Would Bill Clinton be allowed an account at a US private bank in the light of the US Treasury’s foreign potentate guidelines? Would the fact...

Would Bill Clinton be allowed an account at a US private bank in the light of the US Treasury’s foreign potentate guidelines? Would the fact that he was the president of the US rather than the president of Nigeria be relevant? These were questions that delegates asked themselves at the recent Sixth International Money Laundering Conference in Miami, hosted by Money Laundering Alert.

In recent years, money laundering has increasingly been linked with the ‘C’ word – corruption. From the Nazis to Ferdinand Marcos, foreign potentates and their minions have always sequestered their ill-gotten wealth overseas as an insurance against the evil day when they may lose power. Only in the last decade, and primarily in the last two years, have the world’s great financial powers done something about this.

The major initiative from Western governments has been the US Senate report about private banking in 1999 whose author, Elise Bean, was on the panel at Miami. Other notable efforts, from the private sector and international standard-setters, include the Basel Committee’s notes about customer due diligence and the Wolfsberg principles, promoted by 12 international banks.

Donald Vangel, a partner at Ernst & Young and the director of the firm's US bank regulatory advice service, told delegates that commentators who suggest that self-regulation in private banking is ineffective ought to remember that governments have been ineffective in this area as well.

“Effective risk management begins at the point where the risk arises – the private banker. If it does not, the rest of the anti-money laundering or AML effort will be without defence”, he said.

“We know that the very act of getting all the US regulators to agree on anything is very hard. In this light, the fact that the banks managed to agree on the Wolfsberg principles at all is very good. The principles, however, are only a good base point for AML efforts; monetary incentives also have to be offered to staff for their vigilance.”

Domestic US controls

Nelson Everhardt, an expert on AML compliance programmes, surveyed the flurry of recent developments. The Wolfsberg principles and the foreign potentate guidelines were international in application, he said, but US compliance officers should not forget that they have to apply them at home as well.

“Think ‘process’. It’s no use having procedures if they’re laid down in a file and left on a shelf somewhere. The Office of the Comptroller of the Currency will be watching to see if you’re using them. Regulators won’t tell you the law. You need to demonstrate the process you have to them. You could stay up one night and risk rate everything, and get it right, but if you don’t follow your published procedures they’ll punish you anyway," opined Everhardt.

“As far as monitoring is concerned, you can buy a good system to look at unusual or suspicious activity, but there must be an administrative machine to deal with the results. You must document your training – have records which say that this man was trained on that date.”

The troubles of international US-based private banks

Even leaving aside the question of foreign potentates or public figures in the USA, Joe Ciccolella, director of AML compliance at Citigroup Private Banking, told the conference that international private banks faced much greater challenges than US domestic ones. He listed six reasons:

The ever-changing nature of laws and rules outside the USA. This refers not only to money laundering laws but to banking laws as well. The Bahamas, for example, has just changed its AML laws to ensure that every account holder at a private bank must provide a passport and the bank must take a photocopy of the first two pages; Ciccolella laughed when delegates told him that this was good news for British and American launderers, whose photos and most crucial details appear at the back of their passports. He also pointed out that in Chile, a country that has recently stopped its banks from having anything to do with the Cayman Islands, the private banking customer must be fingerprinted and photographed.

The need to keep aware of cultural differences and changes. AML procedures must be flexible enough to take into account the expectations of customers in other countries and that KYC must be handled in ways that do not offend these people by appearing rude and intrusive.

The need to verify information. In the USA a good deal of information that the MLRO needs on a client is made public as a matter of course, but this is not always the case elsewhere. The result, said Ciccolella, will have to be a compromise. “The private banker will have to satisfy himself that what the customer is telling him is real. You also have to know the markets, who the public figures are and who the big players are,” he added.

The quandary of how to react to or handle the FATF 15. “At Citibank we actually have offices in some of these jurisdictions. It’s not clear policy that we do not intend to do business with the Bahamas, for instance, so we have to use our judgment,” he commented.

Privacy. He went on to say that as a global private bank, Citigroup Private Banking would like to share its clients’ information between its branches in various countries. “Our clients want globality,” he said with the usual American flair for inventing new words on the spot. He provided an example: “If a potential customer goes to our branch in France, is rejected and then goes to Italy, we want our office in Italy to know straight away that we don’t want to do business with him.” Under American law this is not possible at present.

Finally, as a continuation of the last point, Ciccolella said that Citigroup wanted “a global AML policy to stop delays in our getting at the good money. That way, we could have a consistent policy.”

Public figures – would Bill Clinton qualify for a private bank account?

The panel were then asked a disquieting question which cut to the heart of the US government’s warnings about the assets of foreign potentates – would the same standards which are designed to screen out suspect foreigners apply to US public figures as well?

The example the panel were given was that of Bill Clinton. US federal prosecutors recently opened a criminal investigation into the pardoning of Marc Rich, a fugitive from the Federal Bureau of Intelligence, by the former president in his last hours of office. The investigators in the case are trying to find out whether money was illegally transferred to obtain Rich's pardon in the final hours of Clinton's presidency. Rich fled to Switzerland 17 years ago while facing more than 50 charges of tax evasion and illegal oil trading with Iran. Hundreds of thousands of dollars were later made in Democrat Party campaign donations by his ex-wife, Denise.

How, then, should an institution like the Bank of America’s private banking arm react if Bill Clinton wanted to open an account? Would it treat him the same as it would treat an identical public figure that came from, say, Nigeria?

An embarrassed shuffling of papers followed. Nelson Everhardt was the only one brave enough to answer, admitting that “it’s hard to say yes or no, but we have to live by our procedures or we’d just be assuming additional risk”. Another panellist said that his bank would give Clinton some leeway but hoped that the same standards would apply to everybody.

Elise Bean, however, said she would refuse Clinton his account if he also wanted to open up a private investment corporation in the Caymans or Bahamas beyond the reach of the US government and allow it to have an account at the private bank. Her reason was that “he’d be trying to keep his bank records out of the country while there’s a criminal investigation going on. This isn’t illegal, but I’d question it and probably decline.”

The courage of compliance

A delegate mentioned that private banks with branches in foreign countries are loath to turn down applications from or conduct rigorous and inquisitorial due diligence on influential notables from that country for fear of jeopardising the other accounts there. In turn, some compliance officers are loath to tell their commercial masters something that they do not want to hear. Ciccolella recalled an uncomfortable moment when his private banking compliance department had to convince the CEO not to take on a wealthy Nigerian:

“This guy was referred to [the compliance department] and we didn’t want to do business with him. We’d discovered that he’d been involved in a typical Nigerian-type scam involving cheques and photocopiers. We approached the boss and told him we wanted to reject the Nigerian and he agreed. It was scary, but we did it.”

If telling a CEO something like this is scary for compliance officers at established private banks, it is obviously more difficult at institutions that are further down the food chain. The panel picked up on this, saying that the right tone at the top is the sine qua non of any truly successful AML effort as it affects public figures and their relatives. One panellist commented that the screening of public figures was a non-starter at any bank whose board looked at the issues merely as technical compliance problems.

In the coming days we shall look at more issues which the conference raised in relation to money laundering through private banking.