Corruption Profiles: Prosecution of Financial Intermediaries that

Facilitate Corruption

Steven Durham, Deputy ChiefFraud and Public Corruption Section

U.S. Attorney for the District of ColumbiaU.S. Department of Justice

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Bank Secrecy Act

• Primary anti-money laundering law for financial institutions;

• Why does it exist?

• Requires financial institutions to engage in certain activity to prevent the laundering of money;

• Civil and administrative enforcement by bank regulators and FinCEN, the US FIU;

• Criminal penalties for willful violations.

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What Must a Financial Institution Do?(What Did Riggs Fail to Do?)

• Have a comprehensive AML program;

• Engage in reasonable due diligence of customers and transactions;

• Report certain activity;• Not aid and abet the

laundering of money.

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Comprehensive AML Program(What Riggs Didn’t Have)

• Implement internal policies, procedures and controls;

• Appoint a compliance officer who is responsible; USSG Sec 8B2.1(b)(2)(B) & (C);

• Conduct training of bank personnel;

• Conduct internal or external audits to determine effectiveness;

• USSG Sec. 8B2.1(b) (Promotion of an organizational culture)

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Engage in reasonable due diligence

• Know your customer and likely transactions;– Customer identification– Understanding specific

transactions• Level of risk will determine

reasonableness of due diligence;

• Talk is Cheap; Actions speak louder than words

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Special and Enhanced Due Diligence

• Calls for special due diligence for correspondent and private banking accounts involving foreign persons.

• Enhanced due diligence for correspondent accounts maintained for offshore banks or those in high risk ML locations.

• Enhanced scrutiny of private banking accounts maintained by senior foreign political leaders.

• Learning from past mistakes – USSG Sec. 8B2.1, Application Note 2(D).

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Report Specific Activity

• CTR: in excess of $10,000 cash transactions

• SAR: suspicious activity reports

– Knows, suspects or has reason to suspect

– Illegal source

– Not consistent with customer’s financial profile

– Duty to investigate

– Judgment call

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Criminal Enforcement

• 31 USC 5322: Willful failure to report suspicious transactions; Willful failure to have effective AML compliance program

• Systemic Failure/Pervasiveness

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Proving Willfulness

• Individual knowledge;• Corporate or collective

knowledge;• Willful blindness --

“flagrant institutional indifference”

• Evaluated against the institution’s duty to know as a result of the BSA

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Riggs Bank

• Founded 1837 in Washington, D.C.;

• “The most important bank in the most important city”

– Banked 8 U.S. Presidents including Abraham Lincoln

– 95% of all Embassy business

– International Private Banking/Embassy Banking Division.

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Augusto Pinochet

• Leader or president of Chile 1973-90; Commander-in-Chief of armed forces 1990-98;

• Allegations of significant human rights abuses, including murder, torture and kidnapping;

• By 1998, was in significant legal trouble; October 1998 Spanish arrest warrant and worldwide freeze of all assets;

• Arrested in UK in 98; released and re-arrested in Chile in January 2001.

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Account Opening Procedures

• Federal banking regulators require banks to understand and document source of money;

• Pinochet deposited US $8 million into Riggs accounts, despite declaring less than US $1/2 million on Chilean tax returns;

• No investigation or documentation of source of money by Riggs;

• No attempt to reconcile declared wealth with actual deposits.

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Account Names and Nominees

• After Pinochet’s legal troubles became apparent, Riggs allowed Pinochet accounts to be changed to wife’s maiden name to prevent their discovery;

• Riggs maintained accounts for military attaches, knowing that they were actually for Pinochet;

• Internal Riggs documents consciously avoided referring to Pinochet by name.

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Offshore Accounts

• Riggs created two offshore shell corporations in the Bahamas for Pinochet in 1996 and 1998;

• Riggs accounts were in the name of the shell corporations rather than Pinochet;

• At the time, the Bahamas had been designated as a FATF blacklist country;

• Bank regulators advised caution in dealing with both FATF blacklist countries and with shell corporations.

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Moving Money

• Riggs allowed the early termination of a CD held in London, and then transferred it to the US at a time where the money could have been seized by the UK;

• Riggs vice president broke apart US $1 million into 40 cashiers checks, then physically transported them to Chile;

• Money had been transferred into Riggs clearing account before converting it to cashiers checks; no legitimate reason to do so other than to disguise origin of money.

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Equatorial Guinea

• Significant issues of corruption and mismanagement by current government; numerous public documents put Riggs on notice that corruption was an issue;

• Billions of dollars of oil reserves found in EG territorial waters;

• Riggs held accounts worth US$700 million for EG in 64 different accounts.

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Offshore Corporations

• Riggs opened offshore corporation, named Otong in Bahamas for Teodoro Obiang Nguema, the EG President;

• Otong was a “Private Investment Company” (PIC); bank regulators cautioned banks that such PICs were often used as money laundering vehicles;

• Again, Bahamas was on FATF blacklist at time.

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Cash Deposits

• EG first family deposited US $11 million in currency, often wrapped in plastic bundles, into Otong offshore account;

• No due diligence as to the source of the cash or purpose of the transactions;

• CTRs filed, falsely stating that Otong was a timber exporter, rather than a PIC;

• No SARs filed, although clearly should have been.

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Mysterious Wire Transfers

• Approximately US $26 million, in 16 wire transfers, moved from oil revenue account to Spanish account of EG corporation;

• Money likely embezzled from country’s revenues;

• No due diligence conducted as to nature of EG corporation or purpose of the transaction; no letters of credit or bills of lading on file to justify it.

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Regulatory efforts

• Bank regulators issued 30 different written findings between 1997-2004;

• Bank generally refused or was unable to correct deficiencies;

• Regulators did not monitor deficiencies from year to year and insist on correction; always gave bank a passing mark;

• “Clean bill of health” from regulators does not necessarily end the inquiry

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Systemic Deficiencies

• Poor information systems could not link multiple accounts, could not identify risky accounts;

• Poor “know your customer” procedures, particularly with high-risk accounts;

• Failing to monitor wire transactions;• No effective procedure for filing SARs

(Riggs policy);• Poor audit function;• Poor training of employees.

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The End of the Bank

• Riggs pled guilty to BSA violation and paid a total combined civil and criminal penalty of US $41 million;

• Fine was greater than last 5 years’ profits, combined;

• Riggs was immediately sold to larger bank, who stripped the Riggs names off the buildings; Riggs no longer exists as an institution.