Investigation: U.S. Banks Funnel 'Dirty' Money

Feb. 5, 2001 -- U.S. banks, through their relationships with high-risk foreign banks, have become a funnel for dirty money into the country, and as a result, have facilitated criminal enterprises such as drug trafficking and financial fraud, a U.S. Senate investigation has found.

Through correspondent accounts they provide to foreign banks, many American banks are unwittingly being used by criminal agents or enterprises to gain direct access to the U.S. financial system and to move money within the U.S. and around the world, according to the report released today by the minority staff of the Senate Permanent Subcommittee on Investigations.

Because of generally poor monitoring of relationships with foreign banks, many Americans banks, including big banking institutions like Citibank, Chase Manhattan and Bank of America, are not even aware that criminal activities are taking place right under their noses, the report says. Those banks that were made aware of the problems during the course of the Senate inquiry have taken steps to improve security and oversight of the correspondent accounts, the report said.

Estimates of the amount of dirty money passing through the global financial system each year range from $500 billion to more than $1.5 trillion. Money laundering refers to the practice of moving illicit funds through a series of financial institutions to disguise their origin and ownership.

"The failure of U.S. banks to take adequate steps to prevent money laundering through their correspondent bank accounts is not a new or isolated problem," says the report, which was released by Democratic Sen. Carl Levin. "It is longstanding, widespread and ongoing."

A 1999 report on vulnerabilities in the U.S. banking system by the same subcommittee resulted in hearings on money laundering practices.

A Yearlong Investigation

Democratic staff members of the Senate committee spent a year investigating the use of correspondent accounts by U.S. banks by interviewing bank officials, conducting a survey of 20 banks and by examining civil money laundering indictments in U.S. courts.

The current investigation included an interview with a U.S. citizen who had owned a bank in the Cayman Islands and had pleaded guilty to money laundering, the report said. The man was willing to explain how his bank laundered millions of dollars through U.S. correspondent accounts.

The man, John Matthewson, the majority owner and chief executive officer of Guardian Bank, helped prosecutors secure criminal convictions for many of his former clients on tax evasion, money laundering and other crimes. His cooperation is estimated to have resulted in the collection of more than $50 million in unpaid taxes and penalties, the report said.

"I have no excuse for what I did in aiding U.S. citizens to evade taxes, and the fact that every other bank in the Caymans was doing it is no excuse," Matthewson said at his sentencing hearing. "But I did cooperate."

Another American, who had pleaded guilty to conspiracy to commit money laundering, was willing to explain how he used three offshore banks to launder illicit funds from a financial scheme that defrauded hundreds of Americans.

‘Correspondent’ Banking Is the Problem

At the core of the investigation is the use of correspondent accounts. Correspondent banking occurs when one bank provides services to another bank to move funds, exchange currencies or carry out other financial transactions. It allows banks to conduct business or provide services for their clients in places where they have no physical presence.

For example, a bank in a foreign country with no offices in the United States might open up a correspondence account in a U.S. bank to provide banking services to its customers. As of mid-1999, the top five correspondent bank holding companies in the United States held account balances exceeding $17 billion.

"Inattention and disinterest by U.S. banks in screening the foreign banks they take in as clients have allowed rogue foreign banks and their criminal clients to carry on money laundering and other criminal activity in the United States," said Sen. Levin.

"The U.S. banks that gave them accounts were, at best, asleep at the switch and, at worst, didn't care what these foreign banks or their clients were doing."

Many large American banks have dozens, hundreds or even thousands of correspondent relationships, including a number of relationships with high-risk banks, the report said.

So-called high risk banks include "shell banks," like those in the Cayman Islands and in the Bahamas that have no physical presence. For instance, Hanover Bank is an Antiguan-license bank that is operated out of its owner's home in Ireland. Offshore banks, which are barred from banking activities with citizens of their own jurisdictions, are also part of the high-risk group.

What Makes Banks Vulnerable?

Until the Bank of New York scandal erupted in 1999, in which a former bank executive and her husband pleaded guilty to laundering $1.8 million — purportedly for the Russian mob — international correspondent banking had received little attention as a high-risk area for money laundering.

The lesson from the Bank of New York scandal was that some foreign banks carry higher money laundering risks than others because some countries are seriously deficient in their bank licensing and supervision.

Correspondent banking in the U.S., said the report, is highly vulnerable for several reasons: a relaxed culture in monitoring; correspondent accounts being used by foreign bank clients without the U.S. bank's knowledge; foreign banks with weak banking or accounting standards; bank secrecy laws; and U.S. legal barriers to seizing illicit funds from U.S. correspondent accounts.

In Miami, for example, Senate staff investigators found that for almost two years a U.S. bank never reviewed suspicious activity of numerous wire transfers totaling $50 million that went into and out of an offshore bank called the British Trade and Commerce Bank. The funds included millions of dollars associated with money laundering, financial fraud and Internet gambling.

In some cases, the report found that even when banks learned of questionable information, they took little or no action to correct the problems.

Citibank, for example, left open a correspondent account belonging to M.A. Bank and allowed hundreds of millions of dollars to flow through it, even after receiving a seizure order from U.S. law enforcement alleging drug money laundering violations and freezing $7.7 million deposited into the account.