Three top Israeli banks and several French correspondent banks are under investigation for their inadvertent part in a huge Franco-Israeli l...

Three top Israeli banks and several French correspondent banks are under investigation for their inadvertent part in a huge Franco-Israeli laundering operation. The resulting spate of judicial inquiries into the competence of banking staff has led several French banks to complain about the ambiguity of the country's anti-laundering regulations.

French authorities are investigating staff at Bank Leumi France, Israel Discount Bank, which conducts international private banking business, and First International Bank of Israel. The Israeli press believes that the real focus of investigation, however, is on the French banks. These have been identified as Barclays France; Société Générale SA; a subsidiary of the Banques Polulaires group called BRED; and Société Marseillaise de Crédit, which is owned by HSBC in London.

Bank Leumi has already suffered at the hands of Swiss AML regulators with the removal of the manager of its Swiss operations last month. Meir Grosz stands accused of accepting assets from Peruvian spy chief, Vladimiro Montesinos, and failing to keep up the proper account opening procedures and other AML controls.

A long and in-depth investigation

The entire laundering scam is thought to involve €80m, centring on Jewish and Israeli charities and cultural groups in France which used banks to wash the proceeds of undisclosed crimes. Six rabbis are under judicial investigation as well as numerous bank executives. Many details, including the exact nature of the charities' involvement, remain unclear.

The ever-widening affair came to light in 1997 when seven banks, including Société Générale, filed complaints against some of those suspected of involvement. Two French judges, Isabelle Prevot-Deprez and Philippe Courroye, have been investigating the alleged money laundering ring since 1998. They are concerned that banks failed to take action to report suspicious transactions in the alleged scheme. The investigation is linked to last year's trial of 124 people in the so-called "Sentier affair". These traders from the Sentier textile district of Paris, most of the Jews of Tunisian extraction, were charged with defrauding 33 banks and insurance companies of $77m in the late 1990s with a pyramid scheme.

The scam is said to have involved more than 80 people, six of whom are already in prison. Last November police arrested Henri-Paul Pellegrino, the managing director of Barclays France, on suspicion of money laundering. He was subsequently released. Société Générale has admitted that its head of international banking services, Jean-Paul Leblanc, has been placed under formal investigation for "aggravated money-laundering". Many more of its executives and staff members have been called in for questioning. Judicial investigation in France is one step short of arrest.

According to Le Monde, the investigators are interested in the flow of cheques from Israeli banks to the French banks. Other accounts have it that scores of cheques written in France against nonexistent transactions were cashed in bureaux de change in Israel or Palestine, often passing through Germany on the way.

The Société Générale web site contains another cryptic description of the scam: "The investigation concerns cheques presented to Société Générale by foreign banks for cashing by various French banks." The questioning and investigation involve managers of the bank's central banking check-processing services, antimoney-laundering department and three members of the Group's general management committee. A spokesman for Barclays France told Complinet that French charities were involved as well, but no further details have come to light.

Regulations under attack

For their part, French bankers are railing against their country's anti-laundering regulations. All the bankers in this saga who have been placed under investigation or arrested have been accused of failing to follow the correct AML procedures.. Jean Laurent, the chairman of the French Banking Federation, is asking French financial regulators to list the duties of French correspondent banks very precisely. The same sentiment has been expressed by Jean Peyrelevade, the chairman of Crédit Lyonnais. So far, however, the banks mentioned in this article have declined to explain their reasons for thinking that the regulations are too vague. A spokesman for Société Générale, however, told Complinet that far from being too imprecise the French 'know your correspondent customer' regulations are unreasonably stringent and that the very existence of correspondent banking is now in doubt.

"The whole case is about managers not making staff report their suspicions. Our bank processes about 700m cheques a year from France, but that's not the problem. We process 3m French cheques a year which are sent to us by foreign banks and it's impossible for us to check each one of these. We don't have solutions today for correspondent banking. The rules are too strict. Every French bank is in the same situation. There is no real regulation in French correspondent banking, just the money laundering rules of 1993, 1996 and 2001. If they were applied all the time they would drive correspondent banking out of business.

"The way justice works in France is a problem for us. The judges can take somebody away for questioning any day they like, and they don't tell us why. All they do is ask questions, not answer them. The entire banking industry is now being disrupted by judges taking different banking executives away from their work every day."

This case is just as unfortunate for the Israelis, who are still languishing on the Financial Action Task Force's black list. Israel's problems have also been exacerbated by the recent replacement of its anti-money laundering supremo, Lior Horev, by Yehuda Schaeffer. Horev fell out with the Justice Ministry because he thought that the government was not serious about establishing a new financial intelligence unit. The unit is still not fully operational