As Investigations Proliferate, Big Banks Feel Under the Gun

[R.A. Hettinga]

<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 at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
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