Private banks are havens for tainted money and they must ensure that relationship managers are extra vigilant, a high level conference has h...

Private banks are havens for tainted money and they must ensure that relationship managers are extra vigilant, a high level conference has heard. Elise Bean, deputy chief counsel for the US Senate minority commission on investigations, who wrote this year’s Senate report on correspondent banking, ran through the recent history of money laundering at private banks at the sixth international money laundering conference, hosted in Miami last week by Money Laundering Alert.

Private banking is a long-standing, lucrative and growing part of the US banking system. Until the US Senate released a report on the subject (which Bean co-wrote) in November 1999, it was generally thought that there were no money laundering risks in the sector because of the personal contact between relationship managers and their wealthy customers. The report revealed the folly of this attitude, showing that private bankers were often disinclined to perform enough due diligence tests, even when their managers sent them memos that threatened them with a loss of bonus if they failed to comply.

Case histories: Abacha, Bongo and Salinas

Bean told the story from its beginnings in 1998 with the Senate investigation into Citicorp. Before its merger with the Travelers Group to form Citigroup, this banking giant’s private arm was probed for its part in helping the brother of former Mexican president Carlos Salinas siphon $100m in drug money out of Mexico into Swiss bank accounts in the early 1990s. Bean’s team originally started looking at public figures who had bank accounts at Citicorp, partly because public figures in the US have less privacy than other people and partly because foreign potentates were a cause for concern even then.

“In the Raul Salinas case, his profile was blank. The private banker did not fill his profile in. The $100m was laundered through the bank in very disturbing ways. It turned out that the regulators at the [Office of the Comptroller of the Currency] had said that there was no need to check him. We conducted our own double check. We went to the International Monetary Fund with our findings. When questioned, the private banker said that ‘we had to treat him like a heard of state for reasons of etiquette, so for the first two years I didn’t dare ask him,’” she said.

The private bank accounts of the sons of the late Nigerian dictator Sani Abacha are another case in point. Here, according to the Senate report, Citibank’s private banker who handled these accounts in New York was unaware for more than three years – between 1993 and 1996 – that his clients were Abacha’s sons. He neither talked to his supervisors nor colleagues about press reports that one of the account holders was accused of corruption and caught with $100m in cash by Nigerian police at Lagos airport. He never asked questions about a six-month influx of $47m. His counterpart in London, where the funds in the accounts nearly tripled from $18m to $60m between 1996 and 1998, helped the sons move $39m to Swiss bank accounts in an atmosphere of extreme hurry and in ways that even auditors might not detect. Altogether, the private bank allowed these accounts to operate for ten years with few questions asked.

In another case, President Bongo of Gabon was a long-standing private client of Citibank. Again, according to Bean, the provenance of over $10m in deposits made in 1997, the largest deposits to the Bongo accounts in ten years, was essentially unexplainable. When an OCC examiner pressed Citibank for documents which related to the source of funds in Bongo’s accounts, the private banker who controlled the account sent a memo which identified just one source, the Gabon national budget. The OCC examiner told the subcommittee staff that he accepted this explanation because he assumed that Bongo had carte blanche over his government’s accounts. He did not attempt to double check the information, even when it emerged from press reports that Bongo and his henchmen were taking bribes from the French oil company Elf Aquitaine. Citibank did not close the Bongo accounts until January 1999.

Self interest and extreme secrecy

Bean listed four reasons why private bankers were not complying with “due diligence” rules.

They operated in a culture of personal service and confidentiality.
In this “confidential” culture secrecy was at a premium. In some cases the client asked the banker to issue him with a codename and to allow him to issue codes instead of giving him orders.
Private bankers were worried about losing their franchises, reasoning that if they offended a client who was a head of state in a country where the private bank had other customers, the ramifications would be catastrophic.
Lastly, some bankers were paid in part according to the size of their assets under management, so they were reluctant to close accounts down.

Since that time, much has changed in the regulation of private banking. It is now held that, since signs of possible money laundering originate on the “front line” of private banking, the primary responsibility for devising practical and effective oversight must rest with the relationship managers. In the coming days we shall examine the effect of the self-regulatory Wolfsberg principles, the US “foreign potentate guidelines” and the problems that the compliance department of a private bank might face if it opened an account for an unnamed ex-president of a great Western power who was involved in ongoing criminal investigations and who had pardoned a large number of suspect individuals.