|Congressional Testimony of
Thomas A. Renyi,
Chairman of the Board of the Bank of New York
U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. SEPTEMBER 22, 1999
PANEL III OF A HEARING OF THE HOUSE BANKING AND FINANCIAL SERVICES COMMITTEE SUBJECT: RUSSIAN CORRUPTION AND MONEY LAUNDERING
WITNESS: THOMAS RENYI, CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER, BANK OF NEW YORK
CHAIRED BY: REPRESENTATIVE JAMES LEACH (R-IA)
REP. LEACH: Our third panel is -- we welcome Mr. Thomas A. Renyi. Mr. Renyi is chairman of the board and chief executive officer of the Bank of New York. And your full statement will be placed in the record. You may proceed as you see fit and read the full statement or parts as you prefer.
MR. RENYI: Thank you, Mr. Chairman. Mr. Chairman, members of the committee, my name is Tom Renyi, and I am chairman of the board and chief executive officer of the Bank of New York. I appreciate the opportunity to testify before the House Banking Committee on behalf of the Bank of New York. Our bank was founded in 1784 by Alexander Hamilton. Our business today focuses on the global financial services sector, and we are one of the leading correspondent banks for other banks around the world. We provide corporate and retail services in our home market as well as a variety of other trust and investment services. The Bank of New York has consistently enjoyed a reputation for prudence and responsibility while producing amongst the highest earnings in our industry for our shareholders. I have been dismayed by suggestions in the press that the Bank of New York was somehow actively involved in the reported Russian money laundering scandals. Let me set the record straight: No charges have been filed against the Bank of New York, no relevant authorities have asserted that the bank has engaged in money laundering or violated any other law. No customer of the bank nor the bank itself has lost money as a result of the activities in question. During the past year we have worked closely with all of the ongoing investigations. We have provided thousands of documents and millions of electronic bits of information, and these investigations are not yet complete. They remain highly confidential, and as you can understand there are limits as to what we can disclose prior to their completion. And, Mr. Chairman, in my written statement I provided detailed information on the six specific topics raised in your letter inviting me to appear today. I would like to use this limited time available to me now to discuss several basic questions: What events actually took place, how did they take place, what have we done as a result of these events and the subsequent inquiry. And finally, Mr. Chairman, I would like to suggest policy issues that the committee may wish to consider. Press accounts have tended to ignore the Bank of New York's cooperation with the investigating agencies both here and abroad. And although, Mr. Chairman, there are limits to what I can say against about these investigations, let me try and describe what I can. The bank learned of these investigations a year ago, in September of '98. And when we requested the U.S. Attorney's permission to close the accounts we were asked to keep the accounts open, to advise no one other than our bank regulators, and to take no action that would compromise the investigations. We did all of these things. This was our commitment then, and it remains our commitment now to cooperate fully with all law enforcement agencies. Now, when opened the accounts were quite normal. The principal accounts were opened at a New York City branch of the bank by Peter Berlin (sp), a New Jersey resident, who became a U.S. citizen in 1996, and who represented himself as operating small businesses in the New York metropolitan area. The accounts were referred to us by an officer of the bank, Lucy Edwards (ph), Mr. Berlin's (sp) wife. The initial history of these accounts were unremarkable, and account activity was consistent with a modest business. However, the volume of funds moving through these accounts increased to levels well beyond what would have been expected for businesses of this kind. And when bank employees noticed the increase in volume, questions were raised within the bank about both Mr. Berlin (sp) and his companies. But the questions were not pursued with sufficient vigor or follow-through, and the questioners relied too heavily on the fact that Mr. Berlin (sp) was married to a well regarded bank officer, Ms. Edwards (sp), who again originally referred the accounts. Allowing these accounts to remain open and active without sufficient questioning was a lapse on the part of the bank, and I have taken personal responsibility for implementing remedial actions which I will describe later in my testimony. So let me turn, Mr. Chairman, to the Bank of New York's business dealings in Russia. The bank has done business in Russia since 1922. And with the collapse of the Soviet Union in '91, a new banking system began to emerge in Russia, and we, as many of the nation's leading commercial and investment banks, were asked to aid in the development of their banking system. The role we chose was similar to what we do in many other countries and more limited than what many other banks chose. In our case, correspondent banking and securities processing activities, bank-to-bank business that generates stable, predictable fees with relatively low risk in capital exposure, was what we chose. To correct any mis-impression's, I want to underscore the fact that the Bank of New York has no branches or bank subsidiaries in Russia -- just a small five-person office that performs administrative functions. When we open correspondent relationships, we are selective. We do business only with banks that meet the high standards in their particular marketplace. We require documentation from them as to the legality and the creditworthiness of their businesses, and we review their capital adequacy and their reputation in the local marketplace. But having a correspondent relationship with a bank, Mr. Chairman, does not give us, nor any bank, much direct knowledge about that correspondent's customer accounts. This results from the opaque nature of the electronic global payment system. Information regarding the sender and receiver of funds consists little more than sums, account numbers and digital information regarding the bank identified. The system is excellent at tracking fund flows within its electronic pathways; but the system is not very good at identifying who controls the origination or destination accounts, how they may have come by the money, or what they plan to do with it. So we share that frustration that all of the authorities who are our partners in these ongoing investigations have regarding these accounts. In the last five weeks we have examined vast amounts of data, but we do not have all of the answers that we want, and we don't know when or if we will. Working with outside auditors, we have reviewed the program we employ for identifying and reporting suspicious activity, and we have identified several areas for improvements and have implemented already most of the changes. We have formed an anti-money laundering --
REP. LEACH: Mr. Renyi, if I could interrupt --
MR. RENYI: I'm sorry, Mr. Chairman.
REP. LEACH: I apologize. We are interrupted by a vote on the floor -- it may be several votes. And it strikes me that it might be better to recess in the middle of your testimony than just before you finish, so you have a better chance to give a flow.
MR. RENYI: Fine, Mr. Chairman.
REP. LEACH: So what I would suggest is that the committee recess pending the several votes, and then we'll return to your testimony, and you can proceed as you see fit at that time.
MR. RENYI: Very well.
REP. LEACH: So the committee will be in recess pending the vote.
MR. RENYI: Thank you. (Recess.)
REP. LEACH: (Sounds gavel.) The committee will reconvene. When we recessed for a series of votes, Mr. Renyi was in the middle of his testimony, and I would like him to proceed.
MR. RENYI: Thank you, Mr. Chairman. Prior to the vote, I had summarized much of the activities that were taking place in the Bank of New York that were subject to our investigation, and most importantly what we did about them, what we are doing about those activities, those investigations. I was at the point where I would like to really discuss and offer some public policy commentary, being that one of the central issues, one of the central questions that is coming before this committee is the possible misuse of international funds transfer system which we feel is a truly important issue that affects clearly all of the banking system here in the U.S. It is an issue that has two components: the granting of access to the global payments system and the monitoring of activity taking place within the system. Mr. Chairman, if Congress concludes that the access to the payment system should be tightened, I would urge strongly that this be done through a process of international cooperation. Otherwise, if we restrict access in any one country, we may simply drive would-be wrongdoers to less stringent points of entry into the system. The U.S. dollar is the unquestioned currency of choice for payments, for payments moving through the global system. Any policy action that reduces the importance and the attractiveness of the U.S. dollar for world trade would place the United States at a competitive disadvantage. As we look at monitoring activity within the payments system, we should as well determine how U.S. foreign policy should address illicit business activity that uses this payment system. Today an agency of the U.S. Treasury, the Office of Foreign Access Control, provides enforcement against economically embargoed countries. Should that approach be applied to money laundering? Should it be applied to capital flight? Could it be done without hindering legitimate trade flows? And if we choose to step up surveillance activities, can we do so with appropriate respect for our fellow citizens' rights to privacy? Mr. Chairman, you have expressed a policy concern about the role of U.S. banks in establishing correspondent relationships in Russia and other emerging countries where there are clear concerns for corruption. Let's be careful that if Western banks redline Russian banks, the emergence of a modern capitalistic economy in Russia will probably be impossible. In conclusion, I believe that these are legitimate and important issues that touch on the central themes of these hearings. Yet the broader considerations should not obscure the essential responsibility that we and all the participants in the global system have in ensuring its appropriate use. When any financial institution provides access to the system or facilitates its use, it must do everything it can to prevent illicit activity from taking place as a result. And if illicit activity does take place, it must detect it and bring it promptly to the attention of appropriate authorities. This is our responsibility, and on behalf of the Bank of New York I reaffirm that responsibility today. Thank you, Mr. Chairman.
REP. LEACH: Thank you very much, Mr. Renyi. And let me say that there is an element of awkwardness in all of this hearing in that we have before us today one of the most reputable banks in the world, and a bank with enormous history, in fact as stated in your initial comments -- the oldest bank in the United States, founded by the man many of us consider to be our greatest secretary of the Treasury, Alexander Hamilton. The fact that it is such a great bank and such a reputable bank makes the questions at stake rather large, because if our best and strongest are part of a system in which money can be laundered, whether it be through the fault or not fault of the bank, is very difficult. So let me just begin by saying -- can you give us a sense for the magnitude of funds that you believe have come from Russia through your bank?
MR. RENYI: I'm sorry, I didn't hear -- what is the source?
REP. LEACH: The magnitude of funds --
MR. RENYI: Magnitude of funds --
REP. LEACH: -- that would be considered in a traditional way of -- as you know press account are in the $10 billion figure. You have indicated to me privately perhaps less than that.
MR. RENYI: Somewhat less than that. We have done -- we are in a process of our own investigation, which really started five weeks ago when the leak first occurred in the press. And as you can imagine, this is a very, very complex -- very complex situation to review. There are literally thousands of pages of documents, thousands of credits and debits flowing through these accounts.
What we have been able to determine is that the central accounts in question here that were controlled seemingly by Mr. Berlin (sp) moved $7.5 billion over the past three years -- roughly three years and one quarter -- roughly even throughout the course of those three and a half, three and a quarter years. So the magnitude is very substantial under virtually any type of measurement.
REP. LEACH: So these are the accounts controlled by this one individual. How many Russian banks or correspondents do you work with?
MR. RENYI: Today, Mr. Chairman, we have roughly 160 banks that we work with that represents approximately 10 percent of the universe in Russia today.
REP. LEACH: Yesterday a former CIA station chief indicated that his judgment was about 85 percent of the Russian banks are fraudulent, and there are figures of a given kind of magnitude that have been talked about for some time, and that Russian banks in many cases are considered money laundering platforms. Do you have figures on dollar volume of Russian bank funds run through your bank?
MR. RENYI: We do, Mr. Chairman. Obviously through the course of this examination we have literally pored over every type of statistic we can to develop a sense of dimension to this issue within our own organization. I think it gives some degree of dimension as well to the issue overall through the U.S. banking system. With regard to our banks, our correspondent banks in Russia, we looked at specifically a time frame of last July and last August, which coincides with the IMF payment last year, to determine what volumes were flowing through our accounts. And at that time it was $3.7 billion per day --
REP. LEACH: Three point seven billion per day?
MR. RENYI: Three point seven billion dollars per day on average, and a fairly tight range -- 3.2 to 3.8 billion?
REP. LEACH: How would this relate to, say, three months earlier and three months later?
MR. RENYI: It appeared to be very, very similar. There was a slight run-up since the early part of '98, but it has stayed very stable around that $3.7 billion. I might add that represents less than one half of a percent of all of the dollars that we clear for all of our correspondents, which is about $600 billion.
REP. LEACH: Of these amounts, how many would have had any origin in let's say from offshore banks, or are these directly from Russia?
MR. RENYI: This would be all from Russia.
REP. LEACH: Directly?
MR. RENYI: These are all Russian --
REP. LEACH: No intermediaries?
MR. RENYI: Russian-domiciled organizations, yes, Mr. Chairman.
REP. LEACH: Now, you have an offshore subsidiary, is that correct? In the Caymans?
MR. RENYI: We have a branch --
REP. LEACH: A branch.
MR. RENYI: -- not a subsidiary. We do not have a chartered --
REP. LEACH: For what reason would you have a branch in the Caymans?
MR. RENYI: The Cayman branch is a funding vehicle for the bank overall. It is similar to virtually every Cayman branch that any U.S. bank would have. It strictly offers an ability for us to be able to quote different rates than what we have here in the U.S. The Cayman branch that we have is under the jurisdiction of the Federal Reserve.
REP. LEACH: Now, today's Wall Street Journal reports that investigators are reviewing two accounts at your Cayman branch that are beneficially owned by a Leonid Dyachenko, who is married to President Yeltsin's daughter and close political adviser, Tatyana. The article suggests that the Cayman accounts were opened in the names of two offshore companies, the ownership of which appears to be a bit unclear; and then deposits into the account came from two companies controlled by Mr. Dyachenko and incorporated in the Caymans. These two companies are in turn reported to be affiliated with a Russian company that published President Yeltsin's memoirs. Can you tell us first is it true that the Bank of New York maintains accounts for Mr. Dyachenko in the Cayman Islands?
MR. RENYI: Well, as you can imagine, Mr. Chairman, this is an exceptionally sensitive issue, because it is very much under the purview of the ongoing investigation. We have -- by policy do not discuss relationships with any of our clients. That is a policy that is shared by virtually every bank that I am aware of -- compounded by the issue surrounding the investigation. Obviously given the commentary today in today's press, what I can say is to confirm the fact that those two accounts do exist at the Bank of New York. That Cayman Island branch again is -- any deposits that may be in the accounts in the Cayman Island branch is under the supervision and jurisdiction of the Federal Reserve, just as every branch in the United States is.
REP. LEACH: Jurisdiction implies regulatory --
MR. RENYI: Regulatory review.
REP. LEACH: -- but that's different than legal jurisdiction.
MR. RENYI: I'm implying the regulatory review.
REP. LEACH: Which I think that's a distinction -- (inaudible). Did you make inquiries to determine who the beneficial owners were when these deposits were made? Did you know that at the time?
MR. RENYI: That, Mr. Chairman, I'm, again, quite sensitive to. And I'm not sure I'm in a position to respond to that, again, given the ongoing investigation. I --
REP. LEACH: This is just a question for the bank, to the bank's knowledge.
MR. RENYI: In terms of the bank's own actions, yes, we did. We asked and went through, to the best of my knowledge -- and I have reviewed that -- the typical routines we have for "Know your customer," which includes an identification of the beneficial owner and source of proceeds.
REP. LEACH: Do you maintain accounts, to your knowledge, for any other members of President Yeltsin's inner circle?
MR. RENYI: To my knowledge, no. And I might add, we have tried to do as thorough an investigation over the course of the five weeks to identify any of those accounts.
REP. LEACH: Is there anything unique about Russian bank correspondent relationships with your bank? That is, relative to other countries, do they -- do you charge different fees? Do they have different patterns of activity?
MR. RENYI: The style and the character of the business that we do with our Russian correspondents are very, very similar to what we do elsewhere in the country and elsewhere in the world, especially as it relates to other emerging or developing countries. In those types of countries, our correspondent banking business tends very much to be in the deposit side of dollar clearing, in providing cash management services with a very modest level of credit exposure. And that does exist. That profile, that character, is very, very similar in Russia; it's similar to everyone else. In terms of the fees, we did also investigate -- again, given the press reports -- that would indicate that significant amounts of profitability were gained from our Russian business. I looked very specifically at fee comparisons as to what we have been able to charge, what we charge for our Russian correspondent banking business and elsewhere around the world. And what we have found, with the exception of Europe, which is the most competitive portion of the world, Eastern Europe generally and Russia in particular had the next- lowest rate of fees that we were charging. I asked why, and the immediate response is the competitive atmosphere, given the fact that we are not the only organization that has similar banking relationships, correspondent banking relationships and dollar clearing accounts.
REP. LEACH: Well, let me, just to be clear about this, just go to the numbers, because numbers can be numbing. You had seven and a half billion cleared through one account and then three and a half billion a day through just general correspondent relationships with Russian banks.
MR. RENYI: Yes.
REP. LEACH: To your knowledge, is this typical of other banks in New York, or are you different?
MR. RENYI: I believe it is typical, Mr. Chairman. The seven and a half billion dollars that were referred to was a cumulative number over three years. The average volume per day was approximately $6 million. I think there's a need to compare that and characterize that in the context of our overall clearing, which I indicated was about $600 billion a day for all of our correspondent banking relationships.
REP. : Can I interrupt you for a second? I just want to clarify. Are you comparing $6 million to $6 billion per day?
MR. RENYI: In terms of the dollar clearing that we do, yes.
REP. : Okay. I wasn't sure that I got the Ms and the Bs straight. Thank you.
MR. RENYI: There were three figures, three statistics, that I think, Mr. Chairman, you were discussing, and that is the daily flow within the principal accounts of the so-called Berlin accounts, all of our correspondent banking within Russia, and then our entire dollar clearing business, enterprise-wide. And that is $6 million for the Berlin account, $3.7 billion per day with regard to the Russian banking correspondence, and $600 billion enterprise-wide. We are the second-largest dollar clearing organization in the U.S.
REP. LEACH: So as a financial company that's central to this worldwide movement of capital, what is your personal sense, over the last three or four years, of how Russia is behaving? Do you have a view that we have a problem in this great country of Russia, or is this something the bank is neutral about?
MR. RENYI: No, I suspect, Mr. Chairman, that, given the nature of the proceedings and what I heard last night on television of yesterday's proceedings, and clearly seeing this first-hand myself this morning, it is not an uncomplex issue. There are a lot of very countervailing forces here. Clearly there is an intention since 1991 to bring Russia west, if you will, to effectively provide for them, to offer to them westernized capital markets. We also have, I think, as an intention from a government-to- government view to certainly support Russia in its view, in its journey to democracy. What we have found in every other country that the strength of a democracy, the strength of an economy, is based on its banking system. And thus when we were asked, when we saw opportunities clearly as a commercial bank in the U.S. dealing with offshore correspondence, to be able to conduct business and then encourage, by numerous governmental agencies, to be supportive with regard to the development of a capital market, we saw a great opportunity, therefore an encouragement, and therefore we have been active, as many banks, as very many commercial banks as well as investment banks, within that Russian market. At the very same time, we clearly have been seeing the growing pains that exist within Russia, as it has been in virtually every emerging country. Every developing country has gone through similar phases, if you will. The degree of volatility within the Russian economy, Russian banking system, may be somewhat unique. I'm not sure I'm the best person to respond to that.
REP. LEACH: Well, let me just conclude with one kind of tying in the numbers. You've indicated a figure for Russian banks. You've indicated a figure for the Berlin associated companies. Are there other Russian companies or individuals that you have figures for?
MR. RENYI: No, that is by far and away the statistics. There is, I don't believe, any other relevant statistics, I think, for the issue on the table today. REP. LEACH: Thank you. Mr. LaFalce.
REP. LAFALCE: Thank you very much. Let me make sure that I have a correct, an accurate grasp of the statistics. When you were referring to $6 million per day, you were referring to one account, the Berlin account. Is that correct?
MR. RENYI: To be very clear, it's several accounts, but essentially operated by one individual.
REP. LAFALCE: About how many different accounts operate --
MR. RENYI: Approximately -- I believe there were eight in total. I think there were probably three or four active at any one time.
REP. LAFALCE: Are these bunched together in any computer's mind or --
MR. RENYI: Yes.
REP. LAFALCE: Okay. So you would view those --
MR. RENYI: Absolutely. They were clustered to the point of we had one individual overlooking all of them.
REP. LAFALCE: So we can look at the $6 million. And then the next data is $3.7 billion per day. Is that correct? And that was for all Russian accounts.
MR. RENYI: All Russian correspondent bank accounts.
REP. LAFALCE: Correspondent bank accounts, yes. And then the third figure was $600 billion per day, and that was for all correspondent bank accounts. Is that correct?
MR. RENYI: That's correct, sir.
REP. LAFALCE: Okay. Was there anything that, in retrospect, should have raised a red flag either to you or someone working under you or to the federal regulator responsible for BONY, the Federal Reserve Board?
MR. RENYI: There certainly were flags that were raised, not necessarily, unfortunately, to my level personally or to the regulators, but that there were individuals who supervised the accounts on a day-to-day basis who did see a marked increase in volume over what was originally reported to be or represented to be expected to go through those accounts. Those individuals who did raise questions, unfortunately, raised them without really much vigor, without much follow-through, without raising it up their own chain of command within their organization. Our own investigation would indicate that those individuals took comfort in the fact that those accounts, particular accounts, were referred to by a very well-regarded bank officer, who happened to be Mr. Berlin's wife. Unfortunately -- I can't get into the psyche of those individuals and the minds of those particular individuals, but they did not see the obvious conflict that we might see in hindsight.
REP. LAFALCE: Thank you. The Federal Reserve Board has the legal regulatory authority over the Bank of New York.
MR. RENYI: That's correct, sir.
REP. LAFALCE: Now, A, what does that authority consist of with respect to accounts like this? And what's the nature of their periodic examinations of accounts such as this, most especially with respect to the money laundering laws? It is my understanding that the law enforcement officials criminally relied in large part on the regulatory authority's examinations to detect whether there is some criminal violation of the money laundering laws. Can you expand upon that?
MR. RENYI: Congressman, it is a very appropriate question. I suspect that even a better person to respond to that would be the Federal Reserve officers. However, from my perspective as someone who is regulated by the Federal Reserve, my view has been -- my experience has been that they would come in and review -- in a very thorough manner, I might add -- the process upon which we organize and manage our own organization. In certain areas, such as credit extension, they take an even further and much more detailed review of our accounts. But one of the very basic components of a Federal Reserve exam is reviewing the nature, the process, the oversight process that we have, not only in anti-money laundering or "Know your customer," but as well, every other facet of our management approach to the bank. So they are very much intent on looking at how our management team manages the organization.
REP. LAFALCE: So their examination is more systems examination than account examination.
MR. RENYI: Account by account, that is correct. It's much more systemic, much more process-oriented, reviewing the reports that I might see, other members of our management team might see, in the conduct of --
REP. LAFALCE: One of the difficulties is if criminal enforcers are reliant upon that examination, a systems evaluation is probably the least likely to discover some type of wrongdoing, I would think.
MR. RENYI: It would certainly discover if anything that was truly systemic or endemic in the organization.
REP. LAFALCE: Sure.
MR. RENYI: There'd be no question, I think, that the Federal Reserve and any regulator, whether it's the Fed or the OCC or even our own state banking regulators in New York, would look at the situation to determine is there a systemic issue. Is there a case where there is an isolated issue with regard to a set of accounts? They may or may not pick that up. That is something clearly that our own internal auditors should also pick up.
REP. LAFALCE: Let me ask you two more questions, if I might try to ask them at the same time. On the one hand, we hold dear to the principle that all individuals are presumed innocent until proven guilty. On the other hand, you have to file suspicious activity reports. And I'm wondering how you draw the line. You know, where's the gray area? What do you do? That's the first question. The second question is this. I know that there are bankers' groups that get together to discuss the appropriate use of derivatives, et cetera. Is there a group of bankers that gets together to discuss the approach that banks will take domestically and internationally with respect to money laundering? And the reason I ask this question is because if some banks are very, very vigorous, rigorous, they just might not get the business, and so some other banks might be less rigorous and obtain the business. There could be a competition for laxity both domestically and internationally. And I'm just wondering if, within the banking community, there is any coordinating mechanism, a group of CEOs, et cetera, that gets together to discuss this. If everybody has to go by the same rules, it's great. If somebody doesn't have to live or doesn't live by those rules, they have an unbelievably unfair competitive advantage. Those are two questions.
MR. RENYI: Let me answer the second first, and that is with regard to any cooperative efforts. Personally, I am not aware of any efforts at a chief executive or an executive management level, and I really don't have a -- I can't identify a particular group within the U.S., or certainly extraterritorial outside the U.S., that meets specifically any money laundering issues. I think it would be a very good suggestion. It may exist. And I would suspect that possibly some of our compliance officers within our organization may very well be attending these. We do have it at a very local level; say, at the New York clearing house. We do have committees that specifically look at these issues. Within the first question, with regard to SARs -- and I think your point is with regard to privacy -- specifically the regulations surrounding the suspicious activity report filings require absolute privacy, absolute confidentiality, for I think the very specific reason you are intimating here, that there could be a guilty-until- proven-innocent view toward any accounts that we might file an SAR on. To that extent, we are under strict guidance not to reveal filings of SARs, and I suspect for that very reason.
REP. LAFALCE: Not to reveal them to whom?
MR. RENYI: Not to reveal them to the public.
REP. LAFALCE: Right.
MR. RENYI: Certainly to law enforcement.
REP. LAFALCE: But my question is not whether you reveal them to the public. You do file them. You're mandated to file them.
MR. RENYI: Absolutely.
REP. LAFALCE: Who do you file them with? And how do you make the judgment as to whether to file or not? If I go to three different case workers and I ask in my district, you know, "How many cases do you have?" I find out that each of them has a different measurement as to what constitutes a case. Somebody might say a phone call does. Somebody else would say, "Oh, it's not a case unless I have to work on it for at least a week or so." And I'm just wondering what goes on, at least within your bank's mind, in determining whether to file a suspicious activity report. And is there any commonality that is enforced by the regulators on this issue?
MR. RENYI: Well, Congressman, I don't believe that there is -- and I don't know the regulations precisely, but I know what we do and how we do it, which leads me to believe that there is not necessarily a preset criteria of review that each bank must follow in order to file an SAR. I say that because we have filed many, many hundreds of SARs over the past year or two. Most recently, obviously, given the incredible oversight that the press reports and this investigation has created, we are filing many, many more, for simply a reason that we hear, we see, that a particular account may have received a debit or a credit from a name that we see in the press. And to err on the cautiousness side, we would file an SAR.
REP. LAFALCE: Thank you.
REP. LEACH: Mrs. Roukema.
REP. ROUKEMA: Mr. Chairman, you indicated in your introduction that you had an element of awkwardness here because of the stature of the bank, et cetera. I have another element of awkwardness here, which I only learned about last night, and that is that Mr. Renyi is a constituent of mine. I learned that last night. It makes it a little awkward, but I think we can speak frankly and directly --
MR. RENYI: Sure, we can.
REP. ROUKEMA: -- in the interest of getting full information, so that we can do our job and that you can do your job, recognizing that the bank is under investigation, but no charges, as you quite correctly pointed out, have been made. But it seems to me, with all due respect, I do have to point out, with respect to the -- and you've just ended your discussion with Mr. LaFalce with respect to the suspicious activities reports. And I don't know exactly how this fits in, but it seems to me that over this period of years, with the billions of dollars there, and with the fact that Mr. Berlin and Lucy Edwards were married, and that it would seem to me that there should have been some understanding of the potential for the conflict of interest. Can you tell me either how you dealt with that, and why you dismissed the need for the SARs to be filed, and how you now would apply it in view of the experience and the new knowledge that you have an understanding? And then I want to go on to the global payment system.
MR. RENYI: Really, Congresswoman Roukema, there are really two issues I think you raised in that question, and that is, one, the filing of an SAR, and then the conflict of interest; the SAR to begin with.
REP. ROUKEMA: Yes.
MR. RENYI: During the course of those three years of activity within those Berlin accounts, there is no question that people at a lower level, people who are looking over the operations of that account, raised issues, raised questions, as to the validity or the rationale as to why the volume vis-a-vis an export-import company or a tour company, of which he variously over a period of time identified himself as, why that volume would exist, so that we do see people in our organization -- again, retrospectively -- who have identified an issue but not sufficient follow-through. And I think that is where clearly the awkwardness, the embarrassment on our part, and mine in particular, as to why those individuals saw fit not to report that up the chain of command, which ultimately would have resulted in an SAR. It did not get up to a level, which was the compliance officer, in those particular areas. And that is, I think, the awkward question here, why an SAR was --
REP. ROUKEMA: How can we reform that system in this legislation that we're dealing with? I'm not quite sure -- I'm an enthusiastic co-sponsor, but I'm not quite sure anything in this legislation will deal with that --
MR. RENYI: I don't believe it --
REP. ROUKEMA: -- you know, appointing that responsibility, targeting that responsibility.
MR. RENYI: That is very much of an internal issue, Congresswoman. I don't think that I saw in the brief read of the legislation proposed elements that deal directly with that. Having said that, I do think it is very much incumbent upon the organization itself not only to have the process, which we do, but the culture of being inquisitive, of questioning, of ensuring that every question that has to be asked is asked, and that no assumptions are made. The fact that people made an assumption that a well-regarded officer of the bank referred these accounts, gave an ability of that individual to be less concerned -- that should not happen.
REP. ROUKEMA: I think this bears more review and study by those of us on the committee. But let me get to what you have, quite correctly -- you've really pointed out very well, I believe, although I'm not quite sure that I understand the solution or the specifics of your recommendations about not only the nature of the global payment system, but the increasing complexity of it. I think you called it the opaque nature of it.
MR. RENYI: Yes.
REP. ROUKEMA: And of course, the volumes that are increasing. I'm not sure. Have you given us some very specific recommendations as to how we can deal with this in a specific way, or is it just through regulatory authority?
MR. RENYI: I have not offered what I would call great specifics, or a great detailed recommendation with regard to the global payment systems. Its characteristics of being huge, complex, immediate and instantaneous in its style for some very explicit reasons -- because of its size, because of the cost of errors, the high cost of errors, the need for strength through automatic processing, also offers it this opaqueness that I referred to in my remarks and in my testimony, whereby the information that is obtained from the global payment system in terms of the remitter and beneficiary of payments is abbreviated very much in the form of digital code rather than more, in layman's terms, identifiers -- words describing who owns the account, where is that money going to. There are some very good reasons for that to happen, because as one puts words, sentences, and direction and instructions as to where monies go, there is a greater opportunity for error. And therefore again, in an effort to ensure that there is a greater level of straight-through processing or automation, there has been this reduction of information that one might see as usable. Having said that, I think the core of my recommendation here for the committee and the Congress to consider is access to the payment system. Because once access is granted, once an individual has an ability to enter into the payment system, it is easily has lost track of, because of the nature of the system.
REP. ROUKEMA: Meaning controlling the access.
MR. RENYI: Controlling the access, having greater, more stringent requirements in terms of access to the system.
REP. ROUKEMA: I think the chairman's bill does go into some of that. I don't know if it's as comprehensive as we might want to make it, given your circumstances. But we do begin to -- and maybe it's as much as we can do, in that respect -- so that we make a lot more unlawful about the falsification of these --
MR. RENYI: Yes.
REP. ROUKEMA: -- identity transactions with the banks. And we will look at that again. Thank you very much. I appreciate your assistance here.
REP. LEACH: Thank you, Marge. Mrs. Maloney.
REP. CAROLYN MALONEY: Thank you, Mr. Chairman. The Bank of New York case troubles me for a number of reasons. As we all know, the Bank has played a groundbreaking role in the history of American finance. For over two centuries, New Yorkers have entrusted the Bank with their life savings. This is not a bank whose culture would be expected to lead itself into the center of a major scandal. The fact that such an incident would occur at such a respected bank is frightening to me. We have to wonder if this case is simply the tip of the iceberg. While the guilt or innocence of the parties involved is far from being determined, it would appear that insiders in the Bank were able to avoid detection until foreign investigators tipped off our government. In other words, our money-laundering laws would appear to break down when confronted with insider dealings. Would you agree with that -- that our laws are not sufficient now, and they break down with insider dealings?
MR. RENYI: Well, Congresswoman, I would say that virtually any law, virtually any regulation that would be imposed on any financial institution is at risk if there is in fact inside assistance. It's awfully difficult to deal with many of these issues in any way, but when there is the possibility -- and I must be very careful here not to imply that there exists in our case here -- but if that were to take place, it would make it even more doubly difficult to deal with.
REP. MALONEY: To what extent was your institution's anti- money- laundering policy reviewed by the federal bank regulators? You testified earlier that they were looking at the systemic rather than actual transactions. But was there regular oversight? And was your bank ever cited as "insufficient?"
MR. RENYI: There has been regular oversight. The Bank of New York has never been cited for inadequate anti-money-laundering or know-your-customer policies. It should be obvious to everyone that given the intense reporting with regard to this particular issue that regulators have redoubled their efforts, in terms of reviewing our systems internally. And I'm confident that we will do well here.
REP. MALONEY: Chairman Leach, as we know and has been cited earlier, is proposing legislation that would require financial institutions that open U.S. accounts to identify the beneficial owners of the accounts. It would also prohibit U.S. banks from opening correspondent accounts with so-called brass banks that are not subject to comprehensive home country supervision.
How would these requirements impact on your institution on a day- to-day basis?
MR. RENYI: Well, I think, Congresswoman, to respond succinctly, quite little, because our business is not to do business with these brassplate banks in these offshore areas. So great scrutiny, greater restrictions or requirements in terms of review of these particular banks, would have certainly no negative impact, and I would welcome the opportunity to comply with those.
REP. MALONEY: But the requirement to identify the beneficial owners of the accounts -- would that impact on your day-to-day operations at all?
MR. RENYI: That may. I would need to know clearly a bit more of the detail. As in virtually every piece of legislation that would impact the banking system, it depends upon the application, the evenness of the application, which then goes to other banks possibly outside the U.S. banking system, and certainly our ability to comply with those.
REP. MALONEY: To what extent do you believe money-laundering is taking place in the United States banks? And what can be done to prevent bank officers from facilitating laundering? You testified that the two provisions that I mentioned in the chairman's proposed legislation would have little impact. What would you suggest should be done, and how extensive do you think --
MR. RENYI: When I say "little impact," I really mean, Congresswoman, that it would not be negative -- negatively impact the Bank of New York.
REP. MALONEY: Would not negatively impact.
MR. RENYI: Negatively impact us. Not the fact that it wouldn't be effective, but that it would not pose a problem for us to be able to comply generically with that approach. But I think your question with regard to the presence r the size of money-laundering -- that is an exceedingly difficult question, of course, to respond to. I think one of the issues that I sense is being debated here, and that I offered as a possible public policy issue, is the definition of money-laundering, the distinction between money-laundering and capital flight, some of which is in fact illegal, some of which has no restrictions by the host country. There is also the issue of being able to discern, through the information that we would normally receive in the global payment system, monies that are sent to support legitimate business transactions, or to support business transactions that are structured in a way to avoid local law, local taxes. That is a very difficult thing to distinguish in the best of circumstances. But the issue of money-laundering -- and I go back obviously to our experience with these particular sets of accounts -- given the vast amounts of data that we have reviewed, it is very difficult to determine which might be money-laundering, which might be capital flight, which might be legitimate business transactions. And I suspect it might very well be some of each.
REP. MALONEY: My time is up.
REP. LEACH: Thank you, Ms. Maloney. Mr. Bereuter.
REP. BEREUTER: Thank you, Mr. Chairman. Mr. Renyi, thank you. I heard your entire testimony and the chairman's questions from the side, if I wasn't here directly. I'll get through as many questions as I can here. First of all, as I understand it, if a bank processes a transaction knowing that it's designed to conceal or disguise the nature of the proceeds, the bank could be charged criminally or have their charter revoked. Did anyone at the management level in your bank know of Russian money-laundering through your bank?
MR. RENYI: Absolutely not, Mr. Bereuter.
REP. BEREUTER: Thank you. As Barclay Bank announced last week that it's closing a substantial number of its accounts for Russian corporate customers out of concern that it cannot verify where funds are coming or going to. Has the Bank of New York considered scaling back its presence in Russia in light of the recent allegations of the misuse of Russian-related accounts a the bank?
MR. RENYI: Well, Congressman, I think again, you can imagine the amount of review and oversight that's taking place within our own organization throughout our organization with regard to these types of accounts, these types of correspondent relationships. This does not just simply focus on Eastern Europe, by any means. Having said that, clearly we are taking another look, a second look at each and every one of our relationships to ensure that they do comply with the highest levels of compliance, not only with anti- money-laundering but know-your-customer requirements.
REP. BEREUTER: Thank you. Earlier, I think you gave a statistic, $3.7 billion from Russian correspondent banks on a daily basis. Now, that would not include corporate customers or other accounts coming from Russia or from Russian citizens. Is that correct?
MR. RENYI: We do not have corporate accounts in Russia. We - - any deposit relationship that we have, which I referred to in the $3.7 billion, are strictly from the banking system. It is our policy only to do business on a correspondent banking business with regard to credits and to deposit-taking.
REP. BEREUTER: Thank you. Do you have correspondent banking relationships with entities domiciled in Antigua, Cyprus, Cayman Islands?
MR. RENYI: With regard to Antigua, I believe we have one relationship. It is a relative dormant one, very little transactions flowing through it. Cayman Islands -- I'm not quite sure. I do not believe we do. Cyprus, I believe we do, but I don't have the precise figures. And I'll be happy to come back with those.
REP. BEREUTER: Thank you. Has Mr. Bruce Rappaport assisted the Bank of New York in the past in developing clients or other business relationships in Russia or in Antigua?
MR. RENYI: I understand the source of that question, given the press reports. But I can say that there has not been any involvement with Mr. Rappaport with regard to our Russian efforts. I think, as it was reported in the press, he assisted us in establishing our presence in Russia. That in fact was simply us being able to sublet some of his space that his bank, the Inter- Maritime Bank has in Moscow, for a one-year period. It does not go beyond that.
REP. BEREUTER: Thank you. You mentioned him in your written statement --
MR. RENYI: I did.
REP. BEREUTER: You mentioned his ambassadorial role from Antigua to Russia, and so on. We had a little discussion before from Mr. LaFalce, I think a question related to the suspicious activity reports, the SARs. Were any SAR reports or potential reports suppressed by management in your bank?
MR. RENYI: Absolutely not, sir.
REP. BEREUTER: If you had a deposit of, say, in excess of $5 million in currency coming to your bank, would it automatically or likely generate an SAR?
MR. RENYI: Five million dollars in currency --
REP. BEREUTER: Currency.
MR. RENYI: -- clearly would. Absolutely. In fact, there is a regulation of deposits of $10,000 deposits -- or $10,000 or more in currency, a report must be filed.
REP. BEREUTER: Thank you. I want to understand a little bit more about the relationship on Russian correspondents, to the extent I can in this time remaining. Correspondent banks. Has the bank assisted any Russian banks in attempting to open representative offices in the U.S. and have any applications been successful?
MR. RENYI: We have in fact provided letters of recommendation to certain of our correspondent banks in Russia to open offices in the U.S. This as, again, part of the overall process of bringing the Russian banking system to the West, to be able to allow them to conduct business along Western-style banking. In some instances, we have made those representations, but again, only to those banks with whom we do business with, and that we are comfortable with.
REP. BEREUTER: But some would have been successful, as far as you know?
MR. RENYI: I believe some may have been successful, I don't know the specifics.
REP. BEREUTER : I have one more question relate to correspondent banks, if I may pursue --
REP. LEACH; Please, go right ahead.
REP. BEREUTER: Thank you. I'd like to understand what kind of advantages or privileges or services go along with being a correspondent bank to the New York bank, especially of course those related to Russian correspondent banks. What privileges or services would they have by virtue of their correspondent status with your bank?
MR. RENYI: As a correspondent, the typical correspondent banking services that we offer, certainly through dollar clearing, a principal service and really the heart of our correspondent banking business. In certain instances, we also might provide short-term credit on an overnight basis. We might very well provide foreign exchange transactions as well. And possibly certain security servicing arrangements with that. In terms of privilege, we view it as a privilege for them that they can list the Bank of New York as a correspondent, because it is in fact I think a very rare, a very privileged view that they can in fact use us as a correspondent -- effectively access to the banking system. And again it speaks to the diligence that we do on a continuing basis.
REP. BEREUTER: Thank you. Thank you, Mr. Chairman.
REP. LEACH: Thank you. Mr. Forbes.
REP. FORBES (D-NY): Mr. Renyi, again thank you for being here today. And I particularly appreciate that in your capacity, you've taken full responsibility for straightening out the situation that led to the unfortunate revelations. And I think all of us were shocked that this undertaking was transpiring at the Bank of New York, certainly a venerable institution, well-respected not just nationally but internationally. Let me say that I've learned today, more than I ever realized, that money-laundering is extremely widespread in this country, and that it's affecting far too many -- and one is too many -- but far too many of our financial institutions. Since these revelations, have you heard from some of your colleagues across the country as they've maybe taken a long, hard look at their internal systems and lamented that perhaps would be as vulnerable as the Bank of New York was? And do you have any sense in a way of validating what I think many of us has grown to understand, that money-laundering is a very, very widespread, serious problem in this country?
MR. RENYI: Well, it certainly has piqued everyone's interest, Mr. Forbes. I think that there is no question that -- and I can say universally, without exception, every one of my counterparts that I have come into contact with over the last five weeks -- have said that this has clearly initiated a review internally. So if there's anything good that can come out of this particular issue that the Bank of New York being the poster child for money- laundering -- unfairly, I hope, and certainly believe -- than the fact that there is a much more greater intention of looking at intensive review of internal operations throughout every bank in the country.
REP. FORBES: Well, a conservative institution like the Bank of New York, I have no doubt that this certainly caused you and all of your officials to step back for a moment. I noticed in your testimony, as you said, it is very difficult to identify, you know, origination and destination of accounts. And I know that the domestic banking community has wanted very much to partner with emerging nations, and particularly nations like Russia, which are trying to be more democratic and get more marketplace and free market enterprises going, and particularly reforming the banking industry there. But has there been consideration by your bank to suspend any business with Russia, or any transactions that would come from Russia? And I just add to that -- and I know that that's perhaps a pretty dramatic consideration. But I think you made clear also that it's very difficult, for example, to track and review transactions that come from some pre-set identifiers like Cuba and Havana, and Baghdad and Iraq. And I think the larger question is: do financial institutions, in the wake of what's happened at the Bank of New York and others, seriously consider that maybe there are some places where we just don't accept transactions?
MR. RENYI: First, the last question, in terms of is there an effort to seriously consider refusing transactions from certain countries and the answer -- short answer -- is yes. I think it is a matter of what is the risk, and can we really accept that risk? I think it's clear, given the circumstances here, that there may very well be areas that that is an unacceptable risk under any circumstances. And I don't mean in terms of profitability or reward, but simply risks to the organization, reputational risks, which is clearly what we have here to deal with at the Bank of New York.
REP. FORBES: On another approach here, you know, Congress has this penchant for, when we see some kind of problem like we've seen with the Bank of New York and money laundering, that, you know, we want to go back in and rewrite some laws and make sure we're tougher on those laws. And I embrace those efforts. But, you know, it's hard not to think that maybe a good deal of this was tragic human oversight as far as the supervisors go, and certainly outright criminality on others' part. But did the system break down, Mr. Renyi? Do you think the system broke down?
MR. RENYI: Congressman, my view at this juncture -- and again, it is still a preliminary view, given the fact that the investigations go on, not only externally but internally -- that systems were in place. They did not necessarily break down, but their implementation was far less than perfect. Clearly the implementation was flawed. It allows us an opportunity, though, to enhance the system, to be able to do what we can to take out the personal elements in the oversight. I think that generally is an approach that we will continue to follow in getting enhanced systems with artificial intelligence, behavioral analysis, so that we are taking the human element out of it. We're also attempting to take the relationship out of it, so that no one in the future has the ability to rely on any one other member of the organization for comfort as to the validity of a transaction or an account, the establishment of an anti-money laundering committee of very senior people throughout the organization that has a mandate far broader in independence than ever before, certainly in our organization, and I suspect anywhere else.
REP. FORBES: Thank you, sir.
REP. LEACH: Thank you, Mr. Forbes. Mr. Lazio.
REP. LAZIO: Mr. Renyi, it's nice to see you again. I wanted to ask you to clarify a few points. You had, if I heard you correctly, testified that the Bank of New York had no Russian corporate accounts. Is that accurate?
MR. RENYI: Banking accounts where we either extend credit or accept deposits.
REP. LAZIO: Okay.
MR. RENYI: We do have --
REP. LAZIO: But the wire transfer account; would you --
MR. RENYI: We would not have any wire transfer accounts. What we would have would be the ADR-DR sponsorship relationships, which are an administrative function. It is a processing function where we do not accept deposits or extend credit.
REP. LAZIO: And there's nine accounts, as I understand it, that were controlled or in the name of Peter Berlin.
MR. RENYI: Yes.
REP. LAZIO: How would you characterize those accounts?
MR. RENYI: Those are U.S. domestic accounts. They are companies that are incorporated here in the U.S. We would view those as domestic accounts. And, in fact, when they were opened, they were opened by a Russian national who subsequently became naturalized as a U.S. citizen. The business may be transaction-oriented in an offshore, but it would be viewed as a domestic U.S. company.
REP. LAZIO: Now, let me ask, is it possible for somebody, for an account-holder who has got a wire transfer account, to execute a wire transfer with a terminal off-premises from the Bank of New York without the knowledge or assistance of a Bank of New York employee?
MR. RENYI: We do have that service. That is a service that we, as well as -- and I would check this -- virtually every other bank provides this particular type of service, which is a software-based service where we provide software for installation on personal computers, on-site locations which an individual can, in fact, initiate and execute transactions of wiring money out of their account, out of the bank, to other accounts.
REP. LAZIO: Without the knowledge of the bank, contemporaneous?
MR. RENYI: Contemporaneous. What is done is clearly a due diligence as it relates to who we are giving that service, offering that service to, so that there is a criteria that we use, providing for whether that service is, in fact, appropriate for that individual or that corporation. Once that's taken care of, once we've satisfied ourselves, then that is done outside the bank, without necessarily Bank of New York personnel intervention. There is oversight as we see the volumes. And as we said, we're instituting systems which will then have an oversight of those accounts to determine whether, based on certain parameters, certain criteria, that will trigger a specific oversight for that account.
REP. LAZIO: So this is sort of an historical review that occurs on accounts where there's wire transfer accounts?
MR. RENYI: That's correct.
REP. LAZIO: Is there -- could you just sort of describe briefly for me, if in it's your area of knowledge, what the due diligence principles might be for such an account?
MR. RENYI: Knowing what business the individual is conducting, the volumes, the amounts of the volumes that that individual would, in fact, be utilizing the service for.
REP. LAZIO: That request would be up front?
MR. RENYI: That would be up front, before the installation is made.
REP. LAZIO: Does the bank require documentation up front as well?
MR. RENYI: Certainly all those reports would be noted; the documentation in terms of certificates of incorporation, the legality of that entity.
REP. LAZIO: So might you ask for documentation establishing whether a corporation or the entity is properly licensed in a particular state?
MR. RENYI: If required. If we know that a license is required, then we would request that.
REP. LAZIO: And is there a system, an internal system in check?
MR. RENYI: Again, there's tremendous reliance on the individual and the relationship manager who is initiating that relationship to deal with that.
REP. LAZIO: Now, this is an account -- (inaudible)?
MR. RENYI: Yes.
REP. LAZIO: Do you know if the bank followed that type of protocol in that case?
MR. RENYI: Well, that is certainly part of the investigations that we're going through right now. I'm not sure I'm at liberty to talk specifically about that particular account. It's still subject to investigation.
REP. LAZIO: I understand. Let me ask you this last question, if I can, because this is a question that was raised yesterday involving Bruce Rappaport (sp), who has a very interesting background. And I'm just wondering if you can tell me what the present and historical relationship of Mr. Rappaport might be with the Bank of New York. And if I could briefly follow on to that, if there has been a relationship -- to the best of your knowledge, has there been any attempt by Mr. Rappaport to influence the hiring and placement of Bank of New York employees?
MR. RENYI: I think the latter -- let me address the latter question first, that there has been no evidence, no instant of influence that Mr. Rappaport has had over not only the bank hiring people, but also business transactions.
REP. LAZIO: Could you answer the first question?
MR. RENYI: Our initial relationship with Mr. Rappaport was as he was a substantial owner of bank shares quite a few years ago. It is now, we believe, less than 1.3 percent, possibly lower, in terms of relationship. At this juncture, our principal relationship with Mr. Rappaport is as a shared owner of a bank in Switzerland where we have a 28 percent interest; he has the remainder.
REP. LAZIO: What's the name of that bank?
MR. RENYI: (BNY?) Inter-Maritime Bank.
REP. LAZIO: Thank you very much.
REP. LEACH: Mr. Barr.
REP. BARR: Thank you, Mr. Chairman. Mr. Renyi, according to reports -- and I think these figures have been gone into earlier -- upwards of seven and a half billion dollars may have flowed through nine suspicious accounts at the Bank of New York over a three-year period, beginning in 1996. Let's assume, on the conservative side, that it's $7.5 billion and not more than that. How much would the bank have earned in various commissions, points, interest, income of any sort, for $7.5 billion flowing through its accounts?
MR. RENYI: We would have -- the fees, the growth fees associated with that, would probably be about $500,000 per annum.
REP. BARR: What about interest on any of that money that was parked for any length of time?
MR. RENYI: My understanding -- to the best of my understanding, this was not an interest-bearing account.
REP. BARR: So $7.5 billion would have resulted only in half a million dollars total?
MR. RENYI: Of gross revenue.
REP. BARR: Per year.
MR. RENYI: Per year, out of a total of revenues, fee revenues. This would be fee revenues, Congressman. And last year, our fee revenues was approximately two and a half billion; so a relatively modest account.
REP. BARR: I'm sorry. What?
MR. RENYI: A relatively modest account, $500,000 in fees against a total fee revenue of the bank of about two and a half billion.
REP. BARR: That's not inconsequential, certainly.
MR. RENYI: It is not inconsequential in its absolute terms.
REP. BARR: Has there been any discussion at all with any federal officials of immunity for the bank? Any agreement not to prosecute any potential cases here for either committing illegal acts or failing to take steps to prevent illegal acts, such as failure to file SARs?
MR. RENYI: I'm not aware of any immunity offered to the Bank of New York in this investigation.
REP. BARR: Okay. Apparently at least two individuals, Lucy Edwards and Natasha Kogolovsky (sp), have been terminated by the bank. Is that correct?
MR. RENYI: One of them has; Lucy Edwards. And Natasha Kogolovsky --
REP. BARR: Has been suspended?
MR. RENYI: -- is on a paid leave of absence.
REP. BARR: Okay. Has she been suspended? I mean, was that at her request, or did the bank take that action?
MR. RENYI: The bank took that action when the accounts in question were closed and the investigators asked that we secure files. And we felt that it was in everyone's best interest that that take place.
REP. BARR: Why was Ms. Edwards dismissed?
MR. RENYI: When we had our -- when we were able to do our own private investigation, we reviewed her personal files and discovered paperwork that gave us evidence that she misrepresented the bank in a number of instances. Most particularly, we found out after the fact that she actually had signing authority on one or several of the accounts. That is a -- in order for a staff member to have signing authority of an account, other than her own personal account, requires the approval of the chairman of the board. We have an annual code-of-conduct questionnaire that must be filled out with an affiliation report. Those affiliation reports that would have required her to disclose that were never filled out properly, did not disclose that. That is clear evidence and a clear case for termination, violations of our code of conduct.
REP. BARR: She's married to a Russian businessman who controlled nine accounts at Bank of New York. Is that correct?
MR. RENYI: That's correct.
REP. BARR: And that -- how long a period did that relationship exist before the bank finally terminated Ms. Edwards?
MR. RENYI: Well, I believe they were -- I'm not quite sure, Congressman, when they were married. I believe it would have been '92, '94, somewhere in that time frame. And she had obviously married right up until the point of termination.
REP. BARR: Are either of these individuals, Lucy Edwards or Natasha Kogolovsky, under investigation by federal authorities?
MR. RENYI: I believe I would have to say that's not something I can respond to.
REP. BARR: Do you know? I mean, do you know whether or not they are?
MR. RENYI: I do know whether there has been contact between themselves and federal investigators.
REP. BARR: And there has been contact.
MR. RENYI: There has been contact.
REP. BARR: With regard to the question that's already come up in several instances here today involving SARs and the requirement that the Bank of New York has, as have other financial institutions, to file SARs under circumstances that are laid out in the statute, and then the forms with which I presume all of your bank officers, including the names we've mentioned today, are familiar --
MR. RENYI: Yes.
REP. BARR: -- was there anything in these series of transactions that we've been talking about here -- with Benex, for example -- that wasn't suspicious?
MR. RENYI: The nature of these accounts, again, through preliminary review since the last five weeks, the accounts, while large in amount, did not, in and of itself, pose a reason for suspicion in terms of either increases, significant increases, or changes in the flow through the accounts to necessarily warrant that. But that happened to be the judgment of an individual who followed those accounts on a day-to-day basis.
REP. BARR: Who's that?
MR. RENYI: An individual in our service area -- individuals in our service area.
REP. BARR: I mean, do you know their names?
MR. RENYI: Yes, sir.
REP. BARR: I mean, you've gone back and looked at these and you're saying that -- we have just -- I think there's an initial round of federal subpoenas produced over 3500 pages of transactions for just one of these accounts with Benex, involving huge sums of money. And you're saying that there was nothing suspicious about these transactions?
MR. RENYI: No, I shouldn't -- if I said that, I misstated myself. Clearly, in retrospect, after review of all of those transactions over a three-year period of time, no question that there was something suspicious about it. And, in fact, we filed a suspicious activity report.
REP. BARR: After it had already come to your attention.
MR. RENYI: During -- that's correct, during the course --
REP. BARR: By the authorities.
MR. RENYI: During the course of the three years, we did not file an SAR.
REP. BARR: Are you satisfied that, in the words of, I think, our colleague from the other side of the aisle from New York, that this was just a tragic human error?
MR. RENYI: I believe that it was a -- it appears to be, again, given my reviews today, an element of poor judgment.
REP. BARR: Why would these employees be terminated, then, if people were just involved in a series of tragic human errors? You certainly wouldn't terminate people for that reason, would you?
MR. RENYI: The people that were terminated were terminated for reasons nothing to do with the conduct of the account, Congressman.
REP. BARR: Nothing to do with the conduct of any of these accounts? Even the Benex accounts?
MR. RENYI: That's correct. If I can restate with regard to Ms. Edwards, Ms. Edwards was terminated by us because of violations of the code of conduct surrounding the fact that she did not advise us that she was a signer for these accounts. She did not have any day-to-day activity or involvement in these particular accounts.
REP. BARR: But it wouldn't really be accurate to say that they were fired for -- that she was not fired for any reason connected at all with the Benex accounts. I mean, there is a connection there, is there not?
MR. RENYI: There is a connection to the extent that she was a signer and --
REP. BARR: And through her husband?
MR. RENYI: -- and did not reveal that.
REP. BARR: And through her husband there was a connection, obviously.
MR. RENYI: Yes. But that isn't necessarily grounds for termination.
REP. BARR: But it certainly is grounds, in retrospect, for some rather significant suspicions.
MR. RENYI: Correct. I can't -- that is not to be debated.
REP. BARR: Would you -- I just have a general question. Would you say that any of the following are secondary to earning fees or making profits for the bank? One, protecting our nation's security. Is that secondary?
MR. RENYI: Absolutely not.
REP. BARR: Compliance with our criminal laws.
MR. RENYI: Absolutely not.
REP. BARR: And protecting taxpayer funds.
MR. RENYI: Absolutely not.
REP. BARR: Thank you. Thank you, Mr. Chairman.
REP. LEACH: Thank you. Mr. Royce.
REP. ROYCE: Thank you, Mr. Chairman. Mr. Renyi, in your statement, you describe how certain procedures that the Bank of New York follows to ensure due diligence -- basically, I guess, one of those procedures is reviewing financial statements and other regulatory filings.
MR. RENYI: Yes, sir.
REP. ROYCE: Reported yesterday is a story about the Bank of New York's efforts to help a Russian bank sell shares to investors and the way this aggressive pursuit was undertaken. But what's unusual in the story is that at the same time that your bank was doing that, Inkombank, the Russian bank, was undergoing its own review. And the financial status was being challenged in Russia. And Russian bank regulators that were investigating the bank had found that it had violated numerous rules, including inflating its income. In fact, the report recommended curtailing the bank's operations. And the bank has since been declared insolvent. And what is unusual here is, I think -- the question, why would you pursue, under these circumstances, this particular customer? And why would you help it win regulatory approval in the United States to sell its stock in the U.S. as American depository receipts in 1996?
MR. RENYI: Well, Congressman, the response is somewhat of a lengthy one, because I need to go into just a little bit in terms of the nature of the depository receipt service that we offer. It's very easily confused and misinterpreted against the investment banking opportunity, where an investment bank would, in fact, sell securities or underwrite securities. In our case, and in the case of any depository receipt sponsor, what we provide is what I would call the plumbing associated with the capital market transaction, where we are the individual that provides information, provides the record-keeping for the legal transfer and ownership, registry of ownership of those securities. We in no way underwrite, sell or issue securities on behalf of any of our clients that we are a depository receipt sponsor for.
REP. ROYCE: Let me ask you another question. You stated in your testimony that since the Bank of New York has been conducting its own investigations, a vast amount of data has been examined but, quote, "It is simply not possible for this data to identify the source or legality of any individual transfer of funds. Once a bank grants a customer access to its payment system, it is extremely difficult to track the full funds or to stop a transaction before it happens." Are there any steps that the Bank of New York has taken to remedy this situation, or is it a foregone conclusion that we cannot track the full funds under any circumstances?
MR. RENYI: The issue, Congressman, I believe, is a systemic one. It really lends itself to a discussion of the characteristics of the payment system, not necessarily what the Bank of New York or any other bank can or cannot do. What we are looking at is a system which requires a tremendous amount of volume and speed and automation, which, in order to ensure it takes place, and it takes place flawlessly, there's a significant amount of automation. And therefore, the data that is provided in that system tends to be abbreviated. Therefore, what I was recommending in my testimony is that the Bank of New York, as well as all the members of the payment system, as supported by Congress, to ensure that access to the system is really where the point of control exists -- access to the system, so that we must be much, much more diligent with regard to ensuring who we do business with.
REP. ROYCE: Well, thank you very much for your testimony. Mr. Chairman, thank you.
REP. LEACH: Thank you, Mr. Royce. I continue for a moment on that. Does the Russian central bank have an account at your bank?
MR. RENYI: They opened an account, Mr. Chairman, in November of last year.
REP. LEACH: Nothing before then?
MR. RENYI: Nothing before then.
REP. LEACH: Do you have any sense that -- as you know, we're looking at this IMF issue in a particular time frame, and you referenced it earlier, that --
MR. RENYI: Yes.
REP. LEACH: -- the central bank might have given deposits to any of your correspondent banks. Is that a possibility in your system?
MR. RENYI: I would suspect that it could very well be a possibility. That is the reason why I intensely looked at the volumes going through those accounts for that time frame. There was a press article which indicated that several days after the IMF funding, billions of dollars flowed through the Bank of New York. To the absolute best of my knowledge and review, that did not take place. The numbers that I mentioned to you really were in support of that, in the context that $640 million, I understand, was the IMF advance at that point in time. The monies flowing the account of $3.7 billion may or may not have gone through any of those accounts. It really would be, again, virtually impossible to tell. There is no identifier with regard to IMF or any other type of governmental monies.
REP. LEACH: So all you know is that a number of Russian banks had deposits at your bank, they had flows of funds that were very large, but that they weren't terrifically out of (the norm?), that they were slightly higher than the previous three months and slightly higher than the three months after. Is that --
MR. RENYI: No, there was a continuation of that.
REP. LEACH: There was a continuation. So approximately the same venue.
MR. RENYI: Yes.
REP. LEACH: Part of this gets -- I'm a little bit -- and I wonder if you could comment on this, to the definition of a bank. That is, when you use the word "bank," we all have in mind a bank in our hometown. But it appears that increasingly Russian banks, as a few other societies in the developed world, are individually controlled, possibly money-laundering centers. Because something is called a bank doesn't necessarily mean it is a bank in our description of the term. And so the banks that you have relationships with, would you call these traditional banks, or would you say some of them weren't that? You have this issue of Menatep (ph), which was closed, and another Russian bank that was closed. And what I'm getting at is, is there any difference between the companies Berlin controlled and each of these individual banks, or some of these individual banks? And do you have a judgment on that?
MR. RENYI: Mr. Chairman, I haven't looked at every single one of the 160, roughly 160 banks that we do business with today. That clearly is a process that is underway, however. In the traditional sense of a bank that I think generally the population here would consider of a retail bank, clearly there would have to be a number of those banks that would not be viewed as purely Russian retail banks, but what I would more commonly describe as business banks, banks that are institutional banks, banks that principally did business with other Russian companies acting as their commercial bank.
REP. LEACH: Did you ever do security services for any of these banks? I mean, for example, it strikes me -- I visualize monies coming into your bank. I don't visualize them going out. That is, as they go out, do they go to other banks? Do they go to -- do you buy securities for these?
MR. RENYI: We would be -- the sources of those funds clearly would come from those banks' clients. Dollar funding, any dollar assets that those banks would have, would be in our bank as well as other correspondent banks that those banks might have. The flow out of those accounts could be for the purchase of goods, for importation into Russia. It could be the purchase of securities. It could, in that fashion, could have gone to an investment bank, a broker-dealer where maybe securities may have been bought. Some of those monies inflow to overnight investment.
REP. LEACH: But you don't buy securities.
MR. RENYI: We are not a broker-dealer, no, sir.
REP. LEACH: Do you have any sense -- I mean, you're an expert on the banking system, and there are allegations that an increasing number of banks in Russia are controlled by organized criminal elements. Do you have a sense for that or not?
MR. RENYI: I really don't, Mr. Chairman. Our diligence today, certainly over the past several years, not only incorporates on-site visitation to these banks, but also visitations to the central bank and the authorities there to get, as best we can, a line, if you will, as to the reputation, the local reputation of those banks, of those entities. If, in fact, during the course of those conversations, that type of conversation might have come up, clearly I would not necessarily be privy to it. But I feel comfortable that those relationship managers in the Eastern European area would have done something about it, meaning closed the accounts.
REP. LEACH: Well, thank you very much. Does anyone else have any further questions? Yes, Mr. Lazio.
REP. LAZIO: Mr. Chairman, I want to ask this question, because I was speaking to a representative of a global financial services company who gave me the vignette that they once had one former New York City police officer as their security, and now they have an entire division, including recruitment of former CIA and former FBI officials. I'm just wondering if that experience that (imperiled?) the Bank of New York, what your security system looked like when you inherited the helm and what it looks like now -- with an eye to your suggestion as to what lessons can we draw from this --
MR. RENYI: Well, clearly, congressman, one of the lessons we have learned is to be -- is to look at the staffing in those particular area for whatever talent we can get, not only from law enforcement, but also from the regulatory and compliance areas. So there is clearly an intent on our part to recruit those people that we think can be of great help to us with hands-on experience in precisely those areas -- areas -- and that is a difference from historical terms where clearly we are looking at for bankers in large part we are now looking for people in the infrastructure of our organization to preclude things of happening as they may have happened here.
REP. LAZIO: From '96 to '98, where a lot of account activity occurred, what was the security infrastructure at the bank?
MR. RENYI: We have a unit for physical security, physical and data security as well.
REP. LAZIO: That's system wide, four people?
MR. RENYI: Enterprise wide, made up of individuals formerly from law enforcement, principally in the New York City metropolitan area.
REP. LAZIO: You have since augmented that or have you since enhanced that division?
MR. RENYI: We have not from a physical security point of view. We have augmented it from a data security point of view. Our attention is certainly going to go to the physical security side as well, principally in terms of liaison with law enforcement on a day- to-day basis.
REP. LAZIO: There is obviously significant concern in a sort of borderless society, especially on the economics, and it becomes increasingly difficult to regulate within borders and at the same time to have confidence in our financial systems. It is going to require a good amount of proactive engagement voluntarily on the part of our nation's best financial institutions, and I hope you take leadership on that.
MR. RENYI: I certainly endorse that.
REP. LAZIO: Thank you.
REP. LEACH: Mr. Barr.
REP. BARR: Thank you, Mr. Chairman. Just one quick follow-up question. When we were talking previously about SARs, I think you indicated the bank had filed an SAR?
MR. RENYI: On these particular accounts, on the BENEX (ph) accounts?
REP. BARR: Yes.
MR. RENYI: Yes, we did.
REP. BARR: And do you have that with you?
MR. RENYI: I do not.
REP. BARR: Okay, could you provide a copy to the chairman please?
MR. RENYI: Certainly.
REP. BARR: Within the next week?
MR. RENYI: Absolutely.
REP. BARR: Okay, thank you.
REP. LEACH: Well, let me just conclude with one observation that has nothing to do with the Bank of New York, or probably not. But it strikes me in the world where you have many societies in which people in public life control, there are disproportionate influence in the commercial and financial system, that if one does a favor for someone of this nature, financial institutions can be benefited in other ways. And -- or, if one doesn't, one can be negatively impacted, and that there is an implicit kind of reward-punishment syndrome that can occur with public officials and their accounts abroad. And that becomes a very competitive circumstance I would assume as well. And it just seems fairly obvious that if one is seeking the right to have distribution channels of one kind or another in a given company it would be helpful to have the account of the president of the (company ?). And this is something that is a very worrisome phenomenon I would assume. And I don't know if in your case you have all of five employees in Russia, and so have not been seeking a larger presence, although you do have accounts of a large number of Russian banks. The only thing I would add to this is the magnitude of these dollars is really stunning, and international currency flows are of a volume that makes even those of us who deal in federal government spending difficult to comprehend. You have currency flows that almost equal on a daily basis the totality of the United States budget for a year. And you have flows that come in and out of banks that are of extraordinary proportions. But, nonetheless, when you look at the issues of billions of billions applying to single individuals, it does seem to be something that our system is going to have to pay attention to. I am struck with the likelihood that Mr. Renyi has described the Bank of New York as a possible poster boy, but there is a strong possibility that other institutions have similar kinds of accounts, and that this is an issue that does take serious review. And I am struck also with the observation of Mr. Renyi that if our country moves in a given direction without bringing along the international community there can be difficulties. And we are all going to have to be looking at these issues with great care. But I would say that what Bank of New York has become part of a transmission belt for is something that goes beyond the banking matter. And when we look at the Russian issue and the future of Russian society, we are looking at a vital interest of the United States of America. So it means that we are obligated to look at this as more than an individual institution issue, as more than a United States banking system issue, but in the largest measure of the national interests of the United States and how it intertwines with the best interests of the Russian people. And that is why we have insisted that your bank appear -- not out of any reason to be pointing disproportionate fingers at a particular American bank, but out of the symbolism that these are stunningly significant world events that have become centered in a financial system, and then back down into a particular institution. And we -- I appreciate the difficulty of your testimony, and thank you for your appearance.
MR. RENYI: Thank you, Mr. Chairman.
(End of Panel Three.)