Texts: Excerpt of Senate Money Laundering Report, Press Release

05 February 2001

Texts: Excerpt of Senate Money Laundering Report, Press Release

U.S. banks accused of ignoring drug, bribery money

U.S. banks, through a lack of diligence, have allowed themselves to be used to launder hundreds of millions of dollars obtained through drug trafficking, financial fraud and bribery, a congressional staff report says.

The report by the Democrats' staff of the Senate Permanent Subcommittee on Investigations, released February 5, accuses U.S. banks not of criminal conduct but of inattention when they do business with high-risk foreign banks in what are called correspondent accounts.

"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," the report said. "It is longstanding, widespread and ongoing."

High-risk banks are defined in the report by three categories: shell banks with no physical presence in any country, offshore banks, and banks licensed and regulated by governments having weak controls against money laundering.

Senator Carl Levin of Michigan, the senior Democrat on the subcommittee, supervised the staff report. His February 5 press release that accompanied the report identifies 10 foreign banks investigated by the staff, all but one in the Caribbean, as well as 11 U.S. banks or U.S. offices of banks that allegedly allowed misuse of their services.

"The U.S. banks that gave them accounts were, at best, asleep at the switch and, at worst, didn't care what these foreign banks were doing," Levin said.

[At a February 5 briefing, Levin said he will introduce legislation aimed at prohibiting U.S. banks from opening correspondent accounts with shell banks and requiring them to exercise more diligence with offshore banks' accounts.

He said hearings are scheduled in March on the staff report and his legislative proposal.]

Following are the executive summary excerpted from the staff report and the text of Levin's press release:

(begin excerpt of report)

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

February 5, 2001

U.S. banks, through the correspondent accounts they provide to foreign banks, have become conduits for dirty money flowing into the American financial system and have, as a result, facilitated illicit enterprises, including drug trafficking and financial frauds. Correspondent banking occurs when one bank provides services to another bank to move funds, exchange currencies, or carry out other financial transactions. Correspondent accounts in U.S. banks give the owners and clients of poorly regulated, poorly managed, sometimes corrupt, foreign banks with weak or no anti-money laundering controls direct access to the U.S. financial system and the freedom to move money within the United States and around the world.

This report summarizes a year-long investigation by the Minority Staff of the U.S. Senate Permanent Subcommittee on Investigations, under the leadership of Ranking Democrat Senator Carl Levin, into correspondent banking and its use as a tool for laundering money. It is the second of two reports compiled by the Minority Staff at Senator Levin's direction on the U.S. banking system's vulnerabilities to money laundering. The first report, released in November 1999, resulted in Subcommittee hearings on the money laundering vulnerabilities in the private banking activities of U.S. banks.(1)

I. Executive Summary

Many banks in the United States have established correspondent relationships with high-risk foreign banks. These foreign banks are: (a) shell banks with no physical presence in any country for conducting business with their clients; (b) offshore banks with licenses limited to transacting business with persons outside the licensing jurisdiction; or (c) banks licensed and regulated by jurisdictions with weak anti-money laundering controls that invite banking abuses and criminal misconduct. Some of these foreign banks are engaged in criminal behavior, some have clients who are engaged in criminal behavior, and some have such poor anti-money laundering controls that they do not know whether or not their clients are engaged in criminal behavior.

These high-risk foreign banks typically have limited resources and staff and use their correspondent bank accounts to conduct operations, provide client services, and move funds. Many deposit all of their funds in, and complete virtually all transactions through, their correspondent accounts, making correspondent banking integral to their operations. Once a correspondent account is open in a U.S. bank, not only the foreign bank but its clients can transact business through the U.S. bank. The result is that the U.S. correspondent banking system has provided a significant gateway into the U.S. financial system for criminals and money launderers.

The industry norm today is for U.S. banks(2) to have dozens, hundreds, or even thousands of correspondent relationships, including a number of relationships with high-risk foreign banks. Virtually every U.S. bank examined by the Minority Staff investigation had accounts with offshore banks,(3) and some had relationships with shell banks with no physical presence in any jurisdiction.

High-risk foreign banks have been able to open correspondent accounts at U.S. banks and conduct their operations through their U.S. accounts, because, in many cases, U.S. banks fail to adequately screen and monitor foreign banks as clients.

The prevailing principle among U.S. banks has been that any bank holding a valid license issued by a foreign jurisdiction qualifies for a correspondent account, because U.S. banks should be able to rely on the foreign banking license as proof of the foreign bank's good standing. U.S. banks have too often failed to conduct careful due diligence reviews of their foreign bank clients, including obtaining information on the foreign bank's management, finances, reputation, regulatory environment, and anti-money laundering efforts. The frequency of U.S. correspondent relationships with high-risk banks, as well as a host of troubling case histories uncovered by the Minority Staff investigation, belie banking industry assertions that existing policies and practices are sufficient to prevent money laundering in the correspondent banking field.

For example, several U.S. banks were unaware that they were servicing respondent banks(4) which had no office in any location, were operating in a jurisdiction where the bank had no license to operate, had never undergone a bank examination by a regulator, or were using U.S. correspondent accounts to facilitate crimes such as drug trafficking, financial fraud or Internet gambling. In other cases, U.S. banks did not know that their respondent banks lacked basic fiscal controls and procedures and would, for example, open accounts without any account opening documentation, accept deposits directed to persons unknown to the bank, or operate without written anti-money laundering procedures. There are other cases in which U.S. banks lacked information about the extent to which 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.

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.

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.

(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. 2

(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.

(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.

(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.

(end excerpt of report)

(begin text of press release)

February 5, 2001

Levin Shows How U.S. Banks Are Used to Launder Drug Money and Fraud Proceeds;
Findings of Year-Long Staff Investigation Into High Risk Foreign Banks Released Today

WASHINGTON - Sen. Carl Levin, D-Mich., the Ranking Democrat on the U.S. Senate Permanent Subcommittee on Investigations, today released the results of a year-long investigation by his subcommittee staff on how U.S. banks are being used by foreign banks to launder the proceeds of criminal activity. The report, "Correspondent Banking: A Gateway for Money Laundering," provides the inside story on the operations of ten foreign banks that have used major U.S. banks to move and launder millions of dollars obtained through drug trafficking, financial frauds, bribes, tax evasion and illegal gambling operations.

The report is based on interviews with individuals personally involved in money laundering operations; with dozens of bank owners, managers and employees in the U.S. and abroad; with foreign and U.S. regulators and law enforcement officials; and with victims of the frauds involved. The staff also reviewed thousands of documents obtained from bank regulators, law enforcement officials, courts, and the banks themselves. In addition, the report contains the results of a survey sponsored by Senator Levin of 20 banks doing correspondent banking business (holding accounts for other banks) in the United States.

"Inattention and disinterest by U.S. banks," Levin said, "in screening the foreign banks they take in as clients, have allowed 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 services, safety and soundness of the U.S. banking industry. Taxpayers are spending hundreds of millions of dollars to protect the U.S. banking system and to fight money laundering. It's time for U.S. banks to do their share to end the money laundering carried out by high-risk foreign banks."

"This report is probably the most thorough analysis ever done of the money laundering that goes on in correspondent banking," Senator Levin said. "Virtually every U.S. bank my staff examined had opened accounts for offshore banks [banks licensed to do business only with persons outside the licensing jurisdiction] or banks in suspect jurisdictions; several had opened accounts for shell banks [banks with no physical presence]. Yet few were paying attention or taking the steps needed to make sure these banks weren't misusing their accounts."

One of the case histories in the report involves British Trade and Commerce Bank (BTCB). When it began operations in 1997, BTCB was an unknown, offshore bank in a small bank secrecy jurisdiction in the Caribbean, the Commonwealth of Dominica, with a reputation for weak anti-money laundering controls. BTCB was nevertheless able, within three years, to open accounts at several U.S. banks and move more than $85 million through them, including millions of dollars associated with money laundering, financial frauds and illegal gambling operations on the Internet.

A second case involves American International Bank (AIB) of Antigua, now in liquidation, which facilitated and profited from financial frauds in the United States for five years, laundering millions of dollars through correspondent accounts in U.S. banks, before collapsing from insider abuse and the sudden withdrawal of deposits. The staff report shows how AIB enabled other offshore shell banks (including Caribbean American Bank, a notorious shell bank set up by convicted U.S. felons) to gain access to the U.S. banking system by having accounts with AIB and, through AIB, its U.S. correspondent accounts.

A third case involves British Bank of Latin America (BBLA), a small offshore bank that was licensed in the Bahamas but accepted clients only from Colombia. BBLA closed its doors last year after being named in two separate U.S. money laundering stings. BBLA operated as an affiliate of Lloyds TSB Bank in London and a related bank in Colombia, providing U.S. dollar accounts to Colombian nationals and corporations. Neither BBLA nor its U.S. correspondent bank took any steps to detect money laundering by Colombian money brokers exchanging Colombian pesos for U.S. dollars obtained from illegal drug trafficking; the result was that BBLA's U.S. account became a conduit for illegal drug money.

Among a number of conclusions, the Minority Staff found 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.

-- Offshore banks, shell banks, and banks in jurisdictions with weak bank supervision carry particularly high money laundering risks, and U.S. banks have routinely established correspondent relationships with such banks.

-- Most U.S. banks do not have adequate anti-money laundering safeguards in place with respect to correspondent banking, and this problem is longstanding, widespread and ongoing.

-- High-risk foreign banks that are 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.

-- In the last three years, some U.S. banks have become concerned about the vulnerability of correspondent banking to money laundering and are taking some steps to reduce the money laundering risks, but the steps are slow, incomplete, and not industry-wide.

Based on its findings, the Minority Staff recommended that:

-- U.S. banks should be barred from opening correspondent accounts with shell banks.

-- U.S. banks should be required to use enhanced due diligence and heightened anti-money laundering safeguards as specified in guidance or regulations issued by the U.S. Treasury Department before opening correspondent accounts with foreign banks that have offshore licenses or are licensed in jurisdictions identified by the United States as non-cooperative with international anti-money laundering efforts.

-- U.S. banks should conduct a systematic review of their correspondent accounts with foreign banks to identify high risk banks and eliminate problem banks and should strengthen their anti-money laundering oversight.

-- U.S. banks should be required to identify a respondent bank's correspondent banking clients, and refuse respondent banks that allow shell foreign banks or bearer share corporations to use their U.S. accounts.

-- U.S. bank regulators and law enforcement officials should offer improved assistance to U.S. banks in identifying and evaluating high-risk foreign banks.

The ten foreign banks investigated by the Minority Staff are:

American International Bank (AIB) of Antigua and Barbuda

British Bank of Latin America (BBLA) of Bahamas

British Trade and Commerce Bank (BTCB) of Dominica

Caribbean American Bank of Antigua and Barbuda

European Bank of Vanuatu

Federal Bank of Bahamas

Hanover Bank of Antigua and Barbuda

M.A. Bank of Cayman Islands

Overseas Development Bank and Trust of Dominica

Swiss American Bank of Antigua and Barbuda

The U.S. banks which served as correspondent banks to these foreign banks and which are discussed at some length in the report are:

Banco Industrial de Venezuela (Miami office)

Bank of America

Bank of New York

Barnett Bank

Chase Manhattan Bank

Citibank

First Union National Bank

Harris Bank International

Popular Bank of Florida (now BAC Florida Bank)

Security Bank N.A.

Toronto Dominion Bank (New York branch)

"The investigation was able to get behind the closed doors of some of these secretive foreign offshore and shell banks to show how they operate and how they and their clients misuse U.S. banks. It isn't a pretty picture," Levin said. "Some of these foreign banks operate without the most basic controls or oversight that Americans expect at a regulated financial institution, and they have highly questionable owners, employees, and customers. Yet all of them managed to open U.S. bank accounts and run millions of dollars through them. The U.S. banks that gave them accounts were, at best, asleep at the switch and, at worst, didn't care what these foreign banks or their clients were doing."

(end text of press release)