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Insight Magazine

Must U.S. Banks Be Kept In Check?

Jamie Dettmer

March 17, 2003
Copyright © 2003
Insight Magazine. All rights reserved. 

The Treasury Department is set to issue a controversial due- diligence regulation aimed at making it more difficult for mobsters, corrupt foreign officials, terrorists and narco-traffickers to launder their proceeds through the U.S. financial system. The regulation, which was included in the controversial USA PATRIOT Act and was on a law-enforcement wish list of measures prior to 9/11, will require U.S. banks rigorously to check foreign banks with which they have correspondent relationships and to pay close attention to private U.S. accounts held by foreigners.

But analysts and private-sector experts warn that if the new regulation is to be effective U.S. authorities will need to show as much determination in punishing U.S. banks for involvement in money laundering or infractions as it has shown when dealing with overseas and foreign-owned banks.

According to the respected industry newsletter Money Laundering Alert (MLA), the Justice Department has a "blind spot" when it comes to big U.S. financial institutions and laundering. MLA points to the dramatically different treatment in two recent cases - Banco Popular de Puerto Rico and Wall Street's Lehman Brothers.

In the Banco Popular case, the Justice Department alleged that there had been a failure to file Suspicious Activity Reports (SARs) for transactions dating back to 1998, though there were no actual criminal violations alleged. The bank negotiated a plea agreement this year but was stung with what banking analysts say was a harsh $21.6 million fine, or forfeiture. Banco Popular also was required by FinCEN, the financial-crimes unit of the Treasury Department, to pay a civil fine of $20 million.

By contrast, in June of last year, no forfeiture action or penalty was imposed on Lehman Brothers when the Justice Department mounted a complex case against senior Lehman stockbroker Consuelo Marquez for conducting complicated laundering transactions involving more than $60 million between 1995 and 2000 for former Mexican governor Mario Villanueva. Charges were not filed against the powerful company, nor was there even a Securities and Exchange Commission reprimand.

"The Justice Department's uncommonly harsh `Deferred Prosecution Agreement' on Banco Popular contrasts sharply with the treatment Lehman Brothers in New York got last June," says MLA. "There may bea double standard when it comes to prosecutorial judgment of the conduct of big New York financial institutions compared to smaller institutions that serve or are based in Latin America," it claimed.

Justice officials insist there are no double standards. They point to the prosecution before Christmas of New York's Broadway National Bank, the first U.S. bank to be prosecuted for failing to establish an anti-money-laundering program, which is required under the Bank Secrecy Act. Broadway pleaded guilty in November to several felony counts of failing to file SARs on approximately $123 million in bulk cash deposits and assisting customers to structure $76 million in transactions so as to evade currency-transaction reporting requirements.

Banks not only are required to have an anti-money-laundering program enabling them to identify and report suspicious transactions, but also must file currency-transaction reports for cash deposits and withdrawals of more than $10,000.

"Despite being provided with extensive warnings about its legal obligations under the Bank Secrecy Act by both banking regulators and its own consultants, Broadway failed to establish and maintain even a minimally effective anti-money-laundering program," according to U.S. Customs Service Commissioner Robert Bonner. In fact, the conduct of business at Broadway National has shocked banking professionals. They say that the bank's handling of enormous cash deposits followed by the immediate wiring of the money to red-flag destinations such as Colombia, Panama and Pakistan was flagrant. Cashiers at the bank would complain to senior staff about how they had to forgo their lunch breaks because of the need to count huge amounts of currency brought in to deposit.

The criminal complaint confirms this, detailing how "enormous and highly suspicious" amounts of cash were brought to the bank, including on one occasion a bag containing $660,000. Broadway National managers had no hesitation in wiring the cash to "several well-known money-laundering havens" for customers they suspected were money launderers, including Alfred Dauber, who made cash deposits of $46 million in Broadway accounts between 1996 and 1998. Dauber subsequently pleaded guilty in a separate case to money laundering, which he was doing on behalf of Colombian narco- traffickers.

Broadway National may have become the first bank to be prosecuted for failing to establish an anti-money-laundering program, its public reputation being damaged in the process, but its fine of $4 million is a fraction of what Banco Popular suffered a few weeks later for far less serious infractions, say industry insiders who are skeptical of the willingness of the Justice Department to take off the gloves when it comes to powerful U.S. banks.

It isn't the first time that U.S. authorities have been accused of going easy on big domestic financial institutions caught breaking or ignoring the rules. Two years ago, the Senate Permanent Subcommittee on Investigations embarrassed big U.S. banks, including Bank of America, Chase Manhattan and Citibank, with hearings requiring them to explain documented falsehoods, mercenary conduct, incompetence and lying to banking regulators.

Citibank was accused by Sen. Carl Levin (D-Mich.) of having given "false" statements to Argentine regulators and failing for nearly two years to close the account of an offshore Cayman Islands bank whose funds U.S. authorities had seized on money-laundering grounds. Those hearings focused directly on the issue of correspondent relationships between U.S. and foreign banks, most particularly banks located offshore.

Under the due-diligence regulation soon to be issued by the Treasury Department, U.S. banks will be required to conduct rigorous investigations into all correspondent accounts maintained by foreign financial institutions. These investigations will include checking on the respondent bank's license, taking into account where the bank is located and whether its home country has passed strict anti- money-laundering legislation, and understanding the nature of the business the respondent bank conducts. Furthermore, U.S. banks should be fully informed on the volume of transactions likely to be made.

In the past, as the Permanent Subcommittee on Investigations found, U.S. banks have been loath to close shady accounts. Bank of America and Chase, for example, maintained correspondent relationships with Swiss American Bank of Antigua despite senior officials at both U.S. banks harboring doubts concerning the integrity of the respondent bank. The subcommittee uncovered a wealth of internal memos at both banks that noted how poorly Swiss American was managed and how undiscerning the Cayman bank was when it came to accepting new clients.

Under the new Treasury Department regulation, banks also will be required to focus special attention on private banking accounts at U.S. financial institutions held by foreign political and military leaders, and their immediate family members and business associates.

Jamie Dettmer is a senior editor for Insight.


Correspondent accounts are bank accounts that financial institutions maintain with each other in their own names. They allow banks to undertake business for themselves or customers in countries where they have no branches or physical presence. Large U.S. banks often act as correspondent banks for thousands of small overseas financial institutions.

But money launderers can exploit the accounts all too easily, especially if the banks that hold the correspondent accounts are lax or negligent in knowing the respondent banks overseas.

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