As Investigations Proliferate, Big Banks Feel Under the Gun

<http://online.wsj.com/article_print/0,,SB110436575482112446,00.html> The Wall Street Journal December 30, 2004 PAGE ONE Checking Accounts As Investigations Proliferate, Big Banks Feel Under the Gun Links to Cash-Transfer Firms Raise Troubling Questions About Money Laundering A Probe of Bank of America By GLENN R. SIMPSON Staff Reporter of THE WALL STREET JOURNAL December 30, 2004; Page A1 NEW YORK -- Until last year, federal prosecutors say, a tiny Brooklyn ice-cream shop was a vital cog in al Qaeda's global fund-raising operation. Carnival French Ice Cream sold only the occasional cone from its ground-floor nook in a four-story walk-up in the Park Slope neighborhood. Its real function, according to the government, was to move money. The shop took in $22 million between 1997 and 2003, the Justice Department alleges in federal court filings in New York. Prosecutors believe that Carnival diverted much of that money to a radical sheik in Yemen working with Osama bin Laden. The funds departed New York via the most modern and efficient method the American financial-services industry has to offer: an account at J.P. Morgan Chase & Co. The Carnival case, according to prosecutors, illustrates how since the late 1990s, major U.S. banks doing business with suspect money-transfer outfits like the Brooklyn shop have wired billions of dollars into and out of New York for suspected terrorist and criminal organizations. One Yemeni-American man has been convicted of lying to the Federal Bureau of Investigation in the Carnival probe, and three others await trial on money-laundering and related charges. Prosecutors haven't accused J.P. Morgan Chase of wrongdoing related to Carnival. But the bank and some of its major rivals now find themselves in law enforcement's cross hairs, as regulators and prosecutors crack down on what they say is widespread abuse in the $50 billion international money-transfer industry. Bank executives say they are being asked to bear a heavy burden in seeking to root out criminals who use them to move money. The executives say they are avidly trying to comply, but the authorities counter that the industry must do even more. One unintended consequence of this friction is that banks are simply dropping many small money-transfer businesses as clients, a move that could hurt millions of poor immigrants who send cash to relatives overseas. All of this activity is taking place in the shadow of sensational revelations earlier this year about how Riggs National Corp., a storied institution in Washington, for years failed to make required reports to regulators about hundreds of millions of dollars in suspicious transactions. The Riggs affair involved transactions by foreign officials. But as with some cases involving storefront money-transmitters, Riggs was shown to have failed to sound an alarm over large and seemingly dubious money movements. Now, Robert Morgenthau, the local district attorney in Manhattan, has threatened to indict Bank of America Corp. on money-laundering charges related to a suspect Latin American firm, according to federal law-enforcement officials who have been briefed on the matter. Mr. Morgenthau, in an interview, acknowledges that he is talking with the bank over how to resolve allegations that it transferred hundreds of millions of dollars for a Uruguayan money-transmitting business linked to drug trafficking, tax fraud and other financial crimes. Bank of America spokeswoman Shirley Norton says it "does not comment on its relations with customers or communications with regulators and law enforcement." She adds that the bank takes its anti-money-laundering responsibilities "extremely seriously," and is "routinely cooperating and partnering with law enforcement to investigate and help prosecute any individuals who might attempt to misuse our banking operations." Shortly after the Sept. 11, 2001, terrorist attacks, Congress toughened requirements on banks to investigate their own customers and alert the government to fishy activity. But a spate of recent fines, criminal investigations and prosecutions is raising questions about how effectively banks are fulfilling their role as front-line cops in the offensive against financial impropriety. In May, regulators imposed a $25 million fine on Riggs for its lapses; a federal criminal investigation is pending. In October, AmSouth Bancorp. of Birmingham, Ala., agreed to a pay $50 million in penalties for what federal banking regulators and prosecutors say was a breakdown in its money-laundering controls. And in November, The Wall Street Journal reported that Bank of New York Co. is negotiating with federal prosecutors to pay a fine of perhaps $24 million to avert a potential criminal indictment on charges that it failed to report suspicious activity at one of its branches. Bank of New York escaped criminal penalty in 2000 when a former executive and her husband pleaded guilty to laundering as much as $5 billion in suspect funds from Russia in the 1990s. Some banking executives say that the government underestimated the challenges of outsourcing to the industry so much of an expensive and unpopular task. Simultaneously executing and scrutinizing trillions of dollars in daily transactions, the executives argue, is a profound logistical challenge. By analogy, says William McDavid, general counsel at J.P. Morgan Chase, "think if you're running a railroad, and we say to you, 'We want you to monitor everyone who takes your train and see if their trip is legitimate.' " Still, he says J.P. Morgan Chase is spending tens of millions of dollars to comply with the law, adding in-house lawyers and accountants and new computer software for self-monitoring. Regulators say they appreciate the logistical challenges banks face, but they note that this year's big cases aren't instances of banks missing an occasional check. Rather, banks seem to have ignored numerous transactions that should have raised red flags. Senior executives of Riggs, for instance, overlooked huge cash transactions by Saudi diplomats whom American law enforcement suspects of channeling money to extremist Islamic causes. The Bank Secrecy Act requires banks to keep basic data on account holders -- such as the identities of all beneficial owners and their sources of income -- and to file reports with the government when they do anything defined by federal regulators as inherently "suspicious," such as the wiring of large sums by obscure companies in jurisdictions with notoriously weak regulation. The act also requires banks to report any cash transaction of $10,000 or more. Even after Congress toughened the law, ambiguities remain. The USA Patriot Act, enacted in late 2001, added a new requirement that banks give more scrutiny to "high risk" customers. But it is unclear precisely what that term means. Similarly, the law was changed to require banks to conduct "special due diligence" on certain foreign financial firms with which they do business. But it isn't clear, American banks say, whether that applies only to foreign banks or also to overseas money-transfer companies. Morgenthau Probe INDUSTRY UNDER SCRUTINY Some major cases from 2004 that raise questions about banks' self-policing: * Riggs: Fined $25 million for failing to alert regulators to hundreds of millions of dollars of suspicious transfers involving foreign officials; a criminal investigation is pending. * J.P. Morgan Chase: Transferred millions of dollars for a Brooklyn ice-cream shop that allegedly sent money to an al Qaeda ally in Yemen; the bank wasn't prosecuted. * Bank of America: Under investigation in New York for its alleged role in transferring funds for a money transmitter in Uruguay purportedly tied to the narcotics trade; other major banks could be drawn into the case. * Bank of New York: Negotiating with federal prosecutors to pay a fine of perhaps $24 million to avert a potential criminal indictment on charges that it failed to report suspicious activity at one of its branches. * AmSouth: Agreed to pay $50 million in penalties for what federal banking regulators and prosecutors say was a breakdown in its money-laundering controls. * ABN Amro: New York branch of Dutch banking giant reached an agreement with the Federal Reserve in July to overhaul its compliance operation and shed its ties to banks in Eastern Europe and Russia; Treasury and Justice department inquiries are pending. Source: WSJ research In the Bank of America investigation, Mr. Morgenthau, the veteran Manhattan district attorney, says the bank has transferred hundreds of millions of dollars for a money transmitter in Uruguay called Lespan SA and its affiliates. The prosecutor and federal officials familiar with the matter say they suspect the money has come from Colombian drug trafficking and other criminal activity. Alvaro Barriero, an official at Lespan subsidiary Gales Casa Cambio in Montevideo, says Lespan hasn't engaged in any illegal activity. The firm has a very active legal-compliance department, he says. The Bank of America investigation could get much broader and sweep in other major banks as well. A related local prosecution earlier this year -- in which Mr. Morgenthau's office obtained the conviction of a New York money transmitter operating without a license -- yielded a mountain of data about wire transfers involving Lespan by Bank of America, J.P. Morgan Chase, Citigroup Inc. and Wachovia Corp. Mr. Morgenthau's staff is now reviewing transactions related to all four banks. At The Wall Street Journal's request, the data-analysis firm I2 Inc. examined the wire transfers from the New York case, more than 300,000 transactions between 1997 and early 2003. The analysis found that the four banks, among others, moved hundreds of millions of dollars between New York and Uruguay, Paraguay and Brazil at the behest of obscure firms in the British Virgin Islands, a well-known financial-secrecy haven. "It's a matter of major concern that there was this gap in our supervision and control" of the financial system, Mr. Morgenthau says. According to American and Brazilian officials, much of the money appears to have come from a lawless enclave known as the Tri-Border Area, a free-trade zone on the borders of Argentina, Brazil and Paraguay. The officials say the area is dominated by organized criminal groups, including narcotics traffickers and people raising money -- by means of smuggling and copyright piracy -- for the Lebanese terrorist group Hezbollah. American and Brazilian investigators are looking at whether the big banks made an effort to determine how small firms in Uruguay and Paraguay could possibly have taken in so much cash from legitimate commerce. The investigators are also examining whether the banks inquired into the ownership of the British Virgin Islands companies. Brazilian Investigation The Brazilian government jointly is investigating political corruption, tax evasion and other alleged financial crimes involving Lespan. In connection with its probe, Brazilian officials have sent a 100-page document to the U.S. Justice Department, seeking assistance from American investigators. The Brazilian document confirms major aspects of the Journal's computer analysis of the more than 300,000 wire transfers that came to light in the local New York case. The Brazilian document, which became publicly available through filings in U.S. federal courts, names Wachovia and several other banks as conduits for Lespan. The Journal's analysis of the evidence introduced in the local New York case provides only a sampling of this complex set of bank relationships with Lespan. The analysis shows that Lespan used Citigroup's Citibank unit to move nearly $142 million to New York. Wachovia wired at least $38 million into and out of Lespan's operations in South America. Lespan relied on Bank of America to move at least $8.8 million, the records show. All told, the analysis of the records shows that Lespan used major banks to move at least $265 million between the U.S. and Latin America. J.P. Morgan Chase spokeswoman Judith Miller says, "Preventing money laundering is one of the highest priorities at J.P. Morgan Chase." Citigroup stopped doing business with Lespan in 2001 after detecting possible money-laundering, according to bank records and people familiar with the matter. A spokeswoman for Wachovia, Mary Eshet, says the bank has strong policies to prevent money laundering. She declines to comment further. Dropping Transmitters Big banks are scrambling to beef up their internal compliance staffs and acquire the latest software designed to flag suspicious transactions. One industry reaction that caught the government by surprise is that some banks are hastily ridding themselves of many of their money-transmitter clients. That threatens to hurt the money-transfer industry, which mainly serves the working immigrant poor. In a letter distributed this fall, Citibank informed money transmitters that they are "no longer considered a part of our target market." The letter gave recipients two weeks to find a new bank. Transmitters charge a fee to move funds for people who generally don't have bank accounts. The firms depend upon banks to carry out the transfers -- a mutually lucrative arrangement -- and have long operated with little regulation, making them vulnerable to exploitation by criminals and terrorists. It was only after it became known that the Sept. 11, 2001, plot was financed in large part through such transmitters that they were targeted by regulators. The largest money-transmitting companies, such as Western Union, a unit of First Data Corp., have compliance units and elaborate surveillance systems. Even with those protections, Western Union has come under closer scrutiny by regulators. A majority of the industry consists of small independent outfits that generally don't have much in the way of internal policing. The industry exports a total of more than $20 billion from the U.S. every year. Government officials are worried now that if money transferers can't go to banks, they will only be more likely to seek illegal methods of shipping cash. "It does no one any good if banks refuse to take these businesses -- that just encourages them to go underground," William Fox, the director of the Treasury Department's Financial Crimes Enforcement Network, said in a statement. "A transparent money-services sector is vital to the health of the world's economy." David Landsman, executive director of the National Money Transmitters Association, said in a recent letter to his members that he has warned U.S. officials that up to 75% of the check-cashing and transfer firms in New York could soon go out of business. Mr. Landsman says in an interview that nearly all transmitters are legitimate and that they play a vital role in providing cash to developing economies. Without them, immigrant workers will be forced to pay much higher bank fees to wire money home, he predicts. Yemeni Connection Prosecutors have alleged that Carnival French Ice Cream was primarily an unlicensed money-transmission operation for Yemeni immigrants. Between Sept. 11, 2001, and last year, when it was shut down, the shop allegedly moved at least $5.3 million out of the country through J.P. Morgan Chase. Some of that money came from charitable collections at mosques. Yet, according to J.P. Morgan Chase officials, there was little about Carnival that generated suspicion. In Park Slope, neighbors say the business fit right in with a pizza parlor, a cellphone store, a laundromat and other small shops on an ethnically mixed block. The firm opened its first account in 1982 with Manufacturer's Hanover, which was later acquired by Chase Manhattan, which merged with J.P. Morgan. Over the years, Yemeni immigrants associated with Carnival set up a series of at least 10 other accounts at various other New York banks in the names of other small businesses, such as Prospect Deli in Brooklyn. Funds then flowed among the accounts, creating the appearance of a network of small businesses, perhaps jointly owned by a group of immigrant entrepreneurs, as is common in some big cities. In reality, the government alleges, the other accounts were "feeder accounts" designed to avoid suspiciously large deposits into Carnival's primary Morgan account. These feeder accounts generally made deposits to Carnival's account below the $10,000 level that triggers a report to the federal government. Once channeled into the main Carnival account, the money was wired to Yemen and other countries. But the feeders were a fraud, the FBI alleges in filings in U.S. District Court in Brooklyn. Prospect Deli, the FBI says, pumped some $3.8 million into Carnival's J.P. Morgan Chase account from December 1997 to April 2003, even though the deli went out of business in 2000. While Carnival allegedly tried to hide its activity from the bank, an FBI agent involved in the case described in an arrest-warrant affidavit a number of "suspicious banking activities" for an account controlled by the ice-cream shop. The store's gross receipts from merchandise sales totaled less than $200,000 annually, FBI Agent Sharon Hassell said in the April 2003 sworn statement. Yet millions were wire-transferred out of its J.P Morgan Chase account "to a myriad of individuals, companies and foreign bank accounts, including banks in Saudi Arabia, Yemen, the United Arab Emirates, Canada, Thailand and China." J.P. Morgan Chase officials say they never suspected Carnival. They point out that on an average day, the bank processes more than 320,000 wire payments valued at nearly $2.3 trillion. By the end of 2005, J. P. Morgan Chase says it will have spent more than $20 million on improved transaction-monitoring systems and software. In the future, the bank's new protections will detect and flag customers like Carnival, bank officials say. -- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'