In a staff report set for release on Monday, Feb. 5, Democrats on the Senate Governmental Affairs investigations subcommittee claim that American banks are now allowing so-called correspondent accounts with foreign banks to launder money from financial fraud, drug trafficking, Internet gambling, and illegal arms sales. Foreign banks routinely use such accounts to conduct business for their customers in places where the foreign banks have no presence. For instance, a foreign-licensed bank with no U.S. office might want to provide services in America to attract or retain clients that do business here.
It's not unusual for U.S. banks to have hundreds, even thousands, of correspondent account relationships around the globe. And many of the highest-risk foreign banks have only minimal relations with their U.S. partners, such as using the host as a vehicle for wire transfers. But for the money launderers, wire transferring is the key to the kingdom. The Senate probers claim they have found literally thousands of instances of money laundering's signature move -- large sums being wired into U.S. banks from suspect banks abroad, only to sit briefly before being wired off to other accounts around the world.
NOT LEGITIMATE. One example according to in the report, obtained by BusinessWeek Online: Several U.S. banks, including giant Bank of America, had a correspondent relationship with a small offshore bank called American International Bank, from the Caribbean island of Antigua. It happened that one of American International's biggest lines of business was acting as a correspondent for another bank, which used the account to move the proceeds of a huge fraud scam involving improper loan fees. Bank of America spokeswoman Shirley Norton says the bank is committed to fighting money laundering, and it closed the account when it learned of trouble. Representatives of other banks cited in the report all had similar comments in advance of the study's release.
So who's responsible? The Senate investigators cite laxity by banks in checking out foreign correspondent accounts. U.S. banks often assume that if foreign banks are licensed, they're legitimate. Not so, says the staff report. To combat the problem, the report urges legislation explicitly outlawing certain kinds of correspondent relationships. The report also urges government assistance to help banks identify bad-guy banks.
All of which reopens a touchy subject for the U.S. banks -- the possibility of a government crackdown and new regulations. Banks point out that they already aggressively combat money laundering because no institution wants to get tagged for helping the crooks. But playing cop with customers' money also raises issues of privacy and often irks large bank clients, who are asked questions they consider intrusive.
ROGUE BANKS. John Byrne, senior counsel for regulatory affairs at the American Bankers Assn., says banks will study the report and continue working to squeeze out the villains. "We know it's like the drug problem -- it's still there," he says, emphasizing he hadn't seen the results of the probe. "You're not going to stop the movement of illegal money internationally by focusing on one spot." What's needed? The feds already cite "rogue nations," Byrne notes. He says the government should seek out and identify rogue banks as well.
The latest subcommittee investigation follows the Bank of New York scandal two years ago. In that imbroglio, two Russian banks deposited $7 billion into correspondent accounts. The money amounted to the spoils of a scheme to help wealthy Russians avoid taxes, currency controls, and customs duties.
Imposing new regulations on the banking industry would be tough for the Bush Administration: The financial sector was the President's biggest source of campaign cash last year, according to the Washington-based Center for Responsive Politics. A bank -- MBNA -- was his single largest contributor, the center says. And two banking companies cited in the Senate study -- Citigroup Inc. and Bank of America -- made Bush's top 15 list.
The Senate investigators concluded that one important reason U.S. banks haven't caught on to money laundering through correspondent accounts is pure-and-simple economics: None of their own money was at risk. They might be making wire transfers, but it wasn't as if they had assumed loans that could go bad. So they paid little heed to the transactions. If that kind of business imperative remains dominant, it may well take more than jawboning to clean up the problem. By Christopher H. Schmitt in Washington, with Heather Timmons in New York