Wringer time for money launderers
By Tom Lowry Fri., Aug. 27, 1999, FINAL EDITION
Section: MONEY
Page 1BNEW YORK -- Explosive allegations that the Russian mob laundered as much as $15 billion here through two leading banks underscores troubling fissures in the U.S. banking system.
Despite regulations requiring banks to keep an eye out for money laundering, institutions are not doing enough to learn more about their customers or the source of their money, say lawmakers, law enforcement officials and money laundering experts.
''Alarms should be going off all over the banking system this week,'' says U.S. Rep. Jim Leach, R-Iowa. U.S., British and Russian law enforcement officials said this week that Russian organized crime used accounts at Bank of New York and Republic Bank of New York to launder money, including $10 billion in diverted International Monetary Fund loans earmarked to aid Russia's economy.
Leach, the chairman of the House Banking Committee, has scheduled hearings for next month to explore Russian organized crime's infiltration of U.S. banks. Money laundering is the criminal practice of moving the proceeds of illegal activities -- which could range from narcotics sales to arms trafficking to tax evasion -- to mask the source of money connected to such activities.
The government estimates that as much as $500 billion in criminal proceeds are laundered worldwide every year. In his 1996 book The Laundrymen, Jeffrey Robinson says money laundering is the world's third-largest business behind foreign exchange and oil.
Since 1985, 32 U.S. banks and other financial institutions have been convicted of money laundering, paid criminal fines, forfeited assets or paid civil penalties for violating money laundering laws, the Justice Department reports. In the same period, 13 foreign financial institutions faced similar penalties.
The process of money laundering often includes passing the illicit funds through a series of bank accounts, shell companies and legitimate businesses before the criminals use the money. The process often is referred to as ''layering.''
James Moody, a former head of the FBI's organized crime division, says Semion Yukovich Mogilevich, whose crime organization is suspected of laundering money through Bank of New York, operates a ''far-flung empire'' worldwide that runs not only illegal businesses but legitimate enterprises.
In a global economy, where more than $2 trillion a day is wired through banks worldwide, money laundering is becoming increasingly hard to detect. ''The criminal's choice of money-laundering vehicles is limited only by his or her creativity,'' says a State Department report on money laundering released earlier this year.
U.S. banks are required to file reports on any cash transactions of $10,000 or more with the Treasury's Financial Crimes Enforcement Network. Banks also must keep records of wire transfers of $3,000 or more for at least five years and to file ''suspicious activity reports'' (SARs) on any unusual transactions. Determining what is suspicious is at the discretion of the banks, regulators say.
Checks in place
Republic National Bank last August filed a SAR over an unusually large transfer from one of its accounts to an account at the Bank of New York in the name Benex Worldwide, which has ties to Mogilevich.
Republic spokeswoman Melissa Krantz says the bank filed a SAR with the Treasury Department, which then contacted the FBI. The FBI then asked Republic and the Bank of New York to keep the Benex account and related accounts open so they could monitor their activities.
Krantz declined to elaborate on the amount of money moving between the accounts. Bank of New York spokesman Frank Scarangella declined comment. The bank says it's cooperating with investigators.
The banking industry could have faced another anti-money-laundering rule if a proposal hadn't been scrapped earlier this year by regulators after a public outcry. Under ''know your customer'' rules, banks would have been required to verify customers' identities, know the source of their money and determine their normal pattern of transactions.
But privacy advocates and consumers opposed the rule, saying it would violate certain constitutional rights of bank customers. The Federal Deposit Insurance Corp., one of four regulatory agencies that supported the rule, received 225,000 e-mail messages and letters in one week from people opposing the rule.
But 86% of all U.S. banks voluntarily maintain their own ''know your customer'' policies, according to a 1990 survey by the American Bankers Association. Under money-laundering laws, bankers who claim they didn't know the source of customers' money and never asked can be charged with ''willful blindness'' -- a deliberate avoidance of knowledge and facts.
''Every bank has some policies or procedures in place to help them detect money laundering,'' says John Byrne, ABA senior counsel. ''Whether they are effective or not is determined by the frequency of exams by regulators. And the best systems in the world can be compromised by crooked insiders.''
Know your customers
The Bank of New York case is not the first high-profile case involving a major bank and allegations of money laundering.
A report by the General Accounting Office in December concluded that lax procedures at Citibank allowed the brother of former Mexican president Carlos Salinas de Gortari to funnel tens of millions of dollars in payoffs from drug traffickers out of Mexico. Citibank's private banking unit, which handled the accounts of Raul Salinas de Gortari, failed internal audits in 1996 and 1997 because its ''know your customer'' practices were insufficient, the GAO report says. The report did not say Citibank broke any laws.
The U.S. Attorney in Manhattan has been conducting an investigation into the Salinas matter for more than two years. Citibank spokesman Richard Howe says the GAO report ignored the bank's strengthened efforts to combat money laundering.
But money-laundering experts say ''correspondent banking'' is one of the most potentially dangerous areas for large money-center banks such as Citibank and Bank of New York. In correspondent banking, larger banks -- in exchange for a fee -- will become representatives for foreign banks not licensed in the USA to provide services here. Large banks often will serve as the correspondent bank for hundreds of other banks.
''Any brass-plate, shoddy bank can get access to the international banking system through these correspondent banking relationships,'' says Jack Blum, a Washington, D.C., lawyer who specializes in international criminal law.
The Central Bank of Russia issued 3,000 bank licenses from 1991 to 1995. ''Maybe about 300 of them actually had auditors,'' says Rayburn Hesse, a former senior policy adviser at the State Department who specialized in money laundering. Russian banks have allegedly been a vehicle for Russian organized crime to loot the country.
''But if they find a correspondent bank in this country, the assumption is that they are valid,'' says Hesse.
For example, Inkombank, once one of Russia's largest banks that allegedly had ties to organized crime, had correspondent banking relationships with Citibank, Bank of New York, Republic National Bank and Bankers Trust among others, according to court documents filed in a lawsuit brought by the bank's Western shareholders against the bank and its lawyers. Russian regulators declared the bank insolvent last year.
Bruce Zagaris, a Washington, D.C., lawyer specializing in international criminal law, says ''when you're dealing with Russia, the entire economy has a lot of cash and you see a lot of gray transactions. It's very hard to distinguish the legitimate from the illegitimate. It's the whole nature of the economy.''
Banking consultants say much of the dirty money flowing out of Russia will end up in U.S. banks, if only to be wired out the next day. No matter how many money-laundering laws are in place, ''the lack of due diligence on the part of the banks comes down to the people behind the entity,'' says Sheila Tendy, a banking specialist with investigative firm DSFX.
TEXT OF INFO BOX BEGINS HERE
Anti-laundering checks for banks
Federal law requires U.S. banks to take these steps to help prevent and detect money laundering.
* File reports on any cash transactions of $10,000 or more with the Treasury's Financial Crimes Enforcement Network. In 1998, 12.6 million reports were filed.
* Keep records on wire transactions of $3,000 or more for at least five years.
* File suspicious activity reports with the Treasury Department's Financial Crimes Enforcement Network on any unusual activities. In 1998, 94,600 were filed, vs. 79,200 in 1997.
Source: Financial Crimes Enforcement Network
