Introduction of the Money Laundering Abatement Act

Friday, August 3, 2001

Congressional Record 107th Congress First Session Friday, August 3, 2001

Mr. President, today I am introducing, along with my colleagues Senator Chuck Grassley, Senator Paul Sarbanes, Senator Bill Nelson, Senator Jon Kyl and Senator Mike DeWine, the Money Laundering Abatement Act, a bill to modernize and strengthen U.S. laws to detect, stop and prosecute money laundering through U.S. banks.

The safety and soundness of our banking system, the stability of the U.S. dollar, the services our banks perform, and the returns our banks earn for depositors make the U.S. banking system an attractive location for money launderers. And money launderers who are able to use U.S. banks can take advantage of the prestige of these banks to lend credibility to their operations, reassure victims, and send wire transfers that may attract less scrutiny from law enforcement. So whether it is to protect their funds or further their crimes, money launderers want access to U.S. banks, and they are devising one scheme after another to infiltrate the U.S. banking system.

The funds they want to move through our banks are enormous. Estimates are that at least $1 trillion in criminal proceeds are laundered each year, with about half of that amount -- $500 billion -- going through U.S. banks.

Stopping this flood of dirty money is a top priority for U.S. law enforcement which spent about $650 million in taxpayer dollars last year on anti-money laundering efforts. That's because money laundering damages U.S. interests in so many ways -- rewarding criminals and financing crime, undermining the integrity of international financial systems, weakening emerging democracies and distorting their economies, and impeding the international fight against corruption, drug trafficking and organized crime.

The bill we are introducing today would provide new and improved tools to stop money laundering. Because it includes provisions that would outlaw the proceeds of foreign corruption, cut off the access of offshore shell banks to U.S. banks, and end foreign bank immunity to forfeiture of laundered funds, this bill would close some of the worst gaps and remedy some of the most glaring weaknesses in existing anti-money laundering laws. For example, the bill would:

  1. add foreign corruption offenses, such as bribery and theft of government funds, to the list of foreign crimes that can trigger a U.S. money laundering prosecution;

  2. bar U.S. banks from providing banking services to foreign shell banks, which are banks that have no physical presence in any country and carry high money laundering risks;


  3. require U.S. banks to conduct enhanced due diligence reviews to guard against money laundering when opening (a) a private bank account with $1 million or more for a foreign person, or (b) a correspondent account for an offshore bank or foreign bank in a country posing high money laundering risks, and

  4. make a depositor's funds in a foreign bank's U.S. correspondent account subject to the same civil forfeiture rules that apply to depositors' funds in other U.S. bank accounts.

These provisions are the product of almost three years of work by my staff at the Senate Permanent Subcommittee on Investigations examining money laundering problems in the private and correspondent banking fields. Countless interviews with money laundering experts, bankers, regulators, law enforcement personnel, criminals and victims, and the careful review of literally tens of thousands of pages of documents led to the issuance of two staff reports in 1999 and 2001, and several days of Subcommittee hearings, setting out the problems uncovered and recommendations for strengthening U.S. enforcement efforts.

The first Subcommittee investigation examined private banking, a growing and lucrative banking sector which offers financial services to wealthy individuals, who usually must deposit $1 million or more to open a private bank account. In return, the client is assigned a "private banker" who provides the client with sophisticated financial services, such as offshore accounts, shell corporations, and high dollar wire transfers, which raise money laundering concerns.

A key issue to emerge from this investigation is the role that private banks play in opening accounts and accepting hundreds of millions of dollars in deposits from senior foreign officials or their relatives, even amid allegations or suspicions that the deposits may be the product of government corruption or other criminal conduct. The 1999 staff report described four case histories of senior government officials or their relatives depositing hundreds of millions of suspect dollars into private bank accounts at Citibank, the largest bank in the United States. These case histories showed how Citibank Private Bank had become the banker for a rogues' gallery of senior government officials or their relatives. One infamous example is Raul Salinas, the brother of the former President of Mexico, who is imprisoned in Mexico for murder and is under indictment in Switzerland for money laundering associated with drug trafficking. He deposited almost $100 million into his Citibank Private Bank accounts. Another example involves the three sons of General Sani Abacha, who was the former military leader of Nigeria and was notorious for misappropriating and extorting billions of dollars from his country. His sons deposited more than $110 million into Citibank Private Bank accounts.

The investigation determined that Citibank's private bankers asked few questions before opening the accounts and accepting the funds. It also found that, because foreign corruption offenses are not currently on the list of crimes that can trigger a U.S. money laundering prosecution, corrupt foreign leaders may be targeting U.S. banks as a safe haven for their funds.

Another striking aspect of the investigation was how a culture of secrecy pervaded most private banking transactions. Citibank private bankers, for example, routinely helped clients set up offshore shell companies and open bank accounts in the name of these companies or under other fictional names such as "Bonaparte" or "Gelsobella." After opening these accounts, secrecy remained such a priority that Citibank private bankers were often told by their superiors not to keep any record in the United States disclosing the true owner of the offshore accounts or corporations they manage. One private banker told of stashing with his secretary a "cheat sheet" that identified which client owned which shell company in order to hide it from Citibank managers who did not allow such ownership information to be kept in the United States.

On some occasions, Citibank Private Bank even hid ownership information from its own staff. For example, one Citibank private banker in London worked for years on a Salinas account without knowing Salinas was the beneficial owner. Salinas was instead referred to by the name of his offshore corporation, Trocca, Ltd., or by a code, "CC-2," which stood for "Confidential Client Number 2." Citibank even went so far as to allow Mr. Salinas to deposit millions of dollars into his private bank accounts without putting his name on the wire transfers moving the funds, instead allowing his future wife, using an assumed name, to wire the funds through Citibank's own administrative accounts. Later, when Mr. Salinas' wife was arrested, Citibank discussed transferring all of his funds to Switzerland to minimize disclosure, abandoning that suggestion only after noting that the wire transfer documentation would disclose the funds' final destination.

That's how far one major U.S. private bank went on client secrecy.

The Subcommittee's second money laundering investigation focused on U.S. correspondent accounts opened for high risk foreign banks. Correspondent banking occurs when one bank provides services to another bank to move funds or carry out other financial transactions. It is an essential feature of international banking, allowing the rapid movement of funds across borders and enabling banks and their clients to conduct business worldwide, including in jurisdictions where the banks do not maintain offices.

The problem uncovered by the Subcommittee's yearlong investigation is that too many U.S. banks, through the correspondent accounts they provide to foreign banks that carry high risks of money laundering, have become conduits for illicit funds associated with drug trafficking, financial fraud, Internet gambling and other crimes. The investigation identified three categories of foreign banks with high risks of money laundering: shell banks, offshore banks, and banks in jurisdictions with weak anti-money laundering controls. Because many U.S. banks have routinely failed to screen and monitor these high risk foreign banks as clients, they have been exposed to poorly regulated, poorly managed, sometimes corrupt, foreign banks with weak or no anti-money laundering controls. The U.S. correspondent accounts have been used by these foreign banks, their owners and criminal clients to gain direct access to the U.S. financial system, to benefit from the safety and soundness of the U.S. banking system, and to launder dirty money through U.S. bank accounts.

In February of this year, my staff released a 450 page report detailing the money laundering problems uncovered in correspondent banking. The report indicated that virtually every U.S. bank examined, from Chase Manhattan, to Bank of America, to First Union, to Citibank, had opened correspondent accounts for offshore banks. Citibank also admitted opening correspondent accounts for offshore shell banks with no physical presence in any jurisdiction.

The report presents ten detailed case histories showing how high risk foreign banks managed to move billions of dollars through U.S. banks, including hundreds of millions of dollars in illicit funds associated with drug trafficking, financial fraud or Internet gambling. In some cases, the foreign banks were engaged in criminal behavior; in others, the foreign banks had such poor anti-money laundering controls that they did not know or appeared not to care whether their clients were engaged in criminal behavior. Several of the foreign banks operated well outside the parameters of normal banking practices, without basic fiscal or administrative controls, account opening procedures or anti-money laundering safeguards. All had limited resources and staff and relied heavily upon their U.S. correspondent accounts to conduct operations, provide client services, and move funds. Most completed virtually all of their transactions through their correspondent accounts, making correspondent banking integral to their operations. The result was that their U.S. correspondent accounts served as a significant gateway into the U.S. financial system for criminals and money launderers.

In March 2001, the Subcommittee held hearings on the problem of international correspondent banking and money laundering. One witness was a former owner of an offshore bank in the Cayman Islands, John Mathewson, who pleaded guilty in the United States to conspiracy to commit money laundering and tax evasion and has spent the past 5 years helping to prosecute his former clients for tax evasion and other crimes. Mr. Mathewson testified that he had charged his bank clients about $5,000 to set up an offshore shell corporation and another $3,000 for an annual corporate management fee, before opening a bank account for them in the name of the shell corporation. He noted that no one would pay $8,000 for a bank account in the Cayman Islands when they could have the same account for free in the United States, unless they were willing to pay a premium for secrecy. He testified that 95 percent of his 2,000 clients were U.S. citizens, and he believed that 100 percent of his bank clients were engaged in tax evasion. He characterized his offshore bank as a "run-of-the-mill" operation. He also said that the Achilles' heel of the offshore banking community is its dependence upon correspondent banks to do business and that was how jurisdictions like the United States could take control of the situation and stop abuses, if we had the political will to do so.

I think we do have that political will, and that's why we are introducing this bill today. Let me describe some of its key provisions.

The Money Laundering Abatement Act would add foreign corruption offenses such as bribery and theft of government funds to the list of crimes that can trigger a U.S. money laundering prosecution. This provision would make it clear that corrupt funds are not welcome here, and that corrupt leaders can expect criminal prosecutions if they try to stash dirty money in our banks. After all, America can't have it both ways. We can't condemn corruption abroad be it officials taking bribes or looting their treasuries and then tolerate American banks profiting off that corruption.

Second, the bill would require U.S. banks and U.S. branches of foreign banks to exercise enhanced due diligence before opening a private bank account of $1 million or more for a foreign person, and to take particular care before opening accounts for foreign government officials, their close relatives or associates to make sure the funds are not tainted by corruption. This due diligence provision targets the greatest money laundering risks that the Subcommittee investigation identified in the private banking field. While some U.S. banks are already performing enhanced due diligence reviews, this provision would put that requirement into law and bring U.S. law into alignment with most other countries engaged in the fight against money laundering.

The Money Laundering Abatement Act would also put an end to some of the extreme secrecy practices at private banks. For example, if a U.S. bank or a U.S. branch of a foreign bank opened or managed an account in the United States for a foreign accountholder, the bill would require the bank to keep a record in the United States identifying that foreign accountholder. After all, U.S. banks already keep records of accounts held by U.S. citizens, and there is no reason to allow U.S. banks to administer offshore accounts for foreign accountholders with less openness than other U.S. bank accounts. The bill would also put an end to the type of secret fund transfers that went on in the Salinas matter by prohibiting bank clients from independently directing funds to be deposited into a bank's "concentration account," an administrative account which merges and processes funds from multiple accounts and transactions, and by requiring banks to link client names to all client funds passing through the bank's concentration accounts.

Our bill would also take a number of steps to close the door on money laundering through U.S. correspondent accounts. First and most importantly, our bill would bar any U.S. bank or U.S. branch of a foreign bank from opening a U.S. correspondent account for a foreign offshore shell bank, which the Subcommittee investigation found to pose the highest money laundering risks of all foreign banks. Shell banks are banks that have no physical presence anywhere -- no office where customers can go to conduct banking transactions or where regulators can go to inspect records and observe bank operations. They also have no affiliation with any other bank and are not regulated through any affiliated bank.

The Subcommittee investigation examined four shell banks in detail. All four were found to be operating far outside the parameters of normal banking practice, often without paid staff, basic fiscal and administrative controls, or anti-money laundering safeguards. All four also largely escaped regulatory oversight. All four used U.S. bank accounts to transact business and move millions of dollars in suspect funds associated with drug trafficking, financial fraud, bribe money or other misconduct.

Let me describe one example from the Subcommittee's investigation. M.A. Bank was an offshore bank that was licensed in the Cayman Islands, but had no physical office of its own in any country. In 10 years of operation, M.A. Bank never underwent an examination by any bank regulator. Its owners have since admitted that the bank opened accounts in fictitious names, accepted deposits for unknown persons, allowed clients to authorize third parties to make large withdrawals, and manufactured withdrawal slips or receipts on request.

Nevertheless, M.A. Bank was able to open a U.S. correspondent account at Citibank in New York. M.A. Bank used that account to move hundreds of millions of dollars for clients in Argentina, including $7.7 million in illegal drug money. After the Subcommittee staff began investigating the account, Citibank closed it. After the staff report came out, the Cayman Islands decided to close the bank, but since the bank had no office, Cayman regulators at first didn't know where to go. They eventually sent teams to Uruguay and Argentina to locate bank documents and take control of bank operations. The Cayman Islands finally closed the bank a few months ago.

The four shell banks investigated by the Subcommittee are only the tip of the iceberg. There are hundreds in existence, operating through correspondent accounts in the United States and around the world.

By nature, shell banks operate in extreme secrecy and are resistant to regulatory oversight. No one really knows what they are up to other than their owners. Some jurisdictions known for offshore businesses, such as Jersey and Guernsey, refuse to license shell banks. Others, such as the Cayman Islands and the Bahamas, stopped issuing shell bank licenses several years ago. In addition, both the Cayman Islands and Bahamas announced that by the end of this year, 2001, all of their existing shell banks, which together number about 120, must establish a physical office within their respective jurisdictions, or lose their license. But other offshore jurisdictions, such as Nauru, Vanuatu and Montenegro, are continuing to license shell banks. Nauru alone has licensed about 400.

Here at home, many U.S. banks, such as Bank of America and Chase Manhattan, will not open correspondent bank accounts for offshore shell banks as a matter of policy. But other banks, such as Citibank, continue to do business with offshore shell banks and continue to expose the U.S. banking system to the money laundering risks they bring. Our bill would close the door to these money laundering risks. Foreign shell banks occupy the bottom rung of the banking world, and they don't deserve a place in the U.S. banking system. It is time to shut the door to these rogue operators.

In addition to barring offshore shell banks, the bill would require U.S. banks to exercise enhanced due diligence before opening a correspondent account for an offshore bank or a bank licensed by a jurisdiction known for poor anti-money laundering controls. These foreign banks also expose U.S. banks to high money laundering risks. Requiring U.S. banks to exercise enhanced due diligence prior to opening an account for one of these banks would not only help protect the U.S. banking system from the money laundering risks posed by these foreign banks, but would also help bring U.S. law into parity with the anti-money laundering laws of other countries.

Another provision in the bill would address a key weakness in existing U.S. forfeiture law as applied to correspondent banking, by making a depositor's funds in a foreign bank's U.S. correspondent account subject to the same civil forfeiture rules that apply to depositors' funds in all other U.S. bank accounts. Right now, due to a quirk in the law, U.S. law enforcement faces a significant and unusual legal barrier to seizing funds from a correspondent account. Unlike a regular U.S. bank account, it is not enough for U.S. law enforcement to show that criminal proceeds were deposited into the correspondent account; the government must also show that the foreign bank holding the deposits was somehow part of the wrongdoing.

That's not only a tough job, that can be an impossible job. In many cases, the foreign bank will not have been part of the wrongdoing, but that's a strange reason for letting the foreign depositor who was engaged in the wrongdoing escape forfeiture. And in those cases where the foreign bank may have been involved, no prosecutor will be able to allege it in a complaint without first getting the resources needed to chase the foreign bank abroad.

Take the example of a financial fraud committed by a Nigerian national against a U.S. victim, a fraud pattern which the U.S. State Department has identified as affecting many U.S. citizens and businesses and which consumes U.S. law enforcement resources across the country. If the Nigerian fraudster deposits the fraud victim's funds in a personal account at a U.S. bank, U.S. law enforcement can freeze the funds and litigate the case in court. But if the fraudster instead deposits the victim's funds in a U.S. correspondent account belonging to a Nigerian bank at which the Nigerian fraudster does business, U.S. law enforcement cannot freeze the funds unless it is prepared to show that the Nigerian bank was involved in the fraud. And what prosecutor has the resources to travel to Nigeria to investigate a Nigerian bank? Even when the victim is sitting in the prosecutor's office, and his funds are still in the United States in a U.S. bank, the prosecutor's hands are tied unless he or she is willing to take on the Nigerian bank as well as the Nigerian fraudster. That is one reason so many Nigerian fraud cases are no longer being prosecuted in this country -- because Nigerian criminals are taking advantage of that quirk in U.S. forfeiture law to prevent law enforcement from seizing a victim's money before it is transferred out of the country.

Our bill would eliminate that quirk by placing civil forfeitures of funds in correspondent accounts on the same footing as forfeitures of funds in all other U.S. accounts. There is just no reason foreign banks should be shielded from forfeitures when U.S. banks would not be.

The Levin-Grassley bill has a number of other provisions that would help U.S. law enforcement in the battle against money laundering. They include giving U.S. courts "long-arm" jurisdiction over foreign banks with U.S. correspondent accounts; expanding the definition of money laundering to include laundering funds through a foreign bank; authorizing U.S. prosecutors to use a Federal receiver to find a criminal defendant's assets, wherever located; and requiring foreign banks to designate a U.S. resident for service of subpoenas.

These are realistic, practical provisions that could make a real difference in the fight against money laundering. One state Attorney General who has reviewed the bill has written that "there is a serious need for modernizing and refining the federal money laundering statutes to thwart the efforts of the criminal element and close the loopholes they use to their advantage." He expresses "strong support" for the bill, explaining that it "will greatly aid law enforcement" and "provide new tools that will assist law enforcement in keeping pace with the modern money laundering schemes."Another state Attorney General has written that the bill "would provide much needed relief from some of the most pressing problems in money laundering enforcement in the international arena." She predicts that the bill's "effects on money laundering affecting victims of crime and illegal drug trafficking would be dramatic." She also writes that the "burdens it places on the financial institutions are well considered, closely tailored to the problems, and reasonable in light of the public benefits involved."

This country passed its first major anti-money laundering law in 1970, when Congress made clear its desire to not allow U.S. banks to function as conduits for dirty money. Since then, the world has experienced an enormous growth in the accumulation of wealth by individuals around the world, and in the activities of private banks servicing these clients. At the same time there has been a rapid increase in offshore activities, with the number of offshore jurisdictions doubling from about 30 to about 60, and the number of offshore banks skyrocketing to an estimated worldwide total of 4,000, including more than 500 shell banks.

At the same time, the Subcommittee investigations have shown that private and correspondent accounts have become gateways for criminals to carry on money laundering and other criminal activity in the United States and to benefit from the safety and soundness of the U.S. banking industry. U.S. law enforcement needs stronger tools to detect, stop and prosecute money launderers attempting to use these gateways into the U.S. banking system. Enacting this legislation would help provide the tools needed to close those money laundering gateways and curb the dirty funds seeking entry into the U.S. banking industry.

I ask unanimous consent that the letters in support of the bill from the two state Attorneys General of the states of Massachusetts and Arizona, as well as a short summary of the bill, and the text of the bill itself, be included in the record following my remarks.

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