
June to reach a decision with respect to countermeasures for 
those jurisdictions which have not made adequate progress. 
Secretary O'Neill attended his first meeting with his G-7 
counterparts in Palermo 2 weeks ago, where the Ministers 
confirmed their support for countermeasures as necessary.
    By statute, the National Money Laundering Strategy is due 
to the Congress each year on February 1. This year, with the 
new administration in office, we have asked for an extension of 
the deadline until April 1. As we work to meet that deadline, 
we look forward to a continuing cooperative effort in pursuit 
of our common goal to prevent criminals from realizing the 
profits of their crimes.
    The Minority staff's report raises a number of important 
issues. We are carefully considering them. As we consider what 
additional measures may be necessary to reduce the risk of 
abuse in this area, it will be important to ensure that such 
measures do not interfere with legitimate commerce and 
international trade finance, or put our institutions at a 
competitive disadvantage in the global marketplace.
    The Treasury is committed to working with the Congress to 
ensure that we have all the necessary tools to combat money 
laundering. We will carefully evaluate the various legislative 
proposals that have been and may be put forward in this area. 
In so doing, we will consult with the interagency community and 
financial institutions, and seek to balance the legitimate 
interests of law enforcement with the equally legitimate 
concerns about privacy and regulatory burden.
    Meanwhile, we will continue to pursue the FATF work. We 
will be prepared to implement countermeasures as necessary, and 
we will take the findings of this hearing into consideration in 
the context of our review of the FATF 40 recommendations.
    Thank you again for the opportunity to appear today. I will 
be happy to answer any questions you may have.
    Senator Collins. Thank you, Mr. Myers.
    Ms. Warren.

  TESTIMONY OF MARY LEE WARREN,\1\ DEPUTY ASSISTANT ATTORNEY 
    GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE, 
                         WASHINGTON, DC

    Ms. Warren. Thank you, Madam Chairman and Ranking Minority 
Senator Levin. I appreciate the invitation to appear today to 
offer the Department of Justice's views regarding the use and 
abuse of correspondent banking relationships in the United 
States.
---------------------------------------------------------------------------
    \1\ The prepared statement of Ms. Warren appears in the Appendix on 
page 256.
---------------------------------------------------------------------------
    The Criminal Division has been pleased to provide the 
Subcommittee with information concerning law enforcement's 
concerns and our insights on the obstacles and hindrances 
presented by correspondent banking to investigations and 
prosecutions. We look forward to continuing this cooperative 
arrangement.
    Today, I would like to focus on three main areas identified 
in the report of the Minority staff: The extent to which money 
laundering through U.S. correspondent bank accounts is a 
significant law enforcement concern, some of the legal and 
practical challenges in seizing alleged illicit funds and 
identifying beneficial owners of and depositors into such 
accounts, and our general views on the recommendation for 
amending the U.S. forfeiture law and enhancing law enforcement-
industry communications with regard to correspondent bank 
accounts.
    The international movement of illicit proceeds through 
correspondent bank accounts servicing foreign institutions is 
often difficult for law enforcement to detect. Even when 
detected, law enforcement may encounter significant hurdles in 
tracing, seizing, and forfeiting such funds, made once again 
all the more difficult when it is hard to discern the true 
beneficial owner of the funds being transferred.
    Most often, as the Minority staff's report concludes, this 
occurs when U.S. financial institutions offer banking relations 
to foreign shell banks, offshore banks, and to banks in those 
jurisdictions with unduly broad bank secrecy protections and 
those that have little or no effective anti-money laundering 
regimes. Typically, such banks fail to make and maintain proper 
account and transaction records as well.
    From a prosecutor's perspective, in order to attack the 
abuse of correspondent banking by money launderers, the U.S. 
financial institutions must be vigilant and the U.S. Government 
must work to ensure that our laws provide the necessary tools 
to prosecute individuals who knowingly facilitate the transfer 
of illicit funds, and to identify, seize, freeze, and forfeit 
criminal proceeds transacted through such accounts. We need 
that help as well.
    Let me hasten to add that with all these frustrations and 
difficulties, the Departments of Justice and Treasury, in our 
coordinated fight against international financial crime, have 
scored some significant successes.
    In my full written statement, I have outlined Operation 
Skymaster and Operation Juno, in which our investigators and 
prosecutors were able to penetrate the use of the Black Market 
Peso Exchange scheme and to identify the traffickers and those 
who facilitated trafficking through money laundering.
    These successful cases also revealed and highlighted some 
problems facing law enforcement in tracing and forfeiting 
criminal proceeds in foreign countries and in instances when 
correspondent banking is used. Our money laundering laws, 
dating to 1986, addressed primarily a domestic problem in the 
beginning and unfortunately have not always kept pace with the 
developments in technology and international commerce.
    Three major areas of problems emerge. First, when offshore 
banks in one jurisdiction have their representatives in 
another, it can be difficult for U.S. law enforcement to 
determine the actual location of the funds and in which 
jurisdiction we should focus our forfeiture efforts. Once U.S. 
law enforcement pinpoints the correct foreign jurisdiction, our 
ability to forfeit these funds is dependent upon the level of 
cooperation offered by that jurisdiction and by the strength of 
that jurisdiction's forfeiture laws.
    The second major problem area is the complexities that can 
arise from our own forfeiture law with respect to jurisdiction 
and venue in forfeiture cases in the United States. This is 
particularly true in cases when U.S. law enforcement does not 
know initially the final destination or beneficiary of the 
funds sent through a correspondent account and only determines 
that fact much later on.
    Third, the relevant U.S. statute of limitations requires 
the government to bring forfeiture actions against fungible 
property, such as funds in a bank account, within 1 year from 
the date of a money laundering offense. If the government does 
not file within that deadline period, we are required to make a 
strict one-for-one tracing review of the funds or prove that 
the foreign bank itself was involved in the wrongdoing. These 
requirements are often difficult to satisfy, particularly in 
cases involving correspondent bank accounts.
    Some of these problems were best exemplified in the 
forfeiture cases resulting from Operation Casablanca. Criminal 
Division prosecutors in Washington filed civil forfeiture 
complaints in the District of Columbia against the funds wire-
transferred to other foreign accounts. We used the statutory 
authority granted in Title 18, United States Code, Section 
981(a) and 984, as well as 28 U.S.C. Section 1355(b).
    In one instance in Operation Casablanca, funds had been 
wire-transferred to a bank account in one jurisdiction, a 
foreign location. After filing our civil forfeiture complaint, 
the Department requested assistance from that foreign 
government. It was learned by our foreign counterparts, 
however, that the bank, as well as the account into which the 
funds had been transferred, were actually located in the second 
jurisdiction.
    In the second country, the Department advised authorities 
that we had information concerning the transfer of drug 
proceeds to bank accounts within its jurisdiction. That 
country's officials then filed a criminal forfeiture action, 
the only forfeiture available in that particular country. They 
based their criminal case on our request for assistance. That 
jurisdiction froze the accounts.
    But then because the defendants were not before the court, 
it was uncertain whether they could indeed be forfeited 
criminally. In addition, the bank did not appear to have any 
actual buildings or branches within the court's jurisdictions, 
and the assets securing the bank's obligations were not located 
in the country.
    Finally, having come almost full circle, it was determined 
that the assets we were pursuing were likely located in the 
foreign bank's correspondent account back here in the United 
States, at a U.S. bank in New York City. This was a tortuous, 
time-consuming chase.
    The prospects for success in our U.S. civil forfeiture 
action in that particular instance remain uncertain. There is a 
potential claim that the assets in question were actually 
located in the foreign bank's correspondent account in New York 
City. Jurisdiction, venue, and the 1-year statute of 
limitations then may become grounds for challenge. Now, I need 
to note this was an instance when we had enormous cooperation 
from the foreign jurisdictions and we still had all these 
obstacles.
    Let me shift very briefly to the recommendations in the 
Minority staff's report.
    The first four recommendations, I think, are better treated 
by regulators and supervisors. The final two recommendations, 
however, deal with law enforcement issues. They suggest better 
U.S. communication with the industry and assistance to the bank 
in identifying and evaluating high-risk foreign banks. The 
final recommendation was forfeiture protections in the United 
States perhaps should be amended to enhance our ability to 
seize and forfeit illicit funds.
    These are valuable recommendations, and we concur that they 
warrant further study and review. We would be pleased to work 
with the Subcommittee and members of the staff toward these 
goals.
    With respect to improving communication channels between 
the U.S. Government and U.S. banks, Mr. Myers has already noted 
several of the ways we are working bilaterally, multilaterally 
and with the industry itself. Law enforcement intends to 
continue to enhance these working relationships, all, of 
course, within the constraints that we cannot reveal ongoing 
criminal investigations and the sensitive information in those 
investigations.
    With respect to the final recommendation amending our asset 
forfeit laws, we believe that such a provision would be 
beneficial in terms of pursuing and prosecuting forfeiture 
cases and, as I stated, is well-deserving of further study and 
review. We strongly believe that illicit proceeds, wherever 
located in the world, should not be hidden from detection or 
immune from forfeiture when money launderers take advantage of 
some weak link somewhere in the world in the international 
money laundering campaign.
    There should be no safe haven for money that is the 
proceeds of crime. We understand at the same time, of course, 
that the prosecutor's concerns would need to be carefully 
balanced against other needs in the U.S. financial system and 
legitimate commerce.
    Once again, I commend the Subcommittee and staff for 
focusing attention on this important issue. We look forward to 
continuing our work with the staff and the Members to find 
solutions to the problems you have highlighted.
    I look forward to your questions.
    Senator Collins. Thank you very much, Ms. Warren, for your 
testimony.
    Mr. Myers, you mentioned in your statement that Treasury 
and Justice have jointly issued two national money laundering 
strategies, and that in both correspondent banking 
relationships, in particular international correspondent 
banking relationships, were found to be vulnerable to abuse by 
criminals seeking to launder funds.
    You go on to say that the advisories issued by the 
Financial Crimes Enforcement Network--FinCEN, I believe, is the 
acronym--do not discourage banks from maintaining relationships 
with non-cooperative countries. Instead, in your written 
testimony you indicate that they are intended to encourage 
banks to exercise caution in such relationships, but not 
actually to discourage them.
    I am curious why not. Why wouldn't you discourage banks 
from maintaining relationships with foreign banks in countries 
that have been non-cooperating and aren't showing the kind of 
progress that the countries that you have listed that have 
moved on anti-money laundering laws have shown?
    Mr. Myers. Thank you, Senator. We essentially view the 
advisories as a warning. Our best analogy is to a sign on a 
highway bridge, for example, that would say ``slippery when 
wet.'' We are not telling a driver not to cross the bridge, but 
we are telling the driver to be very careful and to take into 
account the circumstances of the road, the weather conditions, 
the type of car he or she is driving, the speed at which he or 
she is traveling.
    In this way, when we look at a complex array of factors 
that may influence a decision to do business in a particular 
jurisdiction, we recognize that our banks are in very different 
circumstances. Across the United States, we have large money 
center banks with very sophisticated compliance systems. We 
have small independent banks without a lot of international 
connections.
    Similarly, in particular jurisdictions that we have named 
on our list, take Israel, for example, they don't have a money 
laundering law. On the other hand, they have a fairly mature 
and well-functioning bank regulatory system. So we wouldn't 
want in that case to tell banks not to deal with Israel or 
advise them that it is--
    Senator Collins. Well, you used Israel as an example of a 
country that has taken steps. I am talking about those 
countries that are non-cooperating and haven't taken any steps.
    Mr. Myers. I guess my point, Senator, is simply to try to 
clarify. The countries that made it on to this infamous list 
made it on to that list for various reasons, and the world 
presents itself to us in shades of gray. We thought it best in 
the first instance for the first year around to issue warnings 
and to tell our banks specifically about our concerns and to 
make those concerns public. We have seen that that has provoked 
a lot of movement in the jurisdictions, and also we think a lot 
more caution in our banking community.
    As I have indicated, however, if the jurisdictions are not 
willing to change their practices, if we find that it is not 
working, we are prepared to consider further countermeasures 
and all options are on the table as far as we are concerned. 
But we are only--we are 9 months into this public process, and 
I remind you we have consensus across 29 jurisdictions to take 
these steps. We certainly weren't in a position to build a 
consensus around cutting off 15 countries from the world's 
financial systems without some kind of fair notice and 
opportunity for them to amend their ways.
    Senator Collins. One of our banking representatives last 
week--I believe it was the witness from Bank of America--
emphasized that U.S. banks would welcome more guidance from 
FinCEN about which banks the American Government believes are 
promoting illegal activities or closing their eyes to illegal 
activities. These banks seem to be asking for more guidance 
from FinCEN on where they should do business, and are 
essentially telling us that they would welcome more red flags.
    Could you comment on that?
    Mr. Myers. Yes, thank you. I would agree with you that the 
banks have made it very clear to us that they welcome as much 
guidance as we can give them. I note that the OCC, Treasury's 
main regulator, has historically issued alerts to the banking 
industry and other regulators about offshore shell banks and 
other institutions that hold themselves out as banks but lack 
licenses from recognized authorities or otherwise are not 
suitable to be engaged in the banking business. These 
advisories have come out regularly and so we try to meet this 
obligation.
    Beyond that, I would just echo the comments made by my 
colleague from the Justice Department that we are very 
interested in trying to provide this kind of information where 
we can, but it obviously raises, as does the process through 
which we identify drug kingpins and others with respect to whom 
we cut out of the U.S. financial system under OFAC sanctions--
this raises a host of concerns about disclosure of sensitive 
information, both from the law enforcement community and also 
the intelligence community.
    Senator Collins. You mentioned shell banks and doing 
business with shell banks. Senator Levin and other experts on 
money laundering have raised the question of prohibiting U.S. 
banks from opening correspondent accounts for foreign shell 
banks because they have no physical location, and are not 
affiliated with any other regulated financial institutions.
    I would like to ask both of you for your opinion on whether 
steps should be taken to prohibit U.S. banks from having 
correspondent accounts with shell banks.
    Mr. Myers. Yes, thank you. We are carefully studying this 
recommendation, and I want to congratulate the Subcommittee and 
the staff for focusing as you have. I note that the report 
defines very narrowly, and you have been defining in the 
hearing very narrowly the term ``shell bank,'' and I think that 
is very productive.
    We recognize that these institutions, as you have defined 
them, pose a significant risk and that they are often used to 
perpetuate all types of fraud and are the subject, as I 
indicated in my previous answer, of a series of Office of the 
Comptroller of the Currency alerts. We also welcome the news 
that jurisdictions such as the Cayman Islands and the Bahamas 
have taken steps to eliminate such institutions.
    We are still struggling around the margins on this issue 
before we can give a ringing endorsement of the recommendation, 
and let me try to explain. We understand, for example--and we 
are still studying this with relevant regulatory authorities--
that entities may be subsidiaries of, for example, securities 
companies or insurance companies. They may be set up in a way 
that might meet your definition of shell bank, or shell 
financial institution if I can broaden it out a little bit, and 
there may be legitimate purposes occasionally for institutions 
like that. We also can imagine an example of an Internet bank 
that doesn't really exist anywhere but may be legitimate and 
sufficiently supervised.
    So with those caveats and with those concerns that we have 
that we are trying to work through, we do think there may be 
scope for work in this area. We welcome what I understand to be 
a new initiative on behalf of the New York Clearing House banks 
to develop best practices in this area, and we think we should 
work with the private sector and with the Congress on any 
specific proposals in this area.
    Senator Collins. Ms. Warren, what is your judgment on this 
issue?
    Ms. Warren. I need to first caveat that our view is from a 
prosecutorial perspective or an investigator's perspective, and 
in many ways it is the view from the medical examiner's office 
or the pathologist. We see where it really goes wrong, and 
there have been enormous harms visited on those who have been 
the victims of fraud or have allowed drug trafficking to 
proceed.
    So from our very limited perspective, we would certainly 
applaud the recommendation. But we also understand that ours is 
only one part of a much larger view of what needs to be looked 
at in terms of regulating and controlling this kind of banking, 
and we would look to work together to provide our insights from 
our medical pathologist office with those who have a different 
piece of the puzzle to provide.
    Senator Collins. Ms. Warren, does the Justice Department 
have concerns that if it alerts banks to problems with a 
specific jurisdiction's bank that you may compromise an ongoing 
investigation?
    I am trying to figure out why the government doesn't more 
readily share information with U.S. banks that would prevent 
them from doing business with people who may, in fact, be 
facilitating the laundering of criminal proceeds.
    Ms. Warren. I can foresee some instances where the 
information about not dealing with a bank, of such identifiable 
particularity, would alert others to our ongoing investigation. 
And we would need to weigh, and ask that others weigh, the 
importance of our proceeding with our investigation against 
immediately shutting down such a bank by providing information 
of such a peculiar nature that it would lead to a conclusion 
that this one bank was the target, or its customers the targets 
of our investigation. There might be such instances.
    If it is information of an ongoing investigation, there may 
be some ways that we can provide more generic advice. But we 
don't want to jeopardize our investigation, and more than that, 
we don't want to jeopardize any of our undercover officers who 
are often right in the middle of such an investigation. Their 
lives could be on the line.
    Senator Collins. I am just going to raise quickly one more 
issue with you before turning to Senator Levin for his 
questions.
    In your written testimony, you indicated that the United 
States must bring a civil forfeiture action against criminal 
proceeds in a bank account within 1 year of the date of the 
money laundering offense, and that is in order to take 
advantage, as I understand it, of the relaxed tracing 
requirements in the current law. Is that accurate?
    Ms. Warren. That is correct.
    Senator Collins. Are there any similar time limitations 
under the criminal forfeiture statutes?
    Ms. Warren. In the criminal context, we don't have the 
advantage of the fungible property provision of that 1-year 
statute of limitations in Title 18 for civil actions. So we 
don't have that at all in a criminal forfeiture proceeding 
today. We would have to do strict tracing of the assets in a 
criminal forfeiture action.
    Senator Collins. If you have any recommendations to the 
Subcommittee on changing these laws, I would very much welcome 
hearing them today or having you submit them in writing.
    Ms. Warren. Understood.
    Senator Collins. Thank you.
    Senator Levin.
    Senator Levin. Thank you, Madam Chairman.
    On the question of shell banks and the purpose they serve, 
we had two U.S. banks in front of us who testified that they 
don't open correspondent accounts for shell banks and they 
could not see any reason not to prohibit correspondent accounts 
for shell banks, as we define that term.
    Are you familiar with their testimony? Were you or someone 
else present for that testimony?
    Mr. Myers. Yes, sir, I am familiar. Thank you.
    Senator Levin. You are looking, I think, at the edges, you 
said, as to what conceivable legitimate purpose there would be 
to open up a correspondent account with a shell bank. I think 
that is well and good, but I think we also have got to look at 
the problem that is created and try to address that problem.
    If U.S. legitimate banks can't see any reason, or at least 
the ones who were in front of us can't see a reason for opening 
up a correspondent account with a shell bank, I would hope that 
you would take their thoughts into consideration and move on 
with it.
    You know, the M.A. Bank was affiliated with a financial 
institution. That was the excuse that was used there. First of 
all, even if the regulatory process for a financial institution 
is good, as we hope it is in the United States, it is a very 
different regulatory process than the one for a bank. So I 
don't think that that part of the fringe that you are looking 
at will provide adequate assurance that the bank regulator 
effort--the regulations that the bank inspectors and bank 
regulators enforce--are being enforced by securities 
investigators. It is a different form of regulation.
    So I don't see offhand how saying, well, there could be a 
shell bank that is associated with a financial institution or 
an insurance company--I don't see how that provides any answer 
in terms of bank regulation.
    Mr. Myers. Thank you, Senator. I am not sure that we 
disagree at all. I hope you will appreciate that we have a new 
administration, and I certainly don't want to be in a position 
of having committed my Secretary to something on which he 
hasn't been fully briefed.
    Senator Levin. Well, we can appreciate that, but if you 
could give yourselves a reasonable time line to reach a 
conclusion on it and let us know what that conclusion is, I 
think we would appreciate that. Is that all right?
    Mr. Myers. Yes, sir. In fact, we very much look forward to 
continued discussion and we think you have raised a very 
important issue. We are looking very carefully at it.
    Senator Levin. Do you think that you give us your opinion 
within a couple of months? Does that sound fair?
    Mr. Myers. Yes, it sounds fair to me, sir.
    Senator Levin. Now, on the question of offshore banks that 
aren't shell banks but are offshore banks that are not allowed 
to do business with the people who live in the jurisdiction 
granting the license, we had testimony here from a former 
offshore bank owner named John Mathewson. He testified that 95 
percent of his bank's 1,500 clients were Americans, and he 
thought that all of them were engaged in tax evasion.
    He has spent the last 5 years cooperating with the Justice 
Department identifying people who had, in fact, evaded our tax 
laws, some of his former clients. He said that his bank is not 
unique; it was a ``run of the mill'' bank in the Cayman 
Islands. He thinks, in other words, that most of these offshore 
banks are engaged mostly in that, hiding the assets of 
Americans who are evading taxes.
    The question is how do we try to get at that issue, as 
well. It seems to me that the shell bank issue, frankly, is a 
relatively easy one. I don't think that should take us a whole 
lot of time, although you want to make sure there are not any 
unintended consequences. One of our witnesses called it a no-
brainer--I think that is what he said, and it seems to me it is 
pretty close to a no-brainer. I don't want to imply that your 
brains won't be at work for the next 60 days, but I will put it 
that way. To me, at least, it is pretty close to a no-brainer.
    Now, let's talk about offshore banks. We have pretty good 
evidence, and Mr. Mathewson in his cooperating role has 
provided an extraordinary amount of it, as to what so many of 
these offshore banks--again, we are talking banks that are not 
affiliated with our regulated institutions--but what these 
offshore banks are mainly about, or many of them are about or 
most of them are about.
    Now, how do we get at it? How do we take a look at these 
unaffiliated offshore banks opening up accounts in American 
banks and then using all the services of our banks to hide 
assets and to really get involved in tax evasion for their 
clients? What do you suggest? It is going on, it is rampant.
    Ms. Warren, why don't you start?
    Ms. Warren. This is a much harder puzzle. Again, there may 
be legitimate commercial reasons for these offshore entities 
that are not affiliated with regulated institutions to 
continue. That is not what we see from the Justice Department's 
viewpoint because of our particular perspective. We see where 
they are abused and abuse our citizens.
    I believe we need to hear--and this set of hearings has 
tried to bring out--all the available information from the 
other pieces in the puzzle, from the bankers themselves, from 
the industry, from the regulators, and from those who have to 
look at the much larger picture to try and see how best to do 
this. Again, I can only speak from the prosecutor-investigator 
point of view, and that is when these banks, these institutions 
are clearly abused.
    Senator Levin. How do we get at the abuses? They are out 
there.
    Mr. Myers. Thank you, Senator. Let me start by agreeing 
with your estimation that this is a much more thorny problem. 
As I am sure you are well aware, the historical antecedents for 
offshore finance are deep and long, and we have much of U.S. 
business and securities trading, insurance, takes place taking 
advantage of offshore markets through subsidiaries and complex 
arrangements.
    Our basic view on this is that--
    Senator Levin. Again, we are only talking unaffiliated.
    Mr. Myers. Yes, I understand, I understand.
    Senator Levin. When you say subsidiaries, you are not 
addressing my question. I am talking about unaffiliated 
offshore banks.
    Mr. Myers. Right. Given a global economy where we have this 
historical basis and then we have, I think, the emergence in 
sophisticated offshore markets like the Cayman Islands and the 
Channel Islands of banks and other firms that would like to 
compete with the subsidiaries of U.S. firms or of London firms 
or of Dutch firms or German firms, I don't know that we can 
draw a line around subsidiaries of U.S. firms in a way that 
would protect our firms' competitiveness with their foreign 
counterparts from England, Germany, other major centers.
    That said, we do think there are things that can be done. 
We are working actively in a couple of areas. One, through the 
FATF and other international standard-setting bodies, we 
believe--and we assert this repeatedly and often--that it 
shouldn't matter to a regulatory regime whether they are 
regulating offshore or onshore entities.
    For purposes of money laundering control, tax evasion, 
cooperation on tax matters, it shouldn't matter whether a firm 
is offshore or onshore, and we push that point of view in all 
of our foreign relations and through all of the international 
bodies in which we participate. The FATF is active in that 
respect, as is the OECD tax initiative which, as I understand 
it, is going forward on the view that there really again is no 
excuse for not cooperating in tax matters and offering up a 
transparent regime. Put aside the question of tax rates. 
Competition on tax rates is another issue, and that is one 
where there is a lot more heated debate.
    Senator Levin. You used the analogy of a traffic sign that 
says ``slippery when wet.'' I would suggest that that is not 
what we are dealing with here. These banks, most of them, are 
slippery under any weather conditions.
    This isn't a case of a few bad apples ruining a barrel. 
This is a case of a few good apples somewhere in the barrel.
    I really think that unless your assessment of the use of 
these unaffiliated--I emphasize that--offshore banks is 
different from that staff report, that is the way you should go 
at it. We have got to try to protect the relatively few good by 
insisting on, first, regulation of these banks. And if they are 
not regulated by a jurisdiction that has good regulation, we 
should tell our banks forget it. We don't have to regulate 
them, but we want a good jurisdiction that does have regulatory 
capability to do the regulating.
    Second, it seems to me we should be able to know who the 
beneficial owners are of these banks. We don't know that now. 
We just heard the example this morning of a victim who was 
victimized by a bank that had a fancy name on it, but which is 
a rogue bank that is stealing money, and you can't find out who 
the owners of that bank are. They have bank secrecy laws in the 
jurisdiction that licenses it.
    It seems to me that as a condition of accepting a 
correspondent account with an offshore bank, or opening an 
account for an offshore bank, our banks ought to be told ``you 
must get the list of beneficial owners of that bank; you must 
have that in your possession and require that bank to notify 
you of any changes, at a minimum'' so our law enforcement 
officials aren't faced with some secrecy laws down in wherever 
the island is or wherever the country is, and where people who 
have been victimized by that bank can, through a subpoena 
process, get access to the beneficial owners of that bank and 
go after them in the case of this bank we have heard about this 
morning.
    We also have to do, it seems to me, much more in terms of 
seizure of assets, and I will get back into that in my next 
round. I am over already. Thank you.
    Shall I go ahead?
    Senator Collins. Yes.
    Senator Levin. Thank you.
    We have a handbook which is issued by the Office of the 
Comptroller of the Currency for bank examiners which says that 
a bank--and this is the September 2000 version of it--it says a 
bank must exercise caution and due diligence in determining the 
level of risk associated with each of its correspondent 
accounts. That caution and due diligence is set forth in some 
detail on page 22, which really sounds pretty good.
    My question is going to be how is this enforced, but here 
is the way it reads: ``A bank must exercise caution and due 
diligence in determining the level of risk associated with each 
of its correspondent accounts. Information should be gathered 
to understand fully the nature of the correspondent's business. 
Factors to consider include the purpose of the account; whether 
the correspondent bank is located in a bank secrecy or money 
laundering haven; if so, the nature of the bank license, i.e. 
shell or offshore bank, fully licensed bank, or an affiliate 
subsidiary of a major financial institution; the level of the 
correspondent's money laundering prevention and detection 
efforts; and the condition of bank regulation and supervision 
in the correspondent's country.''
    That gets at a whole bunch of issues we have been talking 
about for 3 days. My question: In your judgment, how many of 
the correspondent accounts at U.S. banks are subjected to that 
degree of scrutiny right now? Can you give us a guess?
    Mr. Myers. I am sorry, Senator. I am sitting here today not 
able to give you that number. I would be happy to get it for 
you as soon as I can. I would need to call my friends at the 
OCC. I do know that they have begun, as I think I indicated in 
my testimony--if I didn't say it, it is in the written part--
they have begun doing targeted examinations on the basis of 
that handbook from which you just quoted. So I will endeavor to 
get you an answer.
    Senator Levin. On the question of seizure of assets, where 
there is credible evidence that dirty money is in a 
correspondent account, assume the same standard, whatever the 
standard is for seizure of assets in a domestic account. And I 
am not sure of the exact standard, but let's say it is credible 
evidence that there is illegal money in a U.S. bank account.
    The Justice Department, as I understand it--and I want you 
to comment on this because I may be wrong, but the Justice 
Department, I believe, has greater capability to seize the 
asset in a regular domestic account than it does in a 
correspondent account. Is that correct?
    Ms. Warren. Yes, that is. Checking with my experts, yes.
    Senator Levin. So we have a bizarre situation where a 
foreign bank's bank account at a U.S. bank is given greater 
protection than a U.S. citizen's account in a domestic bank. Is 
that correct?
    Ms. Warren. Correct.
    Senator Levin. Now, I think it is pretty clear that we 
ought to be changing that, and again I think it is as clear as 
it is that we ought to be changing some of the shell bank 
regulation. The offshore bank that isn't a shell bank is a 
little more complicated, as we have talked about.
    Nonetheless, this one, it seems to me, is fairly clear. We 
should not be giving greater protection to a foreign bank's 
bank account than we are to a domestic person's bank account at 
our U.S. banks.
    I am wondering if the Justice Department could give us, 
first, a reaction to the proposal which is in the staff report 
and, second, give us any suggested changes in that approach and 
give us actual language that you might recommend. And then we 
would ask the Treasury Department to--why don't you do this 
jointly, if you can, or give us separate recommendations either 
way? But can you do that within a 30-day period?
    Ms. Warren. Agreed.
    Senator Levin. Are you able to do that?
    Mr. Myers. Yes, sir.
    Senator Levin. What about the confirmation of beneficial 
ownership of the foreign offshore bank? I made reference to 
that a few moments ago, but I didn't get a reaction from you. 
Do you think it is reasonable to require that our banks in 
opening correspondent accounts for offshore banks have in their 
files a representation as to who the beneficial owners of that 
bank are? Is that a reasonable requirement, do you believe?
    Ms. Warren. It certainly sounds reasonable for the initial 
opening. Unfortunately, the problems are not just in the 
initial opening of the account, though. How do you monitor that 
as the account proceeds, particularly as we learn about nested 
accounts and those kinds of transfers? Peeling back that onion 
is a lot more difficult.
    Senator Levin. We could require, however, that the 
respondent bank who has that account at the U.S. bank notify 
the bank of any changes. I mean, if they violate that, then 
what the remedy is might be difficult. Nonetheless, we could 
require that right up front the beneficial owners be listed, 
and that the bank tell its customer that if there are changes, 
you must notify us.
    Is there any problem in doing that? I know there is a 
problem in what happens if they lie and don't follow through, 
but nonetheless there is some deterrence in just that 
requirement. Is there any problem in going that far that you 
can see offhand, Ms. Warren?
    Ms. Warren. There are no problems that I foresee or that I 
would foresee in my own very small business relationships. I 
would like to know that. I would think--and this is just a 
prosecutor's view--that a bank, for instance, if it were 
extending credit, would certainly want to know that if it is 
providing these other kinds of services. It seems appropriate, 
again, from this limited perspective, to ask the same 
questions.
    Senator Levin. Mr. Myers.
    Mr. Myers. Yes, Senator, I tend to agree with my colleague. 
I think where we are today is that your report has shown a lot 
of light on what has been viewed as a complicated problem. I 
don't think it has been fully understood, and as Ms. Warren 
pointed out, the history here is that banks have been very 
careful when they extend credit and they have been a little 
less careful when they simply provide services. I think there 
are some lessons learned--
    Senator Levin. A little less careful? I think you are being 
a little too cautious.
    Mr. Myers. They have been less careful, and I think that is 
changing. It does seem to me perfectly reasonable for any bank 
to know the owners of another bank they are doing business 
with.
    Senator Levin. I want to go back to the question of a 
moment ago relative to the beneficial owners being made known 
to our U.S. bank when they open up a correspondent bank 
account.
    Isn't the knowledge of ownership of a customer, in this 
case a respondent bank, really something that banks should be 
doing under the ``know your customer'' requirement anyway? I 
guess I should look first to Mr. Myers on this one.
    Mr. Myers. If the question is knowing who owns the bank 
with whom they are doing business--
    Senator Levin. Yes.
    Mr. Myers. Yes, sir, absolutely.
    Senator Levin. Since we have ``know your customer'' 
requirements, ongoing requirements, that would address the 
question that Ms. Warren raised about what happens if they 
don't tell you if there is a change in beneficial ownership. 
The answer is that then our ``know your customer'' effort would 
have been thwarted and frustrated. But at least we do have a 
requirement that our banks put in place a ``know your 
customer'' regime, and presumably that effort would at least be 
aimed at knowing if there is a change in the beneficial 
ownership of a correspondent bank customer.
    Is that accurate, would you say?
    Mr. Myers. I think that is accurate. If I might just 
offer--this issue does become, as Ms. Warren suggested, a 
question of peeling the onion. Our regulators have taken a view 
that our banks need to make a risk-based assessment and then 
make decisions about how many layers of the onion to peel.
    We find in our international discussion there is really no 
agreed standard here. We use the term ``know your customer'' to 
mean customer identification at the outset of the account-
opening. There are really no agreed standards about what steps 
should be taken on an ongoing relationship. I fully agree with 
you that our regulators expect our banks to be careful and to 
keep apprised of who they are doing business with.
    Senator Levin. I would like to pursue a question that the 
Chairman was getting into relative to the exchange of 
information. When there is negative information that is 
forthcoming about what we call a high-risk foreign bank--that 
is either a shell bank or an offshore bank or a bank from a 
jurisdiction that doesn't have a good regulatory process--we 
call those a problem bank or a high-risk foreign bank.
    So when negative information is received about a high-risk 
foreign bank, for instance that a bank has been indicted or 
that a bank is under investigation by an investigatory wing of 
a government, I know that the regulators issue advisories. But 
is the kind of information that I just talked about part of 
that advisory, where a bank is under investigation or only 
where there has been an indictment?
    Mr. Myers. As I understand it, Senator, that kind of 
information may very well--almost certainly will inform a 
decision whether to issue an advisory and it may be a part of 
an advisory. I think typically the problem that our banks have 
expressed through this hearing and to us directly is that they 
think sometimes the warnings are too little, too late, because 
the investigation is already concluded. We have to work that 
out on a case-by-case basis with our agencies and the Justice 
Department that are conducting the investigation.
    Senator Levin. I want to raise the case of the American 
International Bank, where before there was any indictment or 
conviction there were a lot of subpoenas which were issued. So 
I want to talk about information short of indictment or 
conviction.
    Law enforcement agencies examining the American 
International Bank had issued numerous subpoenas to the bank's 
correspondents for records of the bank and its clients. When 
the American International Bank tried to open a new 
correspondent account with a different U.S. bank, that new 
correspondent bank had no idea of the subpoenas and the 
questionable activity that led to them. Had the new 
correspondent bank known, it might have refused to open an 
account for the American International Bank.
    So I wonder whether or not there are any steps that can be 
taken to let U.S. banks know about that kind of a situation 
without jeopardizing the investigation. Here, I would include 
both Ms. Warren and you, Mr. Myers, in this question because we 
don't want to jeopardize investigations. But at that level 
where subpoenas have been issued, can an advisory be issued to 
alert potential new correspondent banks of at least what the 
current problems are or are alleged to be?
    Ms. Warren, can we start with you on that?
    Ms. Warren. I think it would be a greater problem to alert 
about subpoenas. For example, if there are grand jury 
subpoenas, we would not be able to share that information. 
There are often, however, very public indicia that the bank is 
in trouble. I mean, in some of the cases cited in the report, 
there had been forfeitures already effected or freeze orders in 
place, and those are public information and that information 
should be shared, in my view, as swiftly as possible because in 
the end it just means there will be more victims over time.
    Senator Levin. Could you go through some of the records--
not today but perhaps for the record, could you go through some 
of the files and experiences of the Justice Department and give 
us examples of where there were public indicia or other indicia 
that you think could legitimately and should legitimately be on 
that advisory which are currently not now part of, or assumed 
to be part of that advisory?
    This is a question which our Chairman was getting into in 
terms of exchanging of information. Even if the subpoena 
particularly to a grand jury can't be referred to, for reasons 
that you have given, there could be, it seems to me, additional 
items which are expected to be on an advisory which 
historically have not or have been overlooked. If perhaps both 
of you could look through your files and give us examples of 
those and how you think that problem could be addressed so we 
could get the better of information that was referred to, that 
would be very helpful.
    Ms. Warren. We will undertake that, and I think maybe in 
our review of that information we might also come up with, I 
would hope, some further suggestions about how law enforcement 
could be more forward-leaning in terms of providing information 
that is available.
    We recognize that part of law enforcement is making public 
announcements, providing that information either to the target 
community or to the citizenry at large to protect victims. 
Clearly, we can always do a better job at that.
    Senator Levin. When we started to investigate the offshore 
bank which we heard about this morning, the British Trade and 
Commerce Bank, staff came across a number of criminal 
investigations and prosecutions that dealt with specific 
incidents at the bank, but not the bank itself. The bank itself 
is a major problem. This is truly a rogue bank, and that may be 
generous.
    Here are some of the incidents: One Federal prosecutor in 
New Jersey went after William Koop, a U.S. citizen who had 
defrauded his victims and laundered about $12 million through 
three offshore banks, including the British Trade and Commerce 
Bank. The prosecution obtained a guilty plea from Mr. Koop, but 
no action was taken relative to the bank.
    A second prosecution is underway in Arizona against 
Benjamin Cook, a U.S. citizen who is alleged to have defrauded 
other U.S. citizens out of $40 million, and who then laundered 
the money through a number of banks, including the British 
Trade and Commerce Bank. Again, the prosecution is focusing on 
the person who committed the fraud, but not the offshore banks 
that he used.
    Other criminal and SEC investigations are going on in 
California, Texas, Washington State, and Florida. All are 
looking at the possible frauds, but none at the offshore bank 
or banks that facilitated the frauds by accepting the fraud 
proceeds with little or no due diligence.
    It seems to me that the prosecutors here--and I am not 
being critical of them at all, believe me, because I know the 
problems that they go through. But the prosecutors are each 
sort of touching a different part of the elephant without 
anyone taking aim at the elephant itself.
    I am wondering if there is any strategy at the Justice 
Department to go after the offshore banks that are operating in 
the United States through these U.S. bank accounts and acting 
as repositories in multiple instances of laundered funds. That 
is the specific question.
    Ms. Warren. There is certainly a general strategy that we 
look for banks as corporations, as entities, as defendants 
themselves if it appears that they are guilty of wrongdoing. We 
have prosecuted--and we have a chart that goes on for many 
pages of numbers of financial institutions that we have 
proceeded against directly and not just against any particular 
offender within that bank.
    What you suggest as certainly the collection now of so many 
instances of wrongdoing from one relatively small bank may 
suggest, or more than suggest some rottenness at the very core 
here. Those are the kinds of instances that we need to analyze 
to see if we can meet our standards for corporate liability 
proof in a criminal case against the entity itself. We have 
found that proceeding in that way has had an enormously 
deterrent effect in the banking community, not just in the 
United States but our efforts against foreign banks as well, 
and could have a salutary effect here.
    Senator Levin. Is there a place where the information is 
put together that the same offshore bank is being mentioned in 
numerous criminal investigations or prosecutions, even though 
it is not the target of the investigation itself? Is there one 
place where the banks that are named in those investigations 
are accumulated so that you can see whether or not the bank 
itself should become a target?
    Ms. Warren. Between the Treasury Department's entities and 
the Justice Department's entities, there are several databases 
that help us even down to particular accounts in terms of 
collecting instances where they are misused. We are just 
learning some facility with that information and how to use it 
in a more active way. I predict that we will get much better in 
time.
    If I just might add a postscript on the instance you raise 
about a rogue bank in a series of violations, in order to prove 
our case we are going to still need the documentary evidence 
from that entity or from that jurisdiction, and sometimes that 
can be very difficult. If we have a mutual legal assistance 
treaty with the overseeing jurisdiction, we ought to be able to 
obtain that readily.
    If we have other agreements for financial information 
production, then we can secure it. But without the documentary 
corroboration, our cases can be very difficult to prove. So 
there remain some obstacles and we just have to keep working at 
it.
    Senator Levin. Should we not allow correspondent accounts 
from banks that are licensed by jurisdictions with whom we have 
no such treaties or agreements?
    Ms. Warren. Perhaps there are other ways to look at it. 
That is one way. Another might be in terms of your ``know your 
customer'' rules, an extension of that is to also have an entry 
on that who is your representative for service of process here 
in the United States so that if, in fact, they are doing 
business through their correspondent account, they are present 
for purposes of service of our process as well to retrieve that 
information. I think there are many ways that we could look at 
this and see what might best help us.
    Senator Levin. We would welcome all the suggestions from 
both of you and your agencies in this effort.
    Thank you.
    Senator Collins. Thank you, Senator Levin.
    I want to thank our witnesses of this panel, and I want to 
second Senator Levin's request and urge your assistance in 
helping us to strike the right balance as we seek to prevent 
money laundering, but to do so in such a way that we don't 
needlessly hamper the legitimate operations of the 
international banking system. I would encourage you to work 
very closely with us as we proceed to help us find that right 
balance.
    I want to thank you both for your testimony this morning. 
The two witnesses are excused.
    Ms. Warren. Thank you.
    Mr. Myers. Thank you.
    Senator Collins. The 3 days of hearings that we have held 
during the past week on the role of correspondent banking in 
international money laundering have truly been an eye-opening 
experience.
    Most Americans give little thought to the world of offshore 
banking at all. If and when they do so, I suspect that they 
assume, as I did, that it is a shady world of wealthy criminals 
and tax evaders that exists entirely separate and apart from 
the normal world of reputable banking institutions in the 
domestic arena with familiar and prestigious names that we all 
know. Such thoughts would only be half right.
    The offshore banking and shell bank world certainly 
contains more than its fair share of shady characters and 
outright criminals. But these hearings have made very clear 
that prestigious and reputable American banks with excellent 
reputations have far too often failed to escape being 
indirectly tied to institutions that either knowingly or with 
their eyes deliberately shut are facilitating money laundering.
    As we have seen, the offshore shell banks and other poorly 
regulated institutions can often insinuate themselves into the 
reputable world of the premiere banks by means of correspondent 
banking accounts. The Minority's investigation has provided an 
important service in pointing out the vulnerability of our 
correspondent banking system to abuse by money launderers, and 
in making clear how lax due diligence and sloppy oversight by 
otherwise distinguished American banks can play right into the 
hands of criminals.
    I am pleased to hear that American banks are making 
important strides in improving their due diligence and account-
opening and monitoring procedures. I hope, however, that the 
case studies that the Minority's investigation has undertaken 
will spur them to do much more to strengthen their procedures. 
I also believe that we need an even greater effort by the 
Federal Government working with other countries to crack down 
on international money laundering.
    All in all, I hope and believe that the Subcommittee has 
been able to contribute in important ways to the goal of 
ensuring that our banking industry is made far less vulnerable 
to abuse by money launderers and other criminals.
    I want to thank all of the witnesses who have participated 
in the Subcommittee's investigation. They have made important 
contributions to the work of this Subcommittee.
    I also would again like to commend Senator Levin and his 
staff for their very hard and diligent work on a complex and 
fascinating topic, and for all of their efforts in undertaking 
and leading this complicated investigation.
    Finally, I would like to thank the members of my own 
Subcommittee staff who also worked very hard on these hearings, 
especially Eileen Fisher, Claire Barnard, Rena Johnson, Chris 
Ford, and Mary Robertson. Their hard work and attention to 
detail has also been indispensable in bringing these hearings 
to fruition.
    Senator Levin.
    Senator Levin. Madam Chairman, first let me thank you for 
your invaluable support, both yourself personally and your 
staff, of this investigation.
    We have already achieved some significant results, 
including the delicensing and closure of some rogue banks that 
should have been closed a long time ago. We have heightened the 
awareness in a number of jurisdictions that do not do an 
adequate job, to put it mildly, of controlling their own banks.
    But we have a responsibility of controlling our banks and 
to make sure that our banks do not unwittingly aid and abet 
money laundering through the correspondent accounts that they 
maintain with foreign banks. That has been the goal of this 
investigation. It is a 450-page report which really is the book 
now, as far as I can tell, on the way in which correspondent 
accounts are being used to facilitate improper activities by 
foreign banks.
    I can't say enough about my own staff and their year-long-
plus effort to put this book together. It is an extraordinary 
contribution to a very complicated area about which there has 
been too much mystery. We have got to rip away that mystique 
and we have got to make sure that our banks, our legitimate 
banks, are not misused by foreign banks who either are shell 
banks with no physical presence anywhere or offshore banks 
which are not allowed to do business with the people who live 
in the jurisdiction that licenses the banks or banks that come 
from jurisdictions that have no strong regulatory process. We 
just don't want them to misuse anymore their accounts with 
American banks to take full use of the services of those banks, 
including earning interest, including separating ownership from 
money, hiding ownership, investing that dirty money, and so 
forth.
    That is our responsibility as a people. We give a lot of 
very strongly-held lectures and sermons to other countries 
about trying to end corruption. We cannot allow the product of 
that corruption to flow through our banks. We prohibit our own 
corporations from giving bribes. It is a crime for an American 
corporation to give a bribe. We cannot allow that money to flow 
through and be cleansed by American banks.
    We feel very strongly about the impact of drugs on this 
society. We spend billions of dollars trying to stop the flow 
of drugs into this country and then dealing with the impact of 
those drugs when they do reach our shores. We cannot accept our 
banks, knowingly or unwittingly, being the depository of dirty 
drug money.
    There have been some steps taken, and as a result of this 
investigation there have been some additional steps taken, but 
we have a long way to go regulatory-wise and in terms of our 
laws. We will be working very hard on trying to close the 
loopholes in our laws, trying to strengthen our laws, trying 
to, in my judgment at least, end correspondent accounts for 
shell banks, trying to tighten up on the use of correspondent 
accounts for offshore banks and for banks that are licensed in 
jurisdictions which have no effective regulation.
    We have to try to be sure that the beneficial owners of 
these accounts are made known to our banks so that we have 
access through subpoenas and through lawsuits to people who do 
perpetrate fraud and then try to cleanse their money through 
our banks, or who do take bribe money and try to cleanse the 
money, or who make drug money and then try to cleanse it 
through our banks, and so forth.
    That is our responsibility. It is a heavy responsibility. 
Our Chairman very properly points out that we are going to 
attempt to do that in way which does not impact on the 
legitimate operations of legitimate banks, but that is surely 
our goal. No one should mistake either our intention to get 
after the misuse of our correspondent accounts or our 
determination that in getting after the misuse that we are not 
going to be doing damage to the legitimate use of correspondent 
accounts. Both of those goals are in mind.
    Again, I want to thank our Chairman for her support of this 
investigation. We could not have gotten here without your full 
support or get to where we are going without it, and I again 
thank you and your staff for that support.
    Senator Collins. Thank you, Senator Levin.
    The Subcommittee hearings are now adjourned.
    [Whereupon, at 12:18 p.m., the Subcommittee was adjourned.]


                            A P P E N D I X

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                         CORRESPONDENT BANKING:
                     A GATEWAY FOR MONEY LAUNDERING
                            A REPORT BY THE
                         MINORITY STAFF OF THE
                       PERMANENT SUBCOMMITTEE ON
                             INVESTIGATIONS


                            C O N T E N T S

                                 ------                                

I. Executive Summary.............................................   277

II. Minority Staff Investigation Into Correspondent Banking......   284

III. Anti-Money Laundering Obligations...........................   285

IV. Correspondent Banking Industry in the United States..........   287

    A. Correspondent Banking Products and Services...............   288
    B. Three Categories of High Risk Banks.......................   289
         Shell Banks.............................................   289
         Offshore Banks..........................................   290
         Banks in Non-Cooperating Jurisdictions..................   292
    C. Survey on Correspondent Banking...........................   293
    D. Internet Gambling.........................................   298

V. Why Correspondent Banking is Vulnerable to Money Laundering...   301
    A. Culture of Lax Due Diligence..............................   301
    B. Role of Correspondent Bankers.............................   307
    C. Nested Correspondents.....................................   310
    D. Foreign Jurisdictions with Weak Banking or Accounting 
      Practices..................................................   311
    E. Bank Secrecy..............................................   314
    F. Cross Border Difficulties.................................   316
    G. U.S. Legal Barriers to Seizing Funds in U.S. Correspondent 
      Accounts...................................................   316

VI. GHow an Offshore Bank Launders Money Through a U.S. 
  Correspondent Account: The Lessons of Guardian Bank............   318

VII. Conclusions and Recommendations.............................   330

VIII. Ten Case Histories.........................................   333

    No. 1: American International Bank...........................   333
    No. 2: Caribbean American Bank...............................   333
    No. 3: Overseas Development Bank and Trust Company...........   333
    A. THE FACTS.................................................   334
       (1) American International Bank Ownership and Management..   334
       (2) Financial Information and Primary Activities..........   334
       (3) AIB Correspondents....................................   336
       (4) AIB Operations and Anti-Money Laundering Controls.....   336
       (5) Regulatory Oversight..................................   337
       (6) Money Laundering and Fraud Involving AIB..............   337
          (a) The Forum Investment Scheme........................   337
          (b) Nested Correspondent Banking at AIB................   343
          (c) Internet Gambling/Sports Betting...................   349
          (d) Loans/Self Dealing.................................   350
       (7) Correspondent Accounts at U.S. Banks..................   353
          (a) Bank of America....................................   353
          (b) Toronto Dominion Bank (New York Branch)............   357
          (c) Chase Manhattan Bank...............................   358
          (d) Popular Bank of Florida (now BAC Florida Bank).....   362
          (e) Barnett Bank.......................................   365
       (8) GAIB's Relationship with Overseas Development Bank and 
      Trust Company..............................................   367
          (a) The Koop Fraud.....................................   370
          (b) Financial Statement................................   372
          (c) ODBT's Correspondent Relationships.................   373
    B. THE ISSUES................................................   377

    No. 4: British Trade and Commerce Bank.......................   386
    A. THE FACTS.................................................   386
       (1) BTCB Ownership and Management.........................   386
       (2) BTCB Financial Information............................   391
       (3) BTCB Correspondents...................................   394
       (4) BTCB Anti-Money Laundering Controls...................   394
       (5) BTCB Affiliates.......................................   396
       (6) BTCB Major Lines of Business..........................   398
       (7) Money Laundering and Fraud Involving BTCB.............   404
       (8) Correspondent Accounts at U.S. Banks..................   408
          (a) Banco Industrial de Venezuela (Miami Office).......   409
          (b) Security Bank N.A..................................   416
          (c) First Union National Bank..........................   424
          (d) Other U.S. Banks...................................   431
    B. THE ISSUES................................................   431

    No. 5: Hanover Bank..........................................   439
    A. THE FACTS.................................................   439
       (1)Hanover Bank Ownership and Management..................   439
       (2) Hanover Bank Financial Information....................   444
       (3) Hanover Bank Correspondents...........................   445
       (4) Hanover Bank Operations and Anti-Money Laundering 
      Controls...................................................   447
       (5) Regulatory Oversight of Hanover Bank..................   454
       (6) Money Laundering and Fraud Involving Hanover Bank.....   455
       (7) Correspondent Account at Harris Bank International....   467
    B. THE ISSUES................................................   470

    No. 6: British Bank of Latin America.........................   474
    A. THE FACTS.................................................   474
       (1) BBLA Ownership........................................   474
       (2) BBLA Principal Lines of Business......................   475
       (3) BBLA Correspondents...................................   477
       (4) BBLA Management and Operations........................   477
       (5) Money Laundering Involving BBLA.......................   482
       (6) Closure of BBLA.......................................   487
       (7) Correspondent Account at Bank of New York.............   487
    B. THE ISSUES................................................   490

    No. 7: European Bank.........................................   495
    A. THE FACTS.................................................   495
       (1) European Bank Ownership and Management................   495
       (2) European Bank Financial Information and Primary 
      Activities.................................................   496
       (3) European Bank Correspondents..........................   498
       (4) European Bank Operations and Anti-Money Laundering 
      Controls...................................................   499
       (5) Regulatory Oversight of European Bank.................   501
       (6) Money Laundering and Fraud Involving European Bank....   504
       (7) Correspondent Account at Citibank.....................   509
    B. THE ISSUES................................................   514

    No. 8: Swiss American Bank and Swiss American National Bank..   521
    A. THE FACTS.................................................   521
       (1) Ownership and Management..............................   521
       (2) Financial Information and Primary Activities..........   523
       (3) Correspondents........................................   523
       (4) Operations and Anti-Money Laundering Controls.........   524
       (5) Regulatory Oversight..................................   524
       (6) Money Laundering and Fraud Involving SAB/SANB.........   525
          (a) Controversial Leadership...........................   525
          (b) The Fitzgerald Case--Drugs and Terrorist Money.....   527
          (c) The Gherman Fraud..................................   531
          (d) The DeBella Fraud..................................   533
          (e) The Fortuna Alliance Fraud.........................   538
          (f) Other Frauds/Questionable Accounts.................   541
          (g) Internet Gambling/Sports Betting...................   544
       (7) Correspondent Accounts at U.S. Banks..................   543
          (a) Bank of New York...................................   543
          (b) Bank of America....................................   553
          (c) Chase Manhattan Bank...............................   560
    B. THE ISSUES................................................   576

    No. 9 and No. 10: M.A. Bank and Federal Bank.................   579
    A. THE FACTS.................................................   580
    M.A. Bank
       (1) M.A. Bank Ownership and Management....................   580
       (2) Financial Information and Primary Activities..........   581
       (3) M.A. Bank's Correspondents............................   582
       (4) M.A. Bank's Operations and Anti-Money Laundering 
      Controls...................................................   582
       (5) Regulatory Oversight..................................   582
       (6) Money Laundering and Fraud Involving M.A. Bank........   584
          (a) Laundering of Drug Proceeds through M.A. Bank......   584
          (b) Unsound and Illegal Banking Practices..............   588
       (7) Correspondent Account at Citibank.....................   593

    Federal Bank
       (1) Grupo Moneta and Banco Republica......................   605
       (2) Federal Bank Ownership................................   606
       (3) Financial Information and Primary Activities..........   607
       (4) CEI...................................................   609
       (5) Correspondent Account at Citibank.....................   610
       (6) Regulatory Oversight..................................   611
       (7) Central Bank of Argentina Concerns....................   613
       (8) American Exchange Company.............................   619
       (9) Suspicious Activity At Federal Bank...................   620
    B. THE ISSUES................................................   624

                                APPENDIX

       (1) Bank of New York Scandal..............................   644
       (2) Koop Fraud............................................   646
       (3) Cook Fraud............................................   654
       (4) Gold Chance Fraud.....................................   659
       (5) $10 Million CD Interpleader...........................   665
       (6) GOther Suspect Transactions At BTCB: KPJ Trust, 
      Michael Gendreau, Scott Brett, Global/Vector Medical 
      Technologies...............................................   671
       (7) Taves Fraud and the Benford Account...................   675
       (8) IPC Fraud.............................................   686
                         MINORITY STAFF OF THE

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                               REPORT ON

                         CORRESPONDENT BANKING:

                     A GATEWAY FOR MONEY LAUNDERING

                            February 5, 2001

    U.S. banks, through the correspondent accounts they provide 
to foreign banks, have become conduits for dirty money flowing 
into the American financial system and have, as a result, 
facilitated illicit enterprises, including drug trafficking and 
financial frauds. Correspondent banking occurs when one bank 
provides services to another bank to move funds, exchange 
currencies, or carry out other financial transactions. 
Correspondent accounts in U.S. banks give the owners and 
clients of poorly regulated, poorly managed, sometimes corrupt, 
foreign banks with weak or no anti-money laundering controls 
direct access to the U.S. financial system and the freedom to 
move money within the United States and around the world.
    This report summarizes a year-long investigation by the 
Minority Staff of the U.S. Senate Permanent Subcommittee on 
Investigations, under the leadership of Ranking Democrat 
Senator Carl Levin, into correspondent banking and its use as a 
tool for laundering money. It is the second of two reports 
compiled by the Minority Staff at Senator Levin's direction on 
the U.S. banking system's vulnerabilities to money laundering. 
The first report, released in November 1999, resulted in 
Subcommittee hearings on the money laundering vulnerabilities 
in the private banking activities of U.S. banks.\1\
---------------------------------------------------------------------------
    \1\ See ``Private Banking and Money Laundering: A Case Study of 
Opportunities and Vulnerabilities,'' S. Hrg. 106-428 (November 9 and 
10, 1999), Minority Staff report at 872.
---------------------------------------------------------------------------
I. Executive Summary
    Many banks in the United States have established 
correspondent relationships with high risk foreign banks. These 
foreign banks are: (a) shell banks with no physical presence in 
any country for conducting business with their clients; (b) 
offshore banks with licenses limited to transacting business 
with persons outside the licensing jurisdiction; or (c) banks 
licensed and regulated by jurisdictions with weak anti-money 
laundering controls that invite banking abuses and criminal 
misconduct. Some of these foreign banks are engaged in criminal 
behavior, some have clients who are engaged in criminal 
behavior, and some have such poor anti-money laundering 
controls that they do not know whether or not their clients are 
engaged in criminal behavior.
    These high risk foreign banks typically have limited 
resources and staff and use their correspondent bank accounts 
to conduct operations, provide client services, and move funds. 
Many deposit all of their funds in, and complete virtually all 
transactions through, their correspondent accounts, making 
correspondent banking integral to their operations. Once a 
correspondent account is open in a U.S. bank, not only the 
foreign bank but its clients can transact business through the 
U.S. bank. The result is that the U.S. correspondent banking 
system has provided a significant gateway into the U.S. 
financial system for criminals and money launderers.
    The industry norm today is for U.S. banks \2\ to have 
dozens, hundreds, or even thousands of correspondent 
relationships, including a number of relationships with high 
risk foreign banks. Virtually every U.S. bank examined by the 
Minority Staff investigation had accounts with offshore 
banks,\3\ and some had relationships with shell banks with no 
physical presence in any jurisdiction.
---------------------------------------------------------------------------
    \2\ The term ``U.S. bank'' refers in this report to any bank 
authorized to conduct banking activities in the United States, whether 
or not the bank or its parent corporation is domiciled in the United 
States.
    \3\ The term ``offshore bank'' is used in this report to refer to 
banks whose licenses bar them from transacting business with the 
citizens of their own licensing jurisdiction or bar them from 
transacting business using the local currency of the licensing 
jurisdiction. See also the International Narcotics Control Strategy 
Report issued by the U.S. Department of State (March 2000)(hereinafter 
``INCSR 2000''), ``Offshore Financial Centers'' at 565-77.
---------------------------------------------------------------------------
    High risk foreign banks have been able to open 
correspondent accounts at U.S. banks and conduct their 
operations through their U.S. accounts, because, in many cases, 
U.S. banks fail to adequately screen and monitor foreign banks 
as clients.
    The prevailing principle among U.S. banks has been that any 
bank holding a valid license issued by a foreign jurisdiction 
qualifies for a correspondent account, because U.S. banks 
should be able to rely on the foreign banking license as proof 
of the foreign bank's good standing. U.S. banks have too often 
failed to conduct careful due diligence reviews of their 
foreign bank clients, including obtaining information on the 
foreign bank's management, finances, reputation, regulatory 
environment, and anti-money laundering efforts. The frequency 
of U.S. correspondent relationships with high risk banks, as 
well as a host of troubling case histories uncovered by the 
Minority Staff investigation, belie banking industry assertions 
that existing policies and practices are sufficient to prevent 
money laundering in the correspondent banking field.
    For example, several U.S. banks were unaware that they were 
servicing respondent banks \4\ which had no office in any 
location, were operating in a jurisdiction where the bank had 
no license to operate, had never undergone a bank examination 
by a regulator, or were using U.S. correspondent accounts to 
facilitate crimes such as drug trafficking, financial fraud or 
Internet gambling. In other cases, U.S. banks did not know that 
their respondent banks lacked basic fiscal controls and 
procedures and would, for example, open accounts without any 
account opening documentation, accept deposits directed to 
persons unknown to the bank, or operate without written anti-
money laundering procedures. There are other cases in which 
U.S. banks lacked information about the extent to which 
respondent banks had been named in criminal or civil 
proceedings involving money laundering or other wrongdoing. In 
several instances, after being informed by Minority Staff 
investigators about a foreign bank's history or operations, 
U.S. banks terminated the foreign bank's correspondent 
relationship.
---------------------------------------------------------------------------
    \4\ The term ``respondent bank'' is used in this report to refer to 
the client of the bank offering correspondent services. The bank 
offering the services is referred to as the ``correspondent bank.'' All 
of the respondent banks examined in this investigation are foreign 
banks.
---------------------------------------------------------------------------
    U.S. banks' ongoing anti-money laundering oversight of 
their correspondent accounts is often weak or ineffective. A 
few large banks have developed automated monitoring systems 
that detect and report suspicious account patterns and wire 
transfer activity, but they appear to be the exception rather 
than the rule. Most U.S. banks appear to rely on manual reviews 
of account activity and to conduct limited oversight of their 
correspondent accounts. One problem is the failure of some 
banks to conduct systematic anti-money laundering reviews of 
wire transfer activity, even though the majority of 
correspondent bank transactions consist of incoming and 
outgoing wire transfers. And, even when suspicious transactions 
or negative press reports about a respondent bank come to the 
attention of a U.S. correspondent bank, in too many cases the 
information does not result in a serious review of the 
relationship or concrete actions to prevent money laundering.
    Two due diligence failures by U.S. banks are particularly 
noteworthy. The first is the failure of U.S. banks to ask the 
extent to which their foreign bank clients are allowing other 
foreign banks to use their U.S. accounts. On numerous 
occasions, high risk foreign banks gained access to the U.S. 
financial system, not by opening their own U.S. correspondent 
accounts, but by operating through U.S. correspondent accounts 
belonging to other foreign banks. U.S. banks rarely ask their 
client banks about their correspondent practices and, in almost 
all cases, remain unaware of their respondent bank's own 
correspondent accounts. In several instances, U.S. banks were 
surprised to learn from Minority Staff investigators that they 
were providing wire transfer services or handling Internet 
gambling deposits for foreign banks they had never heard of and 
with whom they had no direct relationship. In one instance, an 
offshore bank was allowing at least a half dozen offshore shell 
banks to use its U.S. accounts. In another, a U.S. bank had 
discovered by chance that a high risk foreign bank it would not 
have accepted as a client was using a correspondent account the 
U.S. bank had opened for another foreign bank.
    The second failure is the distinction U.S. banks make in 
their due diligence practices between foreign banks that have 
few assets and no credit relationship, and foreign banks that 
seek or obtain credit from the U.S. bank. If a U.S. bank 
extends credit to a foreign bank, it usually will evaluate the 
foreign bank's management, finances, business activities, 
reputation, regulatory environment and operating procedures. 
The same evaluation usually does not occur where there are only 
fee-based services, such as wire transfers or check clearing. 
Since U.S. banks usually provide cash management services\5\ on 
a fee-for-service basis to high risk foreign banks and 
infrequently extend credit, U.S. banks have routinely opened 
and maintained correspondent accounts for these banks based on 
inadequate due diligence reviews. Yet these are the very banks 
that should be carefully scrutinized. Under current practice in 
the United States, high risk foreign banks in non-credit 
relationships seem to fly under the radar screen of most U.S. 
banks' anti-money laundering programs.
---------------------------------------------------------------------------
    \5\ Cash management services are non-credit related banking 
services such as providing interest-bearing or demand deposit accounts 
in one or more currencies, international wire transfers of funds, check 
clearing, check writing, or foreign exchange services.
---------------------------------------------------------------------------
    The failure of U.S. banks to take adequate steps to prevent 
money laundering through their correspondent bank accounts is 
not a new or isolated problem. It is longstanding, widespread 
and ongoing.
    The result of these due diligence failures has made the 
U.S. correspondent banking system a conduit for criminal 
proceeds and money laundering for both high risk foreign banks 
and their criminal clients. Of the ten case histories 
investigated by the Minority Staff, numerous instances of money 
laundering through foreign banks' U.S. bank accounts have been 
documented, including:

    --laundering illicit proceeds and facilitating crime by 
accepting deposits or processing wire transfers involving funds 
that the high risk foreign bank knew or should have known were 
associated with drug trafficking, financial fraud or other 
wrongdoing;
    --conducting high yield investment scams by convincing 
investors to wire transfer funds to the correspondent account 
to earn high returns and then refusing to return any monies to 
the defrauded investors;
    --conducting advance-fee-for-loan scams by requiring loan 
applicants to wire transfer large fees to the correspondent 
account, retaining the fees, and then failing to issue the 
loans;
    --facilitating tax evasion by accepting client deposits, 
commingling them with other funds in the foreign bank's 
correspondent account, and encouraging clients to rely on bank 
and corporate secrecy laws in the foreign bank's home 
jurisdiction to shield the funds from U.S. tax authorities; and
    --facilitating Internet gambling, illegal under U.S. law, 
by using the correspondent account to accept and transfer 
gambling proceeds.

    While some U.S. banks have moved to conduct a systematic 
review of their correspondent banking practices and terminate 
questionable correspondent relationships, this effort is 
usually relatively recent and is not industry-wide.
    Allowing high risk foreign banks and their criminal clients 
access to U.S. correspondent bank accounts facilitates crime, 
undermines the U.S. financial system, burdens U.S. taxpayers 
and consumers, and fills U.S. court dockets with criminal 
prosecutions and civil litigation by wronged parties. It is 
time for U.S. banks to shut the door to high risk foreign banks 
and eliminate other abuses of the U.S. correspondent banking 
system.

[GRAPHIC] [TIFF OMITTED] T1166.135


                                             HIGH RISK FOREIGN BANKS
                                  EXAMINED BY PSI MINORITY STAFF INVESTIGATION
----------------------------------------------------------------------------------------------------------------
                                CURRENT                               U.S. CORRESPONDENTS     MONEY LAUNDERING
        NAME OF BANK            STATUS       LICENSE AND OPERATION          EXAMINED              CONCERNS
----------------------------------------------------------------------------------------------------------------
American International Bank  In            <bullet> Licensed in      BAC of Florida         <bullet> Financial
 (AIB)                        Receivershi   Antigua/Barbuda          Bank of America         fraud money
1992-1998                     p            <bullet> Offshore         Barnett Bank           <bullet> Nested
                                           <bullet> Physical         Chase Manhattan Bank    correspondents
                                            presence in Antigua      Toronto Dominion       <bullet> Internet
                                                                     Union Bank of Jamaica   gambling
----------------------------------------------------------------------------------------------------------------
British Bank of Latin        Closed        <bullet> Licensed by      Bank of New York       <bullet> Drug money
 America (BBLA)                             Bahamas                                          from Black Market
1981-2000                                  <bullet> Offshore                                 Peso Exchange
                                           <bullet> Physical
                                            presence in Bahamas and
                                            Columbia
                                           <bullet> Wholly owned
                                            subsidiary of Lloyds
                                            TSB Bank
----------------------------------------------------------------------------------------------------------------
British Trade and Commerce   Open          <bullet> Licensed by      Banco Industrial de    <bullet> Financial
 Bank (BTCB)                                Dominica                  Venezuela (Miami)      fraud money
1997-present                               <bullet> Offshore         First Union National   <bullet> High yield
                                           <bullet> Physical          Bank                   investments
                                            presence in Dominica     Security Bank N.A.     <bullet> Nested
                                                                                             correspondents
                                                                                            <bullet> Internet
                                                                                             gambling
----------------------------------------------------------------------------------------------------------------
Caribbean American Bank      In            <bullet> Licensed by      U.S. correspondents    <bullet> Financial
 (CAB)                        Liquidation   Antigua/Barbuda           of AIB                 fraud money
1994-1997                                  <bullet> Offshore                                <bullet> Nested
                                           <bullet> No physical                              correspondents
                                            presence                                        <bullet> Shell bank
----------------------------------------------------------------------------------------------------------------
European Bank                Open          <bullet> Licensed by      ANZ Bank (New York)    <bullet> Credit card
1972-present                                Vantuatu                 Citibank                fraud money
                                           <bullet> Onshore
                                           <bullet> Physical
                                            presence in Vantuatu
----------------------------------------------------------------------------------------------------------------
Federal Bank                 Open          <bullet> Licensed by      Citibank               <bullet> Bribe money
1992-present                                Bahamas                                         <bullet> Shell bank
                                           <bullet> Offshore
                                           <bullet> No physical
                                            presence
----------------------------------------------------------------------------------------------------------------


                                             HIGH RISK FOREIGN BANKS
                             EXAMINED BY PSI MINORITY STAFF INVESTIGATION--Continued
----------------------------------------------------------------------------------------------------------------
                                CURRENT                               U.S. CORRESPONDENTS     MONEY LAUNDERING
        NAME OF BANK            STATUS       LICENSE AND OPERATION          EXAMINED              CONCERNS
----------------------------------------------------------------------------------------------------------------
Guardian Bank and Trust      Closed        <bullet> Licensed by      Bank of New York       <bullet> Financial
 (Cayman) Ltd.                              Cayman Islands                                   fraud money
1984-1995                                  <bullet> Offshore                                <bullet> Tax evasion
                                           <bullet> Physical
                                            presence in Cayman
                                            Islands
----------------------------------------------------------------------------------------------------------------
Hanover Bank                 Open          <bullet> Licensed by      Standard Bank          <bullet> Financial
1992-present                                Antigua/Barbuda           (Jersey) Ltd.'s U.S.   fraud money
                                           <bullet> Offshore          correspondent,        <bullet> Nested
                                           <bullet> No physical       Harris Bank            correspondents
                                            presence                  International (New    <bullet> Shell bank
                                                                      York)
----------------------------------------------------------------------------------------------------------------
M.A. Bank                    Open          <bullet> Licensed by      Citibank               <bullet> Drug money
1991-present                                Cayman Islands           Union Bank of          <bullet> Shell bank
                                           <bullet> Offshore          Switzerland (New
                                           <bullet> No physical       York)
                                            presence
----------------------------------------------------------------------------------------------------------------
Overseas Development Bank    Open          <bullet> Licensed by      U.S. correspondents    <bullet> Financial
 and Trust (ODBT)                           Dominica                  of AIB                 fraud money
1996-present                               <bullet> Offshore         AmTrade International  <bullet> Nested
                                           <bullet> Physical          (Florida)              correspondents
                                            presence in Dominica     Bank One
                                            (formerly in Antigua)
----------------------------------------------------------------------------------------------------------------
Swiss American Bank (SAB)    Open          <bullet> Licensed by      Bank of America        <bullet> Financial
1983-present                                Antigua/Barbuda          Chase Manhattan Bank    fraud money
                                           <bullet> Offshore                                <bullet> Internet
                                           <bullet> Physical                                 gambling
                                            presence in Antigua                             <bullet> Drug and
                                                                                             illegal arms sales
                                                                                             money
----------------------------------------------------------------------------------------------------------------
Swiss American National      Open          <bullet> Licensed by      Bank of New York       <bullet> Financial
 Bank (SANB)                                Antigua/Barbuda          Chase Manhattan Bank    fraud money
1981-present                               <bullet> Onshore                                 <bullet> Drug and
                                           <bullet> Physical                                 illegal arms sales
                                            presence in Antigua                              money
----------------------------------------------------------------------------------------------------------------
Prepared by Minority Staff of the U.S. Senate Permanent Subcommittee on Investigations, January 2001.

II. Minority Staff Investigation Into Correspondent Banking
    To examine the vulnerability of correspondent banking to 
money laundering, the Minority Staff investigation interviewed 
experts; reviewed relevant banking laws, regulations and 
examination manuals; surveyed U.S. banks about their 
correspondent banking practices; reviewed court proceedings and 
media reports on cases of money laundering and correspondent 
banking; and developed ten detailed case histories of money 
laundering misconduct involving U.S. correspondent accounts. 
The 1-year investigation included hundreds of interviews and 
the collection and review of over 25 boxes of documentation, 
including subpoenaed materials from 19 U.S. banks.
    The Minority Staff began its investigation by interviewing 
a variety of anti-money laundering and correspondent banking 
experts. Included were officials from the U.S. Federal Reserve, 
U.S. Department of Treasury, Internal Revenue Service, Office 
of the Comptroller of the Currency, Financial Crimes 
Enforcement Network (``FinCEN''), U.S. Secret Service, U.S. 
State Department, and U.S. Department of Justice. Minority 
Staff investigators also met with bankers from the American 
Bankers Association, Florida International Bankers Association, 
and banking groups in the Bahamas and Cayman Islands, and 
interviewed at length a number of U.S. bankers experienced in 
monitoring correspondent accounts for suspicious activity. 
Extensive assistance was also sought from and provided by 
government and law enforcement officials in Antigua and 
Barbuda, Argentina, Australia, Bahamas, Cayman Islands, 
Dominica, Jersey, Ireland, the United Kingdom, and Vanuatu.
    Due to a paucity of information about correspondent banking 
practices in the United States, the Minority Staff conducted a 
survey of 20 banks with active correspondent banking 
portfolios. The 18-question survey sought information about the 
U.S. banks' correspondent banking clients, procedures, and 
anti-money laundering safeguards. The survey results are 
described in Chapter IV.
    To develop specific information on how correspondent 
banking is used in the United States to launder illicit funds, 
Minority Staff investigators identified U.S. criminal and civil 
money laundering indictments and pleadings which included 
references to U.S. correspondent accounts. Using these public 
court pleadings as a starting point, the Minority Staff 
identified the foreign banks and U.S. banks involved in the 
facts of the case, and the circumstances associated with how 
the foreign banks' U.S. correspondent accounts became conduits 
for laundered funds. The investigation obtained relevant court 
proceedings, exhibits and related documents, subpoenaed U.S. 
bank documents, interviewed U.S. correspondent bankers and, 
when possible, interviewed foreign bank officials and 
government personnel. From this material, the investigation 
examined how foreign banks opened and used their U.S. 
correspondent accounts and how the U.S. banks monitored or 
failed to monitor the foreign banks and their account activity.
    The investigation included an interview of a U.S. citizen 
who formerly owned a bank in the Cayman Islands, has pleaded 
guilty to money laundering, and was willing to explain the 
mechanics of how his bank laundered millions of dollars for 
U.S. citizens through U.S. correspondent accounts. Another 
interview was with a U.S. citizen who has pleaded guilty to 
conspiracy to commit money laundering and was willing to 
explain how he used three offshore banks to launder illicit 
funds from a financial investment scheme that defrauded 
hundreds of U.S. citizens. Other interviews were with foreign 
bank owners who explained how their bank operated, how they 
used correspondent accounts to transact business, and how their 
bank became a conduit for laundered funds. Numerous interviews 
were conducted with U.S. bank officials.
    Because the investigation began with criminal money 
laundering indictments in the United States, attention was 
directed to foreign banks and jurisdictions known to U.S. 
criminals. The case histories featured in this report are not 
meant to be interpreted as identifying the most problematic 
banks or jurisdictions. To the contrary, a number of the 
jurisdictions identified in this report have taken significant 
strides in strengthening their banking and anti-money 
laundering controls. The evidence indicates that equivalent 
correspondent banking abuses may be found throughout the 
international banking community,\6\ and that measures need to 
be taken in major financial centers throughout the world to 
address the types of money laundering risks identified in this 
report.
---------------------------------------------------------------------------
    \6\ See, for example, ``German Officials Investigate Possible Money 
Laundering,'' Wall Street Journal (1/16/01)(Germany); ``Prosecutors set 
to focus on Estrada bank records,'' Business World (1/15/
01)(Philippines); Canada's Exchange Bank & Trust Offers Look at `Brass-
Plate' Banks,'' Wall Street Journal (12/29/00)(Canada, Nauru, St. 
Kitts-Nevis); ``Peru's Montesinos hires lawyer in Switzerland to keep 
bank accounts secret,'' Agence France Presse (12/11/00)(Peru, 
Switzerland); ``The Billion Dollar Shack,'' New York Times Magazine 
(12/10/00) (Nauru, Russia); ``Launderers put UK banks in a spin,'' 
Financial Times (London)(United Kingdom, Luxembourg, Switzerland, 
Nigeria); ``Croats Find Treasury Plundered,'' Washington Post (6/13/
00)(Croatia); ``Arrests and millions missing in troubled offshore 
bank,'' Associated Press (9/11/00)(Grenada); ``Judgement Daze,'' Sunday 
Times (London) (10/18/98)(Ireland); ``That's Laird To You, Mister,'' 
New York Times (2/27/00)(multiple countries).
---------------------------------------------------------------------------
III. Anti-Money Laundering Obligations
    Two laws lay out the basic anti-money laundering 
obligations of all United States banks. First is the Bank 
Secrecy Act which, in section 5318(h) of Title 31 in the U.S. 
Code, requires all U.S. banks to have anti-money laundering 
programs. It states:

    In order to guard against money laundering through 
financial institutions, the Secretary [of the Treasury] may 
require financial institutions to carry out anti-money 
laundering programs, including at a minimum--(A) the 
development of internal policies, procedures, and controls, (B) 
the designation of a compliance officer, (C) an ongoing 
employee training program, and (D) an independent audit 
function to test programs.

    The Bank Secrecy Act also authorizes the U.S. Department of 
the Treasury to require financial institutions to file reports 
on currency transactions and suspicious activities, again as 
part of U.S. efforts to combat money laundering. The Treasury 
Department has accordingly issued regulations and guidance 
requiring U.S. banks to establish anti-money laundering 
programs and file certain currency transaction reports 
(``CTRs'') and suspicious activity reports (``SARs'').\7\
---------------------------------------------------------------------------
    \7\ See, for example, 31 C.F.R. Sec. Sec. 103.11 and 103.21 et seq. 
CTRs identify cash transactions above a specified threshold; SARs 
identify possibly illegal transactions observed by bank personnel.
---------------------------------------------------------------------------
    The second key law is the Money Laundering Control Act of 
1986, which was enacted partly in response to hearings held by 
the Permanent Subcommittee on Investigations in 1985. This law 
was the first in the world to make money laundering an 
independent crime. It prohibits any person from knowingly 
engaging in a financial transaction which involves the proceeds 
of a ``specified unlawful activity.'' The law provides a list 
of specified unlawful activities, including drug trafficking, 
fraud, theft and bribery.
    The aim of these two statutes is to enlist U.S. banks in 
the fight against money laundering. Together they require banks 
to refuse to engage in financial transactions involving 
criminal proceeds, to monitor transactions and report 
suspicious activity, and to operate active anti-money 
laundering programs. Both statutes have been upheld by the 
Supreme Court.
    Recently, U.S. bank regulators have provided additional 
guidance to U.S. banks about the anti-money laundering risks in 
correspondent banking and the elements of an effective anti-
money laundering program. In the September 2000 ``Bank Secrecy 
Act/Anti-Money Laundering Handbook,'' the Office of the 
Comptroller of the Currency (OCC) deemed international 
correspondent banking a ``high-risk area'' for money laundering 
that warrants ``heightened scrutiny.'' The OCC Handbook 
provides the following anti-money laundering considerations 
that a U.S. bank should take into account in the correspondent 
banking field:

    A bank must exercise caution and due diligence in 
determining the level of risk associated with each of its 
correspondent accounts. Information should be gathered to 
understand fully the nature of the correspondent's business. 
Factors to consider include the purpose of the account, whether 
the correspondent bank is located in a bank secrecy or money 
laundering haven (if so, the nature of the bank license, i.e., 
shell/offshore bank, fully licensed bank, or an affiliate/
subsidiary of a major financial institution), the level of the 
correspondent's money laundering prevention and detection 
efforts, and the condition of bank regulation and supervision 
in the correspondent's country.\8\
---------------------------------------------------------------------------
    \8\ ``Bank Secrecy Act/Anti-Money Laundering Handbook'' (September 
2000), at 22.

    The OCC Handbook singles out three activities in 
correspondent accounts that warrant heightened anti-money 
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laundering scrutiny and analysis:

    Three of the more common types of activity found in 
international correspondent bank accounts that should receive 
heightened scrutiny are funds (wire) transfer[s], correspondent 
accounts used as ``payable through accounts'' and ``pouch/cash 
letter activity.'' This heightened risk underscores the need 
for effective and comprehensive systems and controls particular 
to these types of accounts.\9\
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    \9\ Id.

    With respect to wire transfers, the OCC Handbook provides 
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the following additional guidance:

    Although money launderers use wire systems in many ways, 
most money launderers aggregate funds from different sources 
and move them through accounts at different banks until their 
origin cannot be traced. Most often they are moved out of the 
country through a bank account in a country where laws are 
designed to facilitate secrecy, and possibly back into the 
United States. . . . Unlike cash transactions that are 
monitored closely, . . . [wire transfer systems and] a bank's 
wire room are designed to process approved transactions 
quickly. Wire room personnel usually have no knowledge of the 
customer or the purpose of the transaction. Therefore, other 
bank personnel must know the identity and business of the 
customer on whose behalf they approve the funds transfer to 
prevent money launderers from using the wire system with little 
or no scrutiny. Also, review or monitoring procedures should be 
in place to identify unusual funds transfer activity.\10\
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    \10\ Id. at 23.
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IV. Correspondent Banking Industry in the United States
    Correspondent banking is the provision of banking services 
by one bank to another bank. It is a lucrative and important 
segment of the banking industry. It enables banks to conduct 
business and provide services for their customers in 
jurisdictions where the banks have no physical presence. For 
example, a bank that is licensed in a foreign country and has 
no office in the United States may want to provide certain 
services in the United States for its customers in order to 
attract or retain the business of important clients with U.S. 
business activities. Instead of bearing the costs of licensing, 
staffing and operating its own offices in the United States, 
the bank might open a correspondent account with an existing 
U.S. bank. By establishing such a relationship, the foreign 
bank, called a respondent, and through it, its customers, can 
receive many or all of the services offered by the U.S. bank, 
called the correspondent.\11\
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    \11\ Similar correspondent banking relationships are also often 
established between domestic banks, such as when a local domestic bank 
opens an account at a larger domestic bank located in the country's 
financial center.
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    Today, banks establish multiple correspondent relationships 
throughout the world so they may engage in international 
financial transactions for themselves and their clients in 
places where they do not have a physical presence. Many of the 
largest international banks located in the major financial 
centers of the world serve as correspondents for thousands of 
other banks. Due to U.S. prominence in international trade and 
the high demand for U.S. dollars due to their overall 
stability, most foreign banks that wish to provide 
international services to their customers have accounts in the 
United States capable of transacting business in U.S. dollars. 
Those that lack a physical presence in the United States will 
do so through correspondent accounts, creating a large market 
for those services.\12\
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    \12\ International correspondent banking is a major banking 
activity in the United States in part due to the popularity of the U.S. 
dollar. U.S. dollars are one of a handful of major currencies accepted 
throughout the world. They are also viewed as a stable currency, less 
likely to lose value over time and, thus, a preferred vehicle for 
savings, trade and investment. Since U.S. dollars are also the 
preferred currency of U.S. residents, foreign companies and individuals 
seeking to do business in the United States may feel compelled to use 
U.S. dollars.
      In the money laundering world, U.S. dollars are popular for many 
of the same reasons. In addition, U.S. residents targeted by financial 
frauds often deal only in U.S. dollars, and any perpetrator of a fraud 
planning to take their money must be able to process U.S. dollar checks 
and wire transfers. The investigation found that foreign offshore banks 
often believe wire transfers between U.S. banks receive less money 
laundering scrutiny than wire transfers involving an offshore 
jurisdiction and, in order to take advantage of the lesser scrutiny 
afforded U.S. bank interactions, prefer to keep their funds in a U.S. 
correspondent account and transact business through their U.S. bank. In 
fact, all of the foreign banks examined in the Minority Staff 
investigation characterized U.S. dollars as their preferred currency, 
all sought to open U.S. dollar accounts, and all used their U.S. dollar 
accounts much more often than their other currency accounts.
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    Large correspondent banks in the U.S. manage thousands of 
correspondent relationships with banks in the United States and 
around the world. Banks that specialize in international funds 
transfers and process large numbers and dollar volumes of wire 
transfers daily are sometimes referred to as money center 
banks. Some money center banks process as much as $1 trillion 
in wire transfers each day. As of mid-1999, the top five 
correspondent bank holding companies in the United States held 
correspondent account balances exceeding $17 billion; the total 
correspondent account balances of the 75 largest U.S. 
correspondent banks was $34.9 billion.\13\
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    \13\ ``Top 75 Correspondent Bank Holding Companies,'' The American 
Banker (12/8/99) at 14.
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  A. Correspondent Banking Products and Services
    Correspondent banks often provide their respondent banks 
with an array of cash management services, such as interest-
bearing or demand deposit accounts in one or more currencies, 
international wire transfers of funds, check clearing, payable 
through accounts,\14\ and foreign exchange services. 
Correspondent banks also often provide an array of investment 
services, such as providing their respondent banks with access 
to money market accounts, overnight investment accounts, 
certificates of deposit, securities trading accounts, or other 
accounts bearing higher rates of interest than are paid to non-
bank clients. Along with these services, some correspondent 
banks offer computer software programs that enable their 
respondent banks to complete various transactions, initiate 
wire transfers, and gain instant updates on their account 
balances through their own computer terminals.
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    \14\ ``Payable through accounts'' allow a respondent bank's clients 
to write checks that draw directly on the respondent bank's 
correspondent account. See Advisory Letter 95-3, issued by the Office 
of the Comptroller of the Currency identifying them as high risk 
accounts for money laundering. Relatively few banks offer these 
accounts at the present time.
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    With smaller, less well-known banks, a correspondent bank 
may limit its relationship with the respondent bank to non-
credit, cash management services. With respondent banks that 
are judged to be secure credit risks, the correspondent bank 
may also afford access to a number of credit-related products. 
These services include loans, daylight or overnight extensions 
of credit for account transactions, lines of credit, letters of 
credit, merchant accounts to process credit card transactions, 
international escrow accounts, and other trade and finance-
related services.
    An important feature of most correspondent relationships is 
providing access to international funds transfer systems.\15\ 
These systems facilitate the rapid transfer of funds across 
international lines and within countries. These transfers are 
accomplished through a series of electronic communications that 
trigger a series of debit/credit transactions in the ledgers of 
the financial institutions that link the originators and 
beneficiaries of the payments. Unless the parties to a funds 
transfer use the same financial institution, multiple banks 
will be involved in the payment transfer. Correspondent 
relationships between banks provide the electronic pathway for 
funds moving from one jurisdiction to another.
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    \15\ ``These funds transfer systems include the Society for 
Worldwide Interbank Financial Telecommunications (``SWIFT''), the 
Clearing House Interbank Payments System (``CHIPS''), and the United 
States Federal Wire System (``Fedwire'').
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    For the types of foreign banks investigated by the Minority 
Staff, in particular shell banks with no office or staff and 
offshore banks transacting business with non-residents in non-
local currencies, correspondent banking services are critical 
to their existence and operations. These banks keep virtually 
all funds in their correspondent accounts. They conduct 
virtually all transactions external to the bank--including 
deposits, withdrawals, check clearings, certificates of 
deposit, and wire transfers--through their correspondent 
accounts. Some use software provided by their correspondents to 
operate their ledgers, track account balances, and complete 
wire transfers. Others use their monthly correspondent account 
statements to identify client deposits and withdrawals, and 
assess client fees. Others rely on their correspondents for 
credit lines and overnight investment accounts. Some foreign 
banks use their correspondents to provide sophisticated 
investment services to their clients, such as high-interest 
bearing money market accounts and securities trading. While the 
foreign banks examined in the investigation lacked the 
resources, expertise and infrastructure needed to provide such 
services in-house, they could all afford the fees charged by 
their correspondents to provide these services and used the 
services to attract clients and earn revenue.
    Every foreign bank interviewed by the investigation 
indicated that it was completely dependent upon correspondent 
banking for its access to international wire transfer systems 
and the infrastructure required to complete most banking 
transactions today, including handling multiple currencies, 
clearing checks, paying interest on client deposits, issuing 
credit cards, making investments, and moving funds. Given their 
limited resources and staff, all of the foreign banks 
interviewed by the investigation indicated that, if their 
access to correspondent banks were cut off, they would be 
unable to function. Correspondent banking is their lifeblood.
  B. Three Categories of High Risk Banks
    Three categories of banks present particularly high money 
laundering risks for U.S. correspondent banks: (1) shell banks 
that have no physical presence in any jurisdiction; (2) 
offshore banks that are barred from transacting business with 
the citizens of their own licensing jurisdictions; and (3) 
banks licensed by jurisdictions that do not cooperate with 
international anti-money laundering efforts.
    Shell Banks. Shell banks are high risk banks principally 
because they are so difficult to monitor and operate with great 
secrecy. As used in this report, the term ``shell bank'' is 
intended to have a narrow reach and refer only to banks that 
have no physical presence in any jurisdiction. The term is not 
intended to encompass a bank that is a branch or subsidiary of 
another bank with a physical presence in another jurisdiction. 
For example, in the Cayman Islands, of the approximately 570 
licensed banks, most do not maintain a Cayman office, but are 
affiliated with banks that maintain offices in other locations. 
As used in this report, ``shell bank'' is not intended to apply 
to these affiliated banks--for example, the Cayman branch of a 
large bank in the United States. About 75 of the 570 Cayman-
licensed banks are not branches or subsidiaries of other banks, 
and an even smaller number operate without a physical presence 
anywhere. It is these shell banks that are of concern in this 
report. In the Bahamas, out of a total of about 400 licensed 
banks, about 65 are unaffiliated with any other bank, and a 
smaller subset are shell banks. Some jurisdictions, including 
the Cayman Islands, Bahamas and Jersey, told the Minority Staff 
investigation that they no longer issue bank licenses to 
unaffiliated shell banks, but other jurisdictions, including 
Nauru, Vanuatu and Montenegro, continue to do so. The total 
number of shell banks operating in the world today is unknown, 
but banking experts believe it comprises a very small 
percentage of all licensed banks.
    The Minority Staff investigation was able to examine 
several shell banks in detail. Hanover Bank, for example, is an 
Antiguan licensed bank that has operated primarily out of its 
owner's home in Ireland. M.A. Bank is a Cayman licensed bank 
which claims to have an administrative office in Uruguay, but 
actually operated in Argentina using the offices of related 
companies. Federal Bank is a Bahamian licensed bank which 
serviced Argentinian clients but appears to have operated from 
an office or residence in Uruguay. Caribbean American Bank, now 
closed, was an Antiguan-licensed bank that operated out of the 
offices of an Antiguan firm that supplied administrative 
services to banks.
    None of these four shell banks had an official business 
office where it conducted banking activities; none had a 
regular paid staff. The absence of a physical office with 
regular employees helped these shell banks avoid oversight by 
making it more difficult for bank regulators and others to 
monitor bank activities, inspect records and question bank 
personnel. Irish banking authorities, for example, were unaware 
that Hanover Bank had any connection with Ireland, and Antiguan 
banking regulators did not visit Ireland to examine the bank 
on-site. Argentine authorities were unaware of M.A. Bank's 
presence in their country and so never conducted any review of 
its activities. Cayman bank regulators did not travel to 
Argentina or Uruguay for an on-site examination of M.A. Bank; 
and regulators from the Bahamas did not travel to Argentina or 
Uruguay to examine Federal Bank.
    The Minority Staff was able to gather information about 
these shell banks by conducting interviews, obtaining court 
pleadings and reviewing subpoenaed material from U.S. 
correspondent banks. The evidence shows that these banks had 
poor to nonexistent administrative and anti-money laundering 
controls, yet handled millions of dollars in suspect funds, and 
compiled a record of dubious activities associated with drug 
trafficking, financial fraud and other misconduct.
    Offshore Banks. The second category of high risk banks in 
correspondent banking are offshore banks. Offshore banks have 
licenses which bar them from transacting banking activities 
with the citizens of their own licensing jurisdiction or bar 
them from transacting business using the local currency of the 
licensing jurisdiction. Nearly all of the foreign banks 
investigated by the Minority Staff held offshore licenses.
    The latest estimates are that nearly 60 offshore 
jurisdictions around the globe \16\ have, by the end of 1998, 
licensed about 4,000 offshore banks.\17\ About 44% of these 
offshore banks are thought to be located in the Caribbean and 
Lat