[PDF]Money Laundering And Riggs Bank Senate Subcommittee Report

United States Senate

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

Committee on Governmental Affairs _

Norm Coleman, Chairman

Carl Levin, Ranking Minority Member

MONEYLA UNDERING
AND

FOREIGN CORRUPTION:
ENFORCEMENT AND EFFECTIVENESS
OF THE PATRIOT ACT

CASE STUDYINVOL VING RIGGS BANK

REPORT

PREPARED BY THE

MINORITY STAFF
OF THE

PERMANENT SUBCOMMITTEE
ON INVESTIGATIONS



RELEASED IN CONJUNCTION WITH THE
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS’ HEARING

ON JULY 15, 2004




TABLE OF CONTENTS


I. Introduction. 1

II. Executive Summary . 2

TIT. Findings . 7

(1) Assisting Pinochet. 7

(2) Turning a Blind Eye . 8

(3) Dysfunctional AML Program. 8

(4) Regulatory Failure at Riggs . 8

(5) Conflicts of Interest. 8

(6) Uneven AML Enforcement. 8

(7) Unseen Payments . 8

IV. Current Law . 9

A. Key Anti-Money Laundering Laws. 9

B. Anti-Money Laundering Regulation and Oversight. 10

V. Riggs Bank. 12

A. Riggs National Corporation and Riggs Bank. 12

B. Augusto Pinochet . 18

Finding (1) . 18

C. Equatorial Guinea. 37

Finding (2) . 37

VI. Riggs’ AML Deficiencies and Regulators’ Inadequate Oversight. 68

A. Riggs’ Indifference to its Anti-Money Laundering Obligations. 68

Finding (3) . 68

B. Inadequate Regulatory Oversight of AML Deficiencies. 73

Finding (4) . 73

Finding (5) . 73

(1) Summary of Riggs Examinations. 76

(2) Analysis of the Issues . 86

C. AML Oversight Generally . 94

Finding (6) . 94

VII. Foreign Corruption and Oil Transparency . 98

Finding (7) . 98

A. Oil Companies in Equatorial Guinea . 99

B. Oil Company Payments. 100


-l-




































(1) Payments for Leases and Land Purchases. 100

(2) Payments for Services. 102

(3) Payments to Support E.G. Mission and Embassy. 103

(4) Payments for E.G. Students . 104

C. Joint Business Ventures . 107

D. Transparency Initiatives . 108

E. Foreign Corrupt Practices Act. 112

VIII. Recommendations. 113

(1) Strengthen Enforcement. 113

(2) Take Regulatory Action . 113

(3) Issue Annual AML Assessments . 113

(4) Strengthen Post-Employment Restrictions. 113

(5) Authorize Intrabank Disclosures. 113

(6) Increase Transparency. 113

^ ^ ^


-ii-

















MONEY LAUNDERING AND FOREIGN CORRUPTION:
ENFORCEMENT AND EFFECTIVENESS OF THE PATRIOT ACT

CASE STUDY INVOLVING RIGGS BANK

July 14, 2004


I. Introduction

From 1999 to 2001, the U.S. Senate Permanent Subcommittee on Investigations of the
Committee on Governmental Affairs, at the request of Senator Carl Levin, Ranking Minority
Member, conducted a detailed investigation into money laundering activities in the U.S. financial
services sector, including in-depth examinations of money laundering activities in private
banking, correspondent banking, and the securities industry. Two Minority staff reports were
issued, and Subcommittee hearings were held in November 1999 and March 2001.' This
investigative work provided the foundation for many of the anti-money laundering provisions in
Title III of the USA Patriot Act enacted in October 2001. Among other key provisions, the
Patriot Act obligated U.S. financial institutions to exercise due diligence when opening and
administering accounts for foreign political figures, and deemed corrupt acts by foreign officials
as an allowable basis for U.S. money laundering prosecutions.

In 2003, again at Senator Levin’s request, the Subcommittee initiated a followup
investigation to evaluate the enforcement and effectiveness of key anti-money laundering
provisions in the Patriot Act, using Riggs Bank as a case history. The infonnation in this
Minority Staff Report is based upon the ensuing joint investigation by the Subcommittee’s
Democratic and Republican staffs.

During the course of this investigation, the Subcommittee issued numerous subpoenas and
document requests. The Subcommittee staff reviewed over 100 boxes, folders, and electronic
compact disks containing hundreds of thousands of pages of documents, including bank
statements, account opening materials, wire transfers, correspondence, electronic mail, contracts,
board minutes, materials related to specific bank accounts and transactions, bank examination
materials, audit reports, legislative materials, and legal pleadings. The Subcommittee staff also
conducted numerous interviews with representatives from financial institutions, the Office of the
Comptroller of the Currency (OCC), the Federal Reserve, oil companies, various experts, and
other persons with relevant information.


1 See “Private Banking and Money Laundering: A Case Study of Opportunities and Vulnerabilities,” S.
Hrg. 106-428 (November 9 and 10, 1999), Minority staff report at 872 (hereinafter “1999 Subcommittee Private
Banking Hearings”); “Role of U.S. Correspondent Banking in International Money Laundering,” S. Hrg. 107-84
(March 1,2, and 6, 2001), Minority staff report at 273.



- 2 -


II. Executive Summary

The evidence reviewed by the Subcommittee staff establishes that, since at least 1997,

Riggs has disregarded its anti-money laundering (AML) obligations, maintained a dysfunctional
AML program despite frequent warnings from OCC regulators, and allowed or, at times, actively
facilitated suspicious financial activity.

The evidence also shows that federal regulators did a poor job of compelling Riggs Bank to
comply with statutory and regulatory anti-money laundering requirements. They were tolerant of
the ha nk ’s weak AML program, too slow in reacting to repeat deficiencies, and failed to make
prompt use of available enforcement tools.

Two sets of Riggs accounts, one involving Augusto Pinochet and the other involving
Equatorial Guinea, illustrate the ha nk ’s poor AML compliance. 2 They also illustrate the failure
of federal bank regulators to exercise meaningful oversight of a bank with numerous high risk
accounts and fundamental, long-standing AML deficiencies. This regulatory failure is especially
troubling for the ongoing battles against terrorism and corruption, since it makes it more difficult
for the United States to stop terrorists, corrupt leaders, and other criminals from misusing our
financial system. Federal regulators must do more to meet their legal obligation to protect the
United States from money laundering, terrorist financing, and foreign corruption.

Assisting Pinochet. The evidence obtained by the Subcommittee staff shows that, from
1994 until 2002, Riggs Bank (Riggs) opened at least six accounts and issued several certificates
of deposit (CDs) for Augusto Pinochet, former President of Chile, while he was under house
arrest in the United Kingdom and his assets were the subject of court proceedings. The aggregate
deposits in the Pinochet accounts at Riggs ranged from $4 to $8 million at a time. The
Subcommittee investigation has detennined that the ba nk ’s leadership directly solicited the
accounts from Mr. Pinochet, and Riggs account managers took actions consistent with helping
Mr. Pinochet to evade legal proceedings seeking to discover and attach his ba nk accounts. The
Subcommittee investigation found that Riggs opened multiple accounts and accepted millions of
dollars in deposits from Mr. Pinochet with no serious inquiry into questions regarding the source
of his wealth; helped him set up offshore shell corporations and open accounts in the names of
those corporations to disguise his control of the accounts; altered the names of his personal
accounts to disguise their ownership; transferred $1.6 million from London to the United States
while Mr. Pinochet was in detention and the subject of a court order to attach his bank accounts;
conducted transactions through Riggs’ own accounts to hide Mr. Pinochet’s involvement in some
cash transactions; and delivered over $1.9 million in cashiers checks to Mr. Pinochet in Chile to
enable him to obtain substantial cash payments from banks in that country.


2 Other accounts at Riggs present equally troubling facts, most notably the more than 150 accounts
associated with Saudi Arabia. These Saudi accounts are the subject of an ongoing investigation by the full
Committee on Governmental Affairs.



-3-


The Subcommittee investigation also determined that Riggs concealed the existence of the
Pinochet accounts from OCC ba nk examiners for two years, initially resisted OCC requests for
information, and closed the accounts only after a targeted OCC examination in 2002. Despite
Riggs’ track record of repeat AML deficiencies, the OCC’s concern about the Pinochet accounts,
and Riggs’ concealment of them from the agency, the OCC took no enforcement action against
the ba nk after it learned of those actions in 2002. Moreover, in July 2002, the OCC Examiner-in-
Charge at Riggs instructed the examiners who had investigated the Pinochet accounts not to
include their examination memorandum or supporting workpapers in the OCC’s electronic files
for Riggs Bank. The Subcommittee learned that such an instruction was highly unusual and
contrary to OCC procedure and practice. About a month later, the OCC Examiner-in-Charge
accepted a job at Riggs Bank.

Equatorial Guinea Accounts. The Subcommittee investigation also determined that,
from 1995 until 2004, Riggs Bank administered more than 60 accounts and CDs for the
government of Equatorial Guinea (E.G.), E.G. government officials, or their family members.

By 2003, the E.G. accounts represented the largest relationship at Riggs Bank, with aggregate
deposits ranging from $400 to $700 million at a time. The Subcommittee investigation has
detennined that Riggs Bank serviced the E.G. accounts with little or no attention to the bank’s
anti-money laundering obligations, turned a blind eye to evidence suggesting the bank was
handling the proceeds of foreign corruption, and allowed numerous suspicious transactions to
take place without notifying law enforcement. The Subcommittee investigation found, for
example, that Riggs opened multiple personal accounts for the President of Equatorial Guinea,
his wife, and other relatives; helped establish shell offshore corporations for the E.G. President
and his sons; and over a three-year period, from 2000 to 2002, facilitated nearly $13 million in
cash deposits into Riggs accounts controlled by the E.G. President and his wife. On two of those
occasions, Riggs accepted without due diligence $3 million in cash deposits for an account
opened in the name of the E.G. President’s offshore shell corporation, Otong, S.A.

In addition, Riggs opened an account for the E.G. government to receive funds from oil
companies doing business in Equatorial Guinea, under tenns allowing withdrawals with two
signatures, one from the E.G. President and the other from either his son, the E.G. Minister of
Mines, or his nephew, the E.G. Secretary of State for Treasury and Budget. Riggs subsequently
allowed wire transfers withdrawing more than $35 million from the E.G. government account,
wiring the funds to two companies which were unknown to the bank and had accounts in
jurisdictions with ba nk secrecy laws. The Subcommittee has reason to believe that at least one of
these recipient companies is controlled in whole or in part by the E.G. President. When, in 2004,
the bank requested more infonnation about the two companies from the E.G. President, he
declined to provide it, except to say the wire transfers to them had been authorized.

The senior leadership at Riggs Bank were well aware of the E.G. accounts and met on
several occasions with the E.G. President and other E.G. officials. The bank leadership
pennitted the account manager handling the E.G. relationship to become closely involved with
E.G. officials and business activities, including advising the E.G. government on financial



-4-


matters and becoming the sole signatory on an E.G. account holding substantial funds. The ba nk
exercised such lax oversight of the account manager’s activities that, among other misconduct,
the account manager was able to wire transfer more than $1 million from the E.G. oil account at
Riggs to another ba nk for an account opened in the name of Jadini Holdings, an offshore
corporation controlled by the account manager’s wife.

In response to a Subcommittee subpoena, Riggs Bank initially failed to identify a number
of E.G. accounts at the bank. The Subcommittee later learned that the bank had failed to
designate any of the E.G. accounts as high risk accounts until October 2003, and did not subject
them to additional scrutiny despite obvious warning signs, such as the involvement of foreign
political figures, a country with a culture of corruption, and frequent high dollar transactions.

The bank also failed to monitor or report suspicious activity in the E.G. accounts. The bank
closed these accounts in recent weeks.

Riggs’ Dysfunctional AM T, Program. The evidence demonstrates that the Pinochet and
E.G. accounts were not treated in an unusual manner, but were the product of a dysfunctional
AML program with long-standing, major deficiencies. These deficiencies included the inability
readily to identify all of the accounts associated with a particular client, the absence of any risk
assessment system to identify high risk accounts, inadequate client infonnation, the lack of an
established policy for handling accounts associated with foreign political figures, the failure to
provide enhanced monitoring of high risk accounts, the failure to monitor wire transfer activity,
the failure to detect and report suspicious activity, untimely and incomplete internal audits, and
inadequate AML training. These flaws were repeatedly identified in regulatory examinations and
internal audits, and Riggs repeatedly promised to correct them, but failed to do so.

Regulatory Failure. Given the fundamental, long-standing deficiencies in Riggs’ AML
program, it is difficult to understand why federal regulators failed to act sooner to require the
ha nk to correct them. The OCC recently acknowledged: “there was a failure of supervision” at
Riggs, and “[w]e gave the bank too much time.” The evidence shows that, since 1997, OCC
examiners repeatedly identified major AML deficiencies at Riggs Bank, but more senior OCC
personnel allowed these AML deficiencies to continue year after year without forceful action to
stop them.

In the case of Riggs, the evidence also indicates that the OCC’s Examiner-in-Charge (EIC)
appeared to have become more of an advocate for the bank than an anns-length regulator. In

2001, for example, he advised more senior OCC personnel against taking a formal enforcement
action against Riggs, because the bank had promised to correct identified AML deficiencies. In

2002, he ordered examiners not to include a memorandum or workpapers on the Pinochet
examination in the OCC’s electronic database. About a month after giving this order, that same
examiner was hired by Riggs, creating an appearance of a conflict of interest. During his tenure
at the bank, he attended a number of meetings with OCC personnel related to Riggs’ AML
problems. Federal law bars former federal employees from appearing before their fonner
agencies on certain matters, and OCC rules bar fonner OCC employees from even attending



-5-


meetings with the agency for two years, unless the OCC ethics office approves the contact.
Despite these post-employment restrictions, the former Riggs examiner failed to obtain clearance
from the OCC ethics office prior to attending the meetings with OCC personnel. These actions -
advising against a fonnal enforcement action, suppressing the Pinochet examination materials,
accepting a job offer at the bank he regulated, and ignoring post-employment restrictions on
OCC contact - suggest this Examiner had become much too close to Riggs during the years he
was responsible for overseeing it.

In addition, the facts demonstrate that his supervisors were too slow in reacting to repeat
deficiencies at the ba nk and were too reluctant to make use of available enforcement tools to
compel AML compliance. In 2001, for example, when presented with three examination reports
outlining AML deficiencies at Riggs, OCC enforcement personnel went along with the EIC’s
recommendation against taking any enforcement action. In 2002, after learning that Riggs had
hid the Pinochet accounts from the agency for two years and facilitated suspicious transactions,
OCC supervisors, again, failed to take any enforcement action. The OCC failed even to issue a
final examination report on the Pinochet matter. In 2003, after uncovering extremely troubling
information in connection with accounts associated with Saudi Arabia, the OCC took its first
enforcement action against the bank, issuing a cease and desist order requiring it to revamp its
AML program. This order was more comprehensive and capable of enforcement in court than
directives in prior examination reports, but included no punitive measures at the time such as a
civil fine. It was only in 2004, six years after the OCC began citing Riggs for AML deficiencies,
that federal regulators imposed their first civil fine on the bank.

The key OCC enforcement actions against Riggs Bank also took place after negative press
reports began raising public questions about Riggs’ AML safeguards. Lor example, the OCC’s
>>>