Shell Game

Citibank attacks money-laundering regulations

by Lucy Komisar

In These Times magazine, November 2001


Citibank is leading a fight by American banks to gut the anti-money-laundering laws currently being considered in Congress-laws that could significantly change the way banks do business for their wealthiest clients.

Citibank is seeking an exception to a proposed ban on doing business with shell banks, which have no physical presence and are situated "virtually" in offshore zones to avoid taxes and regulations. The banks are used to hide and launder perhaps billions of dollars a year. "Citibank is the only major bank in the United States that admits to having shell banks as clients, and it doesn't want to give them up," says a congressional staffer, who spoke on condition of anonymity. "Citibank is the most active bank trying to gut the ban on shell banks, and the American Bankers Association is trotting behind them."

In an example of what having friends at the top can do for the financial services lobby, which is one of the largest and most powerful in Congress, Richard Small, director of Citibank's anti' money-laundering department, lobbied the House and Senate committees to insert an exception that would allow U.S. banks to work with shell financial services companies, the staffer says. The clause was deleted in the House version, but at press time the Senate committee had yet to vote on the bill. "The House bill [makes it] look like they're banning shell banks, but the exception makes the ban meaningless," explains the staffer.

Small, who until recently headed the anti-money-laundering office of the Federal Reserve, declined to comment. But a Citibank spokesman says that the banking conglomerate sup ports the legislation and that it is "working with U.S. government and industry associates to determine the most effective means to prevent the banking system worldwide from being used for criminal purposes."

Yet as recently as May, Citibank was forced to close two accounts held in its own offshore banks in the Bahamas and the Cayman Islands after a Senate investigation revealed that several million dollars in drug money had been laundered through the accounts. Both the accounts were from shell banks affiliated with financial services companies, for which Small was seeking the exception, and one with a securities firm linked to drug money. Citibank "closed the accounts of the two [banks] we reported on," the staffer said, "but they have others."

The American Banking Association has been fighting along with Citibank to delete the "due diligence" clause in the legislation, which would require that banks make a concerted effort to verify the source of foreign funds they transfer or receive. Peter Blocklin, senior federal legislative representative for the ABA, told the New York Times that banks were "already doing due diligence."

But a congressional report released in March of this year said the opposite, charging four of the largest U.S. banks-Citibank, J.P. Morgan, Bank of America and First Union-with having inadequate money-laundering controls and weak due diligence practices. Sen. Carl Levin (D-Michigan), co-sponsor of the Senate bill, says the banks are in fact "asleep at the switch."

About $500 billion-or half of the global total-is laundered through U.S. banks each year, according to the Bureau of National Affairs. Jack Blum, a Washington lawyer who co-authored a U.N. report on offshore banking, estimates that $70 billion in taxes is lost every year when the richest U.S. taxpayers hide money in offshore banking accounts. Regardless, Republicans historically have been vehemently opposed to regulating money in U.S. banks, and the bills being considered are a radical about-face, brought about by the September 11 attacks as part of Bush's anti-terrorism plan.

In an area where the United States has been lax for decades, the proposed legislation is reasonably strong. But although the money-laundering controls are a significant step forward, they still ignore many of the problems in the U.S. banking and money-transfer system. The legislation permits, but does not require, the Treasury Department to stop U.S. banks from working with banks in countries where secrecy laws prevent cooperation with investigators (countries like the Cayman Islands and the Bahamas). It asks only a quick study of imposing regulations on investment companies and hedge funds, which are not currently regulated at all. And the Bush administration is not requiring suspicious activity reports (which banks are currently required to file for suspicious transactions over $10,000) from casinos, money transmitters like Western Union and stock brokerages- all of which, because they consistently handle large amounts of cash, are prime targets for money launderers.

Until the United States closes these gaping loopholes in the system, the flow of illegal funds from the world's wealthiest, and the world's wealthiest criminals, will continue.

Banks watch

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