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It’s retribution time in the Russian money-laundering scandal — and not just The Bank of New York Company Inc., or Citigroup Inc. should be worried. Bankers and their advisers everywhere might suffer Congress’ wrath. Federal authorities are continuing to probe into allegations of criminal improprieties arising from the Bank of New York case. (There already have been two guilty pleas entered.) Meanwhile, shareholders have filed a multimillion-dollar suit against the bank and bank officials, charging “systemic wrongdoing that occurred within the bank for over six years” arising out of the alleged Russian money-laundering scheme. Defendants deny all the charges. Perhaps most worrisome to the industry as a whole, though, is the spotlight that’s been turned on international correspondent banking relationships. Not only has the press fixated on the matter, so have government and congressional investigators. As a result, many in the banking industry now fear that if they can’t solve the problem themselves, federal lawmakers will attempt to solve it for them. It’s been over a year and a half since news of Russian money laundering at American banks first made headlines. The opening salvo came on August 19, 1999, when The New York Times led its front page with a sizzling tale of dummy companies, offshore accounts, and the venerable Bank of New York (BONY). Readers might have been forgiven for blinking in disbelief. The Bank of New York is, after all, the nation’s oldest financial institution, and numbers among its founders Alexander Hamilton, America’s first secretary of the Treasury. Still, there was more than just history — or even the bank’s sterling reputation — at stake. Beginning on the front page and spilling inside was a complex account of how a BONY executive named Lucy Edwards and her businessman-husband, Peter Berlin, had laundered as much as $10 billion in dirty money. (The actual figure, according to more recent government documents, is believed to be $7 billion.) Over the course of nearly three and a half years (from February 1996 to July 1999), the Edwards and Berlin team, prosecutors said, received some $1.8 million in illegal commissions. The dimensions of their alleged scheme were such that New York magazine would declare it “the biggest financial scandal in a decade.” BONY, though, wasn’t the only bank receiving unwelcomed publicity thanks to the scourge of Russian money laundering. By November 2000, the spotlight had shifted to another of America’s premier money center banks, Citigroup Inc. A damning U.S. General Accounting Office (GAO) report was released to Congress and the press. In it, the GAO detailed the results of its nine-month-long investigation into possible Russian money laundering at Citigroup and the much smaller Commercial Bank of San Francisco. The amount in question this time: $1.4 billion that had allegedly been moved through these banks’ accounts between 1991 and January 2000. The GAO concluded that the banks had failed to conduct the appropriate due diligence in identifying the owners of accounts. The story made front-page news — and threatened to affect the entire industry — when Sen. Carl Levin, D-Mich., a senior member of the Senate Governmental Affairs Committee, cited this new possibility that Russian corruption had infected the U.S. as his prime example of how easily money could be laundered through American banks. Now comes the next stage in this drama: a shareholder derivative action, first filed Sept. 23, 1999, on behalf of The Bank of New York Company Inc. shareholders by the hard-charging Melvyn Weiss, name partner in New York-based Milberg Weiss Bershad Hynes & Lerach. The defendants include Edwards, who with Berlin entered guilty pleas in U.S. district court on Feb. 16, 2000, to two counts of money laundering in return for their help in the ongoing federal investigation. Weiss and his team also sued the bank, its 15 directors, a former chief financial officer of the company, and two former officers in the bank’s Eastern European division. The defendants deny the accusations. The complaint is sweeping in its charges of “undisclosed participation, reaching to the highest levels of the bank, in a vast money-laundering conspiracy perpetrated by members of the Russian industrial and banking establishment and Russian organized crime.” The most shocking accusation is that the bank’s highest-ranking officials “used their unfettered access to BONY’s wire transfer operations to obtain interests in foreign shell corporations and accounts to which laundered and stolen monies were being diverted.” The complaint singles out Bank of New York Chairman and Chief Executive Officer Thomas Renyi. Plaintiffs’ attorneys allege that Renyi “knew of and assisted the bank’s participation, with private banking leaders, in the implementation of these illegal tax evasion, money-laundering, and capital flight schemes.” Heavy allegations, indeed. Renyi and the bank have vehemently denied the charges. Contacted by Corporate Counsel, Bank of New York managing counsel Robert Kochenthal Jr. would not comment on the case “as a matter of policy.” Phebe Miller, BONY’s general counsel during the period in which the alleged misconduct took place, has since left the company and could not be reached for comment. Similarly, our calls to Citigroup Inc. Global Consumer Business General Counsel Michael Ross came to a dead end. Routed to a company spokesman, we received only a copy of Ross’ lengthy reply to the GAO. “It is clear in hindsight,” Ross wrote, “that our systems and tracking procedures were not sufficient.” Citigroup branch officials, Ross said, “showed little sensitivity to the need to review or monitor activity or question the number of accounts opened for one address.” Moreover, they “undertook only limited due diligence on businesses” referred to them in the case. Counsel’s reluctance to comment on these cases is understandable. The recent publication of a Senate committee report — given the relatively sexy title “Correspondent Banking: A Gateway For Money Laundering” — has highlighted the seriousness of the threat to these banks and the U.S. financial services industry generally. Senate investigators suggest that there is a gaping loophole in the safety net: “the failure of U.S. banks to ask the extent to which their foreign bank clients are allowing other foreign banks to use their U.S. accounts.” According to the Senate report, high-risk foreign banks have on numerous occasions gained access to the U.S. financial system “not by opening their own U.S. correspondent accounts, but by operating through U.S. correspondent accounts belonging to other foreign banks.” According to various accounts given in the recent Senate report, this is how the money laundering game works: A Russian business executive, Mr. X, wants to turn his rubles into dollars and move them out of the country. He doesn’t, however, wish to pay taxes or custom duties — or divulge the source of his income. The reason is obvious: Mr. X’s money is almost certainly dirty. What does he do? Typically, he sets up a dummy company that purports to act as a supplier to a recently privatized corporation he controls. Invoices are sent — not infrequently for goods that never will be delivered. Mr. X signs off on a payment to the phantom vendor and that money is deposited in the name of this vendor in a Moscow bank. Now the Moscow bank has a correspondent banking relationship with a Swiss bank. And the Swiss bank has a similar relationship with a major money center bank in New York. The New York bankers might have cast suspicious glances at money coming directly from Moscow. But they have fewer qualms when it comes from an old, established bank in Geneva. And so it is that Mr. X’s dirty laundry has been “bundled” with thousands of other accounts — some clean, some not — and moved via wire transfer from Moscow to Geneva to New York in the blink of an eye. From there, it will be moved to accounts held in the names of other shell corporations. In this game there is not one cleaning establishment, but many. With each new pass through the wringer, the origins of the money become ever harder to trace. One thing, though, is for sure: Whatever the ultimate destination, whether it’s an account on the Isle of Man or an obscure island in the South Pacific, the money will find its way back into Mr. X’s pockets as rock-solid U.S. dollars. Given the sheer volume of daily wire transfers passing through New York money center banks, the lack of oversight is not exactly surprising. In 1999 the top five money center banks held correspondent banking account balances exceeding $17 billion. A few of the money center banks actually process as much as $1 trillion in wire transfers daily. CEO Renyi told the House Banking Committee that BONY alone processed an average of $3.7 billion a day just in Russian wire transfers during most of 1998. In the Bank of New York case, a key element in the alleged scheme was access to BONY’s proprietary electronic banking software, Micro/Ca$h-Register. According to her testimony, Edwards installed the software in a computer located in an office in Forest Hills, N.Y., that was run by associates of the Russian bankers involved in the alleged scheme. From there, employing U.S. accounts set up for three shell corporations, the funds were transferred in bulk amounts on an almost daily basis on instructions from Moscow. Immense as those sums are, the numbers pale in comparison with the total amount of Russian money believed to have been laundered during the past 13 years. Estimates given in 1999 to the House Banking Committee range from a low of $200 billion up to a high of $500 billion. Testimony before the committee suggests that the westward movement of Russian capital actually began as far back as 1988 — more than two and a half years before the fall of the Soviet Union in August 1991. According to former KGB officers and Central Intelligence Agency analysts, high-ranking members of the old Soviet regime began funneling money and raw goods (oil, gold, silver, and the like) out of the country during the final years of perestroika. Their chief conduit: KGB offices in the West. According to Forbes senior editor Paul Klebnikov in his book “Godfather of the Kremlin,” the Soviet system was so troubled that its gold reserves virtually evaporated in less than two years (1989-91). From 1,300 tons ($30 billion) it became a mere 300 tons. And during President Mikhail Gorbachev’s leadership, Soviet foreign currency reserves fell from $15 billion to $1 billion. Most of this money, Klebnikov believes, found its way into foreign bank accounts. Capital flight, Klebnikov estimates, averaged $15-20 billion every year from 1990 to 1994. And that was just the beginning. By 1998 International Criminal Police Organization (Interpol) was estimating that some $300 billion had been looted from Russia and transferred abroad. Russian prosecutor-general Yuri Skuratov reckoned that, out of a total International Monetary Fund loan of $4.8 billion to Russia in 1998, the bulk — $3.9 billion — found its way out of the country. A 1999 U.S. Department of State document quotes officials of the Central Bank of Russia (CBR) as stating that some $78 billion in Russian capital had fled offshore in 1998 alone — $70 billion of it to the 21-square-kilometer Pacific island of Nauru (population: 11,845). Once a major exporter of phosphates, Nauru’s current leading industry is offshore banking. As the CIA publication “The World Factbook 2000″ puts it: “Tens of billions of dollars have been channeled through [these] accounts.” Question is: If this massive flow of Russian capital can’t be stanched, how can American regulators prevent it from corrupting the U.S. financial system? The Senate committee has some answers. Its report recommends that U.S. banks be barred from opening correspondent relationships with foreign banks that are shell operations. The report could well lead to more regulation, specifically, by requiring U.S. banks to: � enhance their due diligence and heighten money-laundering safeguards; � conduct systematic reviews of their correspondent accounts; and � identify a respondent bank’s correspondent banking clients. In his reply to the GAO, Citigroup’s Ross seemed to suggest that the industry could solve most of its problems on its own. By way of proof, Ross offered the following evidence: Citigroup has put in place a series of new rules that subject account openings to additional scrutiny, track branch network multiple accounts referred by a single individual, strengthen in-house compliance training, and ensure adequate tracking and follow-up when compliance determines that an account should be closed. In other words, Ross’ not terribly shocking message: Let the bankers police themselves. To be fair, in the Bank of New York case, the whistleblower was a member of the banking community. Testifying before the House Banking Committee in September 1999, Republic New York Bank’s deputy general counsel, Anne Vitale, explained how her company’s “Know Your Customer Committee,” of which she was chairman, was made aware in August 1998 of suspicious payments involving one of the shell corporations set up by Lucy Edwards and husband Peter Berlin. The key to the discovery: a software monitoring system that had only gone fully operative the previous month. Its stated purpose: to focus on wire transfer activities from correspondent bank accounts. Which all goes to show that when proper monitoring is in place — whether governmental or self-imposed — diligent bank officers and good lawyers can do the job. Too bad for the Russian people that it’s taking so long for the U.S. banks and their federal overseers to learn that lesson.

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