Riggs update: Chile investigate
Panamanian attorneys
- UPDATE
Tradecraft: how the best laundrymen wash PEPs' millions
Exactly how do experienced money launderers clean up dirty money that
politically exposed persons have entrusted to them?
Laundrymen face the daunting task of 'sanitising' funds
obtained by the PEP in a ...
MORE
Financial Stability Forum
The Financial Stability Forum has met in Australia this
week. Members of the Forum discussed risks and
vulnerabilities in the international financial system and
reviewed ongoing work to ...
MORE
Saving Tax Directive
It is reported that the European Commission is seeking to
include Hong Kong and Singapore within the
remit of the Savings Tax Directive. It is understood that
the Commission is concerned ...
MORE
US Treasury
The US Treasury Department's Financial Crimes Enforcement
Network is to issue a survey to banking
and financial services industry trade groups to consider the
feasibility of financial institutions
... MORE
Practice note: the Financial Action Task Force at-a-glance
The Financial Action Task Force is an inter-governmental
body whose purpose is to set international standards to help
its member countries combat money laundering and the
financing of terrorism...
MORE
Charles Intriago, the money laundering guru who presided over Alert
Global Media's conference in Miami, explored what he called the
"seven deadly sins" that financial institutions could commit. He
argued last week that the consequences had never been higher
because regulators were beginning to levy fines on a hitherto
unknown scale. Chief of these fines was the recent ABN AMRO
penalty of $80m; noteworthy also were the AmSouth forfeitures
which came to a total of $50m. He thought that fines such as
this were bound to set the standard for forfeitures for years to
come.
David Caruso, a consultant and former special agent of the US
Secret Service whom Riggs Bank had hired when the Senate began
to "drop bombs", was on the panel. Intriago joked that the
Office of the Comptroller of the Currency had been "a little
slow to wake up" in that case, as indeed it had been. Ann
Jaedicke, another panellist, had served as deputy comptroller
for compliance since 2003. Also on the panel were Cindy
Eldridge, an assistant US attorney of southern Mississippi who
was involved in the AmSouth case, and Bob Serino, who used to be
senior counsel at the OCC.
Sin one: being
unprepared for examinations before, during and after
Serino began by saying that he expected the causes cιlθbres to
keep occurring, despite the lessons of the past year. He said
that this would happen "for all sorts of reasons, including the
various agencies wanting to get a piece of the publicity."
He thought that it was important for each institution with a
problem to tackle the concerns of its regulators early and at a
low level. In preparing for an examination i.e., a regulatory
inspection he thought that each firm should complete a
"pre-exam exam".
"The number one thing that the bank regulators are looking at
now is this: what is the risk assessment that the bank has done
on itself? They'll look at that. They'll be sending you a
detailed request letter for the information that they want to
use during the examination. If you have not done the risk
assessment, the examiner will do it for you! OCC document
2005/45 takes you through the process. It says that you should
be talking to them throughout the process."
When asked about the review process in the case of enforcement
action, Serino was keen to persuade the audience of compliance
officers to invite the examiners along without excluding them.
He thought that this was important even if the financial
institution in question wanted to appeal to the ombudsman. Above
all, he stressed the importance of each firm evaluating its
four-part compliance programme.
The USA PATRIOT Act 2001 compels certain but not all
financial institutions to run "compliance programmes". Each
programme must do the following:
·
Establish and implement an AML programme and
procedures. The firm should base these on a risk assessment that
is written down.
·
Appoint someone who will implement and monitor
the operations and internal controls of the programme. This is
basically a requirement for an AML compliance officer or some
such.
·
Establish training procedures.
·
Arrange for some kind of independent assessment
or external audit to review the whole process. This is known as
"independent testing".
Serino began to examine the latest fines. He mentioned
Oppenheimer and Co, a broker-dealer which was fined in December
because it broke the New York Stock Exchange's rule 445 by
failing to have an adequate AML programme. He then moved on to
the ABN AMRO fine.
"ABN's faults were quite outrageous. They had risky products and
correspondent accounts in Russia. They didn't look over many
Russian accounts. They failed to review the transactions in
foreign branch offices. They really didn't know their
customers."
Intriago suggested that it was important for ABN AMRO to know
its customers' customers in foreign jurisdictions, but Serino
seemed not to be sure. He said that the issue of KYCC, or
knowing one's customer's customer, was a "very difficult
question".
Sin two: having an AML
programme that does not cover the risks
Ann Jaedicke told the 1,000-strong audience that the risks to be
accounted for in an AML programme included products, services,
customers and "geographies". Many speakers at the conference
seemed to use this last term to mean countries or regions of the
world. She referred to the OCC as the regulator of the national
banking system and appealed for total disclosure.
"If something's wrong at your bank, while the examiners are at
your door, you should talk to your examiner straight away. You
can talk to the manager of the group of examiners that's at your
bank. You can appeal to the OCC's ombudsman. I don't think
you'll find fundamentally different problems in these cases.
It's all failure to have a good four-part customer
identification programme."
The audience heard about last year's assessment for a civil
money penalty involving Arab Bank, which led to the regulatory
emasculation of the bank's New York business. Here the New York
branch did not monitor non-account-holder activity and did not
report suspicious funds transfers. Its programme, in regulatory
jargon, was not "risk-commensurate."
Caruso also thought that Congressional questions about Arab Bank
helping to organise some form of compensation for the families
of dead suicide bombers represented a risk factor.
Sin three: ignoring
signs of imminent trouble
Cindy Eldridge, a federal prosecutor at one of the 93 US
attorney's offices that cover the nation, commented on the
AmSouth case while stressing that her opinions were hers and
hers alone. The investigation, she said, was not an
investigation into the reasons why the bank did not refer an
underlying Ponzi (pyramid) scheme to her office.
She said that the bank should have found the scheme suspicious
from the start. The fraudster told the bank that his customers
the duped investors were investing $10m in accounts that the
bank was to set up. He said later that he wanted the bank to put
all the money into his own account. Eldridge also thought it
suspicious that the fraudster balked at the forms that the bank
wanted the customers to fill in, preferring to provide his own
forms. He also asked the bank to put its own letterhead at the
tops of his forms, presumably to give them an air of legitimacy.
"He also misrepresented to the bank what the money was going
for. How many of your bankers would have found that just a
little bit suspicious?"
Eldridge went on to say that when the bank received eight grand
jury subpoenas it deliberately withheld some pertinent
documents. Under Section 3322 of Title 18 of the US Criminal
Code she exercised her prosecutorial right to share her
information with someone at the Federal Reserve, the main
regulator, and interested him in the case. The AmSouth case was
therefore an example of a prosecutor informing the Federal
Reserve of events rather than the regulator beginning an
investigation of its own.
"When [he] came from Washington he spent weeks in Mississippi.
He looked to see if there was a suspicious activity report. That
wasn't my focus. My focus was 'was a crime committed?'
"AmSouth should have recognised that when they have people
abusing this bank to defraud other people, that's a problem. If
somebody had an account paying interest of
21 per cent a month,
that's suspicious. We consider that to be a wilful violation of
the SAR statute."
The prosecutors reached a deferred prosecution agreement with
AmSouth, which had to pay one sum of $40m and another of $10m.
When Intriago asked why the US attorney's office went down this
route, she implied that this was preferable to a criminal
indictment for the bank on systemic grounds.
"A deferred prosecution agreement is one of the tools of a
prosecutor. [We wanted to use it] rather than indict them. We
all looked at how we can stop a $46bn bank from going under."
Intriago then followed this up: "So they got a break in the
ultimate settlement in respect of the charges that you could
have brought?" To this Eldridge answered: "Yes."
It seems, then, that some large indigenous American banks can
comfort themselves with the thought that they are "too big to
fail" in regulatory matters. Some lawyers, however, believe that
Eldridge's office was too hard on the bank instead of too soft.
Serino first raised the controversy about the deferred
prosecution agreement.
"I think it was an aberration. Cindy's office was investigating
a Ponzi scheme. The fraudsters went to jail. [The prosecutors
asked:] "Why didn't the bank refer this to us?" So they
investigated the bank. That was the predicate case, and they
ended up with a $40m forfeiture. I think that's overreaching."
Most of the audience including this reporter could not keep
up with the legal argument that followed. Eldridge herself,
however, believed that no less a personage than David Aufhauser
had criticised her for using the case to criminalise what was
not criminal. Aufhauser was the US Treasury's general counsel
until 2003. Eldridge replied that the bank's offence was "in the
Criminal Code."
Intriago told the rapt audience that the AmSouth debacle had led
to something called the "Cindy rule," named in Eldridge's
honour. This is an amendment or a proposal for an amendment
to the US Attorney's Manual. This rule suggests that US
attorneys should obtain prior approval from the Department of
Justice before embarking on a deferred prosecution agreement of
this kind. The details of the new rule, however, flashed across
a screen all too briefly. Eldridge herself concluded: "I don't
think that prior approval is needed for a deferred prosecution
agreement for an MSB [money service business]."
Sin four: not
identifying and monitoring obvious high-risk customers
This topic takes us into Riggs territory and the world of
"politically exposed persons". David Caruso, a survivor of the
Riggs case, was in the hot seat. His bank had a rather cosy
relationship with both Augusto Pinochet, the former dictator of
Chile, and President Obiang of Equatorial Guinea.
"Why is it that banks should identify high-risk customers? One
type of customer is high-risk because of who they are, or
because of their national origin. [Some customers] are high-risk
because of what they do e.g., wire transfers that don't make
economic sense. If you don't identify high-risk customers, you
don't have a SAR programme that's meaningful.
"All these cases [Riggs, AmSouth et al] have one thing in
common: the organisation failed to file SARs on high-risk
customers. Why is it that PEPs are high-risk? Not because
they're political people. [Only] certain PEPs in certain places
are prone to corruption."
Intriago was quick to point out that this was a problem in the
US as well as elsewhere. One delegate made a rather odd
observation on this point: "That senator in California with $2m
who pled guilty is not a PEP in my view."
This could be a reference to Randy "Duke" Cunningham, who
resigned from his post as a Republican representative not a
senator for California in November. A defence contractor
bribed him to the tune of $2.4m. He pled guilty on November 28
to one count of conspiracy and one count of tax evasion before
the US district court of the Southern District of California and
was sentenced to prison. As Cunningham was elected to federal
office, it seems unlikely that a more "politically exposed"
person could exist.
His offences also smack of money laundering, at least by the
standards of some countries. In his plea agreement, which he
initialled throughout, he admitted the following.
"The defendant demanded, sought, and received at least $2.4m in
illicit payments and benefits from his co-conspirators in
various forms, including cash, cheques, meals, travel, lodging
to influence the United States Congress's appropriations of
funds. [The] defendant and his co-conspirators attempted to
conceal and disguise this conspiracy through various means,
including one-sided transactions through which one or more
co-conspirators would buy property from the defendant at an
above-market price, would pay money to defendant for property
that defendant continued to own, and would sell to defendant
property at a below-market price.
"[They] also attempted to conceal and disguise this conspiracy
by directing payments through multi-layered transactions
involving corporate entities and bank accounts that defendant
and his co-conspirators owned and controlled
"
There was further evidence that some senior AML people in the US
were not quite sure about the nature of PEPs. Another expert at
the conference referred to Vladimir Montesinos of Peru,
President Fujimori's right-hand man in the 1990s, as "someone
who has a relationship with a PEP."
Montesinos, as Complinet
readers well know, was a political operator in his own right. He
acted as Fujimori's attorney which on its own gave him PEP
status and orchestrated the dreaded "death squads" that
characterised the regime. History does not relate whether banks
have ever tried to convince US regulators that people such as
Cunningham and Montesinos are not PEPs, nor whether the
regulators believed them.
Sin five: wilful
blindness in the face of suspicious activity
Intriago asked the panel to define this peculiarly American
legal doctrine which can apply to US compliance officers if they
fail to spot blatantly suspicious activity. Cindy Eldridge said
that wilful blindness occurred when "There's something going on
under your nose. Unless the person doing it says: 'I'm
committing a crime', you do nothing about it. Every one of those
AmSouth accounts was generating a $2,000 fee for the bank.
"You should have trained your organisation throughout about what
to look for. This should alleviate the wilful blindness
problem."
Intriago himself probably came up with the most elegant
definition, saying that the courts believed wilful blindness to
be "the deliberate avoidance of knowledge of the facts."
Sin six: letting
dangerous wire transfers go through foreign institutions'
correspondent accounts
Ever since the Levin report into correspondent banking forced
several Caribbean banks to close, US regulators have been
pressurising banks to keep a sharp eye on their correspondents.
A delegate asked: "What if you know your correspondent bank has
a good CIP? Does it take away some of the risk?" Ann Jaedicke, a
regulator, replied that she thought that it would.
She added: "You need to continue to measure the wire transfer
activity in your name. At some stage you might realise you can't
monitor it manually. I'm not trying to help the [software]
vendors but
"
Sin seven: doing AML on
the cheap and paying a lot more later
By the end of the session, the panel had mentioned at least
seven institutions that had been fined in the previous year: ABN
AMRO, AmSouth, Arab Bank, Banco de Chile, the Bank of New York,
Oppenheimer and Riggs Bank. Caruso observed: "If you look at all
these instances, it's not a decision of the bank not to spend
more money. It's neglect. There are many institutions in this
country that don't think they are exposed to these risks."
UK compliance experts may find this statement incredible, but
some delegates made roughly the same point to
Complinet during the
conference. Intriago himself evidently thought that there was
something in Caruso's statement: "In times of economic trouble,
the department that is likely to get its budget cut is the
compliance department, is it not?"
Back
to headlines...
A former broker at Lehman Brothers in New York has pleaded guilty to
laundering $11m in the proceeds of crime. In a separate case,
this determined fraudster accessed accounts at a Bank One branch
in Arizona to obtain loans from Lehman Brothers and invest the
money in securities.
Consuelo Marquez worked for Lehman Brothers from 1995 to 2000.
She laundered $11m through several accounts in the British
Virgin Islands on behalf of Mario Ernesto Villanueva Madrid, a
former Mexican governor, who allegedly had links to a Mexican
cocaine cartel. The bank sacked Marquez in December 2000 when it
became aware of her actions.
Lehman Brothers has not been accused of any involvement with
Marquez's actions. The bank has pledged its 'longstanding
commitment to fighting money laundering' in a statement about
Marquez. It also stressed that it cooperated fully with the
government in this matter.
Bank One more fraud,
more jail to come
Marquez also pleaded guilty to 15 counts of wire fraud and one
conspiracy charge in a separate case. She admitted to using
client funds in Bank One accounts without prior permission,
along with a trust officer at Bank One Corp's Arizona unit.
Marquez and the trust officer used the funds as collateral to
obtain fraudulent loans from Lehman Brothers' global finance
division. When they had secured the loans, the pair diverted
them to other accounts at the bank that Marquez controlled.
Marquez opened one of these accounts in the name of a
non-existent Mexican citizen; this allowed her to control the
account without risking discovery.
She invested the money in securities and the two shared the
profits, which amounted to 'hundreds of thousands of dollars,'
according to court reports. Bank One and its clients lost at
least $350,000 because of the scheme, a US Government official
commented.
Marquez faces up to 30 years in prison for each of the wire
fraud charges and up to five years for the conspiracy charge.
New York District Judge Naomi Reice Buchwald will sentence
Marquez on 11 January.
Back
to headlines...
Exactly how do experienced money launderers clean up dirty money that
politically exposed persons have entrusted to them? Laundrymen
face the daunting task of 'sanitising' funds obtained by the PEP
in a variety of illegal schemes. PEPs steal cash from public
treasuries, accept bribes from arms dealers, or pilfer money
given to the state as humanitarian aid; all of these get rich
quick scams are in breach of the public trust.
A good laundryman always assumes that private investigators,
auditors or prosecutors will eventually stumble upon his
client's blood money. He must ensure that the funds will survive
a cursory inspection. Today we will discuss one of the favoured
methods of hiding PEP money and demonstrate how it was used by
launderers acting on behalf of two of Latin America's more
notorious PEPs: Mario Ernesto Villanueva Madrid, the former
governor of Mexico's Quintana Roo Province; and Augusto Pinochet
Ugarte, the infamous Chilean dictator.
Financial boomerang
For lack of recognised term, we shall call this method the
round-trip; the round trip is a sort of financial boomerang that
aids the layering phase of the laundry. The trick is to send
dirty money from one bank to a second financial institution,
where the money remains under the control of the laundryman, and
later returning the funds to the original location, often under
a different identity.
An investigator or compliance officer who reviews the account at
a later date would note that the funds came in from an
institution where AML procedures are in effect. Rarely will
someone be able to trace back the funds to their place of origin
along a trans-national route; most compliance officers will only
peel back one layer of the transaction.
Unscrambling the Marquez
method
To illustrate, we have the case of Consuelo Marquez, a former
investment manager at Lehman Brothers in New York; she was Mario
Villanueva Madrid's broker. Marquez pleaded guilty to charges of
laundering $11m for Mario Villanueva Madrid, as reported on
Complinet.
Villanueva, the former Mexican governor mentioned above, is
awaiting extradition to the US on federal drug charges. He
allegedly accepted bribes in return for allowing the Juarez
Cartel to transport drugs through Quintana Roo, en route to the
US.
Marquez invested Villanueva's money in securities and placed the
money in accounts at Lehmans in New York. The account holders
were purportedly front companies in the British Virgin Islands;
the true beneficial owner, Villanueva, remained anonymous. At
that time, he was one of most wanted fugitives in the Western
Hemisphere; the US Government targeted him for sanctions under
the Foreign Narcotics
Kingpin Designation Act 1999.
Marquez's technique was to close Villanueva's accounts at Lehman
and to open an account at the Nassau branch of the Mexican bank,
Banamex, under the name 'Lehman Brothers Private Client
Services'. This account had no relation to Lehman Brothers at
all. She eventually transferred the funds from that account back
to a Lehman account under the name of a non-existent Mexican
family. Only a superior compliance officer would be able to
unscramble this puzzle. Would you?
Enter Pinochet
The second example of round tripping involves Oscar Aitken
Lavanchy, self-styled 'financial genius' and a defendant in the
US District Court in New York case. The Banco de Chile has
accused Aitken of acting as Augusto Pinochet's laundryman.
Aitken obtained a $200,000 loan on his line of credit at BdC and
added $200,000 of Pinochet's dirty money to it. He placed the
$400,000 into an unnamed bank account and transferred the total
to Monex, a Chilean broker-dealer. The next day, Aitken repaid
the loan, and placed Pinochet's tranche of funds directly into a
front company. Thus, it appeared that the dictator's dirty loot
had come from a legitimate brokerage firm, located in the same
jurisdiction as the bank's home office.
The round-trip technique relies upon the fact that harried
compliance officers and overworked investigators will not
enquire beyond the source of funds and peel back the layers
created by the launderer.
A street-smart compliance officer, however, always looks at
account history records, not just the last incoming transaction.
Back to headlines...
Financial Stability Forum
The Financial Stability Forum has met in Australia this week.
Members of the Forum discussed risks and
vulnerabilities in the international financial system and
reviewed ongoing work to strengthen resilience.
In addition, the fourth Asia-Pacific Regional Meeting was held
where participants exchanged views on the
outlook for the global and regional economies. Further
information in relation to both meetings is available
from the FSF's website at http://www.fsforum.org.
Back to headlines...
Saving Tax Directive
It is reported that the European Commission is seeking to
include Hong Kong and Singapore within the
remit of the Savings Tax Directive. It is understood that the
Commission is concerned that assets may
be being placed in the Far East to avoid the requirements of the
Directive. The Commission is therefore
said to be seeking to broaden existing tax agreements between
Hong Kong, Singapore and various
EU Member States in order that Europe can request co-operation
and information should avoidance
of European taxes be suspected.
Back to headlines...
US Treasury
The US Treasury Department's Financial Crimes Enforcement
Network is to issue a survey to banking
and financial services industry trade groups to consider the
feasibility of financial institutions providing
information on electronic transfers of money in and out of the
United States. The Agency is trying
to identify what specific information could be supplied that
would be especially helpful when combating
terrorist financing and money laundering, and how such
information might be reported to the Government.
Back to headlines...
The Financial Action Task Force is an inter-governmental body
whose purpose is to set international standards to help its
member countries combat money laundering and the financing of
terrorism. FATF was established in July 1989 at a G7 summit in
Paris in response to mounting concerns over the state of
cross-border money laundering and the damage that it was causing
to countries' economies.
"G7", incidentally, refers to the seven leading industrial
nations that meet annually to deal with major economic and
political issues they and the international community as a whole
face. Those seven nations are Canada, France, Germany, Italy,
Japan, the United Kingdom and the United States. The Russian
Federation is an eighth member in the context of discussions on
certain topics. FATF's creation was the result of a joint
initiative on the part of the G7 heads of state and the
president of the European Commission. Its initial members were
the G7 member states, the European Commission and eight other
countries.
FATF's original task was to examine money laundering problems
and the AML laws and international agreements that were already
in place and to recommend standards for future laws and
agreements. After the events of September 11 2001 FATF added to
its job description when it evolved international standards to
deal with the proliferation of terrorist financing. On May 14
2004, representatives from FATF's 33 members reaffirmed their
commitment to the task force and gave it another eight-year
lease of life as the international AML/terrorist finance
standard-setter.
As of January 25 2006, the following were the members of FATF:
Argentina; Australia; Austria; Belgium; Brazil; Canada; Denmark;
European Commission; Finland; France; Germany; Greece; Gulf
Cooperation Council; Holland; Hong Kong; Iceland; Ireland;
Italy; Japan; Luxembourg; Mexico; New Zealand; Norway; Portugal;
the Russian Federation; Singapore; South Africa; Spain; Sweden;
Switzerland; Turkey; the UK; and the US.
Some international bodies and organisations have the status of
"observers" at FATF. These are mainly regional bodies with a
specific anti-money laundering mission or function. China has
been an "observer" since January 2005 and it is expected to
become a full member in the not-too-distant future.
The current president of FATF a one-year position is
Professor Kader Asmal of South Africa. The FATF secretariat is
housed at the headquarters of the Organisation for Economic
Cooperation and Development in Paris and supports the work of
FATF and its president.
Mission statement
FATF's mission statement, as published on its web site, covers
the following activities.
