Report: Banks Lenient On Laundering
Financial services giant Citigroup Inc. and Commercial Bank of San Francisco violated control rules and allowed some $1 billion in possibly illicit Eastern European money to move through their accounts, congressional investigators say.
"These transfers raise concerns that the U.S. banking system may have been used to launder money," the General Accounting Office, Congress' investigative arm, said in a report dated Oct. 31 on its nine-month inquiry. It was made public on Wednesday.
The report is just the latest allegation of large-scale international money laundering, which has received increased notice after it was revealed last year that the Bank of New York, one of the nation's largest, had served as a conduit for $7 billion in Russian money, some of it believed to be from criminal activities.
New York-based Citibank, one of the world's largest banks with operations around the globe, came under congressional scrutiny a year ago for alleged abuses by some executives in handling millions of dollars deposited by foreign officials later accused of corruption and money laundering.
John Reed, then the co-chairman of parent Citigroup, was closely questioned about the bank's activities at a Senate investigative hearing that opened a window on the sheltered world of private banking that caters to the very wealthy.
Citibank on Tuesday sent a letter to the GAO saying it had closed the accounts in question after being contacted by the congressional investigators earlier this year.
"It is clear in hindsight that our systems and tracking procedures were not sufficient to detect the nature and extent" of a client's relationship with the bank, wrote Michael Ross, general counsel of the bank's Global Consumer Business division.
"Given enhancements to our systems and procedures, we are confident that we would detect questionable activity and take action more promptly should a similar situation arise today," Ross' letter said. It said bank officials have detected no illegal activity in the accounts.
The client is a Russian immigrant who set up more than 2,000 corporations registered in Delaware for Russian brokers and then opened the Citibank accounts for them between 1991 and January 2000, according to the GAO report.
The client was identified as Irakly Kaveladze by a congressional source who spoke on condition of anonymity. Of the $1.4 billion or so that he deposited in the two banks, some $800 million went into Citibank accounts and about $600 million into Commercial Bank of San Francisco, the report said. It said much of the money later was transferred by wire to accounts in foreign countries.
The conclusions of the report and Ross' letter were first reported Wednesday by The New York Times and The Wall Street Journal.
Far less well-known is Commercial Bank of San Francisco. According tthe GAO report, its president told the investigators that two Russians bought about 9 percent of its stock for $1 million in March 1995.
A woman answering the telephone at Commercial Bank said no one was available to answer questions.
"It is relatively easy for foreign individuals or entities to hide their identities while forming shell corporations that can be used for the purpose of laundering money," the GAO report said.
It said Citibank and Commercial Bank of San Francisco "violated the principles" of banking industry policies requiring financial institutions to monitor account activities for suspicious transactions or customers.
The report also found that flaws in Delaware's corporation law — which does not require applicants for corporate licenses to list a company's principals, the place of business or the type of business — made it vulnerable to misuse.
Money laundering, in which profits from drug trafficking, prostitution and other criminal activities are moved through a series of bank or brokerage accounts to make them appear to be proceeds of legitimate business activity, is estimated to absorb close to $600 billion a year. That equates to 5 percent of the world's gross domestic product.