Private Banking: Raul Salinas, Citibank, and Alleged Money Laundering
(Letter Report, 10/30/98, GAO/OSI-99-1).
Pursuant to a congressional request, GAO provided information on Raul
Salinas de Gotari, brother of the former President of Mexico, Carlos
Salinas de Gotari, and his alleged involvement in laundering money out
of Mexico through Citibank to accounts in Citibank affiliates in
Switzerland and the United Kingdom, focusing on: (1) how Raul Salinas
was able to transfer between $90 million and $100 million from Mexico
into foreign accounts through Citibank and its affiliates; (2) what
functions and assistance Citibank performed for Mr. Salinas; (3) whether
Citibank's actions complied with applicable federal laws and
regulations; and (4) a comparison of Citibank's practices during the
Salinas transactions with its testimony in a 1994 money laundering
trial.
GAO noted that: (1) Mr. Salinas was able to transfer $90 million to $100
million between 1992 and 1994 by using a private banking relationship
formed by Citibank New York in 1992; (2) the funds were transferred
through Citibank Mexico and Citibank New York to private banking
investment accounts in Citibank London and Citibank Switzerland; (3)
beginning in mid-1992, Citibank actions assisted Mr. Salinas with these
transfers and effectively disguised the funds' source and destination,
thus breaking the funds' paper trail; (4) Citibank: (a) set up an
offshore private investment company named Trocca, to hold Mr. Salinas's
assets, through Cititrust (Cayman) and investment accounts in Citibank
London and Citibank Switzerland; (b) waived bank references for Mr.
Salinas and did not prepare a financial profile on him or request a
waiver for the profile, as required by then Citibank's know your
customer policy; (c) facilitated Mrs. Salinas's use of another name to
initiate fund transfers in Mexico; and (d) had funds wired from Citibank
Mexico to a Citibank New York concentration account before forwarding
them to Trocca's offshore Citibank investment accounts; (5) no U.S.
documentation identified Mr. Salinas as Trocca's beneficial owner or
connected Mr. Salinas to the Trocca funds transferred through Citibank
Mexico and Citibank New York; (6) according to Citibank New York's Vice
President for Legal Affairs, Citibank's actions violated only one aspect
of the then Citibank know your customer policy; Citibank should have
prepared a financial profile or waived the requirement before accepting
Mr. Salinas as a customer; (7) by investigating his financial
background, Citibank could have verified the source of Mr. Salinas's
wealth and transferred funds; (8) limited by the ongoing Department of
Justice investigation, GAO could not determine whether Citibank's
actions violated law or regulation; (9) the Federal Reserve also did not
comment on whether Citibank's actions were violations because
information available to it at the time GAO inquired was insufficient
for it to make a determination; (10) on the basis of the details GAO
presented, the Office of the Comptroller of the Currency stated that the
actions did not violate civil aspects of the Bank Secrecy Act; (11)
further, private banking's know your customer policies are voluntary and
not governed by law or regulation; and (12) a comparison of Citibank
actions and Citibank testimony in the 1994 money laundering trial shows
that the two were inconsistent concerning due diligence and know your
customer practices in private banking.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: OSI-99-1
TITLE: Private Banking: Raul Salinas, Citibank, and Alleged Money
Laundering
DATE: 10/30/98
SUBJECT: Banking law
Banking regulation
Law enforcement
Money laundering
Organized crime
Bank examination
Fraud
Lending institutions
Funds management
Bank deposits
IDENTIFIER: Mexico
Switzerland
London (United Kingdom)
New York
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Cover
================================================================ COVER
Report to the Ranking Minority Member, Permanent Subcommittee on
Investigations, Committee on Governmental Affairs, U.S. Senate
October 1998
PRIVATE BANKING - RAUL SALINAS,
CITIBANK, AND ALLEGED MONEY
LAUNDERING
GAO/OSI-99-1
Raul Salinas, Citibank, and Alleged Money Laundering
(600459)
Abbreviations
=============================================================== ABBREV
FRBNY - Federal Reserve Bank of New York
GAO - General Accounting Office
OCC - Office of the Comptroller of the Currency
OSI - Office of Special Investigations
VP - vice president
Letter
=============================================================== LETTER
B-281327
October 30, 1998
The Honorable John Glenn
Ranking Minority Member
Permanent Subcommittee on Investigations
Committee on Governmental Affairs
United States Senate
Dear Senator Glenn:
On February 28, 1998, you expressed concern about reports that Raul
Salinas de Gotari, brother of the former President of Mexico, Carlos
Salinas de Gotari, had allegedly been involved in laundering money
out of Mexico through a U.S. bank, Citibank, to accounts in Citibank
affiliates in Switzerland and the United Kingdom. At that time, you
requested that we determine
-- how Raul Salinas was able to transfer between $90 million and
$100 million from Mexico into foreign accounts through Citibank
and its affiliates;
-- what functions and assistance Citibank performed for Mr.
Salinas; and
-- if Citibank's actions complied with applicable federal laws and
regulations.
In later discussions with your office, we were also requested to
provide a comparison of Citibank's practices during the Salinas
transactions with its testimony in a 1994 money laundering trial.\1 A
summary of the resultant 1996 appeal,\2 which was also requested,
appears in appendix I.
Currently, the U.S. Department of Justice, through the Office of the
U.S. Attorney, Southern District of New York, is conducting a
criminal investigation of the Salinas/Citibank transactions.\3
Because of the ongoing investigation, the Department of Justice
declined our request for an interview. Citibank made available
knowledgeable officials who provided details about the Salinas
transactions.
--------------------
\1 United States v. Giraldi, No. 93-CR-28-6 & 7 (S.D. Tx. 1994).
\2 United States v. Giraldi, 86 F. 3d 1368 (5th Cir. 1996).
\3 Mexico and Switzerland are also conducting criminal investigations
of Mr. and Mrs. Salinas, which include the Citibank transactions.
BACKGROUND
------------------------------------------------------------ Letter :1
The provision of financial and related services to wealthy clients is
broadly described as "private banking." The Federal Reserve System
and the Office of the Comptroller of the Currency (OCC) are two
regulators that examine\4 banks and private banking activities. With
regard to possible money laundering, examiners determine whether (1)
banks comply with bank secrecy regulations and (2) the banks'
compliance programs include appropriate procedural guidelines for
recording and reporting large currency transactions and for
detecting, preventing, and reporting suspicious transactions related
to possible money laundering activities.
Regulators and most banks contacted during a previous GAO review\5
cited "know your customer" policies as one of an institution's most
important guidelines for detecting suspicious activity. Such
policies enable the institution to understand the kinds of
transactions that a particular customer is likely to engage in and to
identify unusual or suspicious transactions. Although such policies
are currently not required by regulation or statute, banks do have a
legal obligation to prevent money laundering.\6 Bank regulators have
developed examination procedures to determine whether institutions
have implemented sound know your customer policies and procedures.
The Federal Reserve, which is drafting regulations regarding know
your customer issues,\7 has increased its interest in the private
banking area for a number of reasons: As the private banking market
grows, (1) banks increasingly rely on it as a source of income, (2)
competition for wealthy customers increases, and (3) relationship
managers\8 experience heightened pressure to expand their
institutions' private banking business. This growth is also likely
to increase interest in using private banking for money laundering
schemes.
In an effort to protect itself from risks associated with money
laundering and other unlawful activity, Citibank, as have other
financial institutions, has implemented a know your customer policy
to ensure that the bank will have a reasonable level of information
about a client at the time of acceptance. The policies are intended
to enable institutions to (1) understand the types of transactions a
customer is likely to engage in and (2) identify unusual or
suspicious transactions that could indicate money laundering. Due
diligence standards for private banking lay the groundwork for these
policies because the standards generally commit a financial
institution to verifying the customer's identity, determining the
customer's source of wealth, reviewing the customer's credit and
character, and understanding the type of transactions the customer
would typically conduct. Under circumstances that Citibank deems
appropriate, these policies may be waived.
--------------------
\4 See 12 C.F.R. sections 21.21 (OCC) and 208.14 (Federal Reserve)
(1997).
\5 Private Banking: Information on Private Banking and Its
Vulnerability to Money Laundering (GAO/GGD-98-19R, Oct. 30, 1997).
\6 18 U.S.C. 1956.
\7 In October 1998, the Federal Reserve proposed that banks develop a
profile of their customers' typical transactions and monitor them for
deviations. Further, OCC expects to issue companion proposals soon.
\8 Relationship managers, also referred to as private bankers, are
assigned to private banking customers and are responsible for
coordinating the institution's services to benefit the customer.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :2
Mr. Salinas was able to transfer $90 million to $100 million between
1992 and 1994 by using a private banking relationship formed by
Citibank New York in 1992. The funds were transferred through
Citibank Mexico and Citibank New York to private banking investment
accounts in Citibank London and Citibank Switzerland.
Beginning in mid-1992, Citibank actions assisted Mr. Salinas with
these transfers and effectively disguised the funds' source and
destination, thus breaking the funds' paper trail. Citibank
-- set up an offshore private investment company named Trocca, to
hold
Mr. Salinas's assets, through Cititrust (Cayman)\9 and
investment accounts in Citibank London and Citibank Switzerland;
-- waived bank references for Mr. Salinas and did not prepare a
financial profile on him or request a waiver for the profile, as
required by then Citibank know your customer policy;
-- facilitated Mrs. Salinas's use of another name to initiate fund
transfers in Mexico; and
-- had funds wired from Citibank Mexico to a Citibank New York
concentration account--a business account that commingles funds
from various sources--before forwarding them to Trocca's
offshore Citibank investment accounts.
No U.S. documentation identified Mr. Salinas as Trocca's beneficial
owner\10 or connected Mr. Salinas to the Trocca funds transferred
through Citibank Mexico and Citibank New York.
According to Citibank New York's Vice President (VP) for Legal
Affairs, whom Citibank designated as its representative to us,
Citibank's actions violated only one aspect of the then Citibank know
your customer policy: Citibank should have prepared a financial
profile (i.e., a financial background check detailing the source of
Mr. Salinas's funds) or waived the requirement before accepting Mr.
Salinas as a customer. By investigating his financial background,
Citibank could have verified the source of Mr. Salinas's wealth and
transferred funds.
Limited by the ongoing Department of Justice investigation, we could
not determine whether Citibank's actions violated law or regulation.
The Federal Reserve also did not comment on whether Citibank's
actions were violations because information available to it at the
time we inquired was insufficient for it to make a determination.
However, on the basis of the details we presented, OCC stated that
the actions did not violate civil aspects of the Bank Secrecy Act.\11
Further, private banking's know your customer policies are voluntary
and not governed by law or regulation.
A comparison of Citibank actions and Citibank testimony in the 1994
money laundering trial shows that the two were inconsistent
concerning due diligence and know your customer practices in private
banking. For example, Citibank's testimony implied a stricter
adherence to due diligence than actually occurred during the Salinas
transactions.
--------------------
\9 Cititrust (Cayman) was an affiliate of Citicorp, located in the
Cayman Islands. Citicorp is now known as Citigroup, Inc.
\10 An account's "beneficial owner" is the individual or group that
controls the account.
\11 The Bank Secrecy Act is codified in 12 U.S.C. sections 1829b and
1951-59 and in 31 U.S.C. sections 5311-30.
CITIBANK FACILITATED SALINAS
FUNDS TRANSFERS
------------------------------------------------------------ Letter :3
Citibank New York accepted Mr. Salinas as a private banking customer
and created the shell company Trocca through Cititrust (Cayman) to
hold Mr. Salinas's assets. As part of Trocca, Citibank created
other shell companies and opened two investment accounts in Citibank
London and Citibank Switzerland. However, no official documentation
clearly connected Mr. Salinas to Trocca or the investment accounts.
Disguising the origin and destination of the funds, which broke the
funds' paper trail, was accomplished by, among other actions, the
depositing of the Mexican funds in a Citibank New York concentration
account and Mrs. Salinas's use of another name to initiate funds
transfers in Mexico. (At the time of her introduction to Citibank
Mexico officials to begin the transfers,
Mrs. Salinas had not yet married Mr. Salinas. Although they were
not married until the year after the transfers had begun, we refer to
her throughout this report as Mrs. Salinas.) After Mr. Salinas's
March 1995 arrest in Mexico, Citibank placed a watch on the Salinas
accounts in Citibank New York and Trocca's offshore investment
accounts and prepared a financial profile that did not mention
Trocca. After Mrs. Salinas's November 1995 arrest in Switzerland,
Citibank filed a criminal referral form\12 with the U.S. Department
of Justice.
--------------------
\12 The form has since been changed and is now known as the
suspicious activity report.
CITIBANK AND TROCCA
---------------------------------------------------------- Letter :3.1
According to the Citibank representative, in or about May 1992 Mr.
Salinas met with the Vice President, Mexican Division, International
Private Bank section of Citibank New York, who also served as a
senior relationship manager. Mr. Salinas was introduced to the
Citibank New York VP by another of the VP's private banking customers
who was Agriculture Minister in the Mexican government under Mr.
Salinas's brother, the then President of Mexico. The purpose of the
meeting was to arrange the same type of Citibank private banking
relationship for Mr. Salinas. Citibank waived bank references for
Mr. Salinas, relying instead on the referral of the existing client.
In addition, Citibank did not follow its policy in that it did not
prepare a financial profile, or financial background check, on
Mr. Salinas before accepting him. That acceptance, according to
bank signature cards, occurred in late May 1992.
Citibank, according to its representative, first opened a checking
account at Citibank New York in Mr. Salinas's name. Using one of
several Citibank templates, Citibank New York then activated a
private investment company named Trocca--a shell company--to hold Mr.
Salinas's assets.\13 Citibank activated Trocca through Cititrust
(Cayman), which has an inventory of dormant private investment
companies ready to be assigned to clients. The company was set up in
the Cayman Islands, where all documentation connecting Mr. Salinas
to Trocca was held and whose laws protect the documentation's
confidentiality. Trocca was set up primarily for secrecy, tax
advantages, and facilitating the distribution of assets to Mr.
Salinas's family in case of his death, according to the Citibank
representative.
To further insulate Mr. Salinas's connection to Trocca, Cititrust
(Cayman) used three additional shell companies to function as
Trocca's board of directors--Madeline Investment SA, Donat Investment
SA, and Hitchcock Investment SA. Trocca's officer and principal
shareholder was another company formed by Cititrust (Cayman) named
Tyler Ltd. Further, Confidas, a Cititrust affiliate located in
Switzerland, acted as Trocca's manager and handled all administrative
requirements. See figure 1.
Figure 1: Trocca and Related
Entities
(See figure in printed
edition.)
As part of Mr. Salinas's private banking relationship, Citibank New
York opened two investment bank accounts for Trocca, one in Citibank
London and one in Citibank Switzerland. According to the Citibank
representative and other Citibank officials, Citibank London had no
documentation or knowledge that Mr. Salinas was Trocca's beneficial
owner. However, these officials subsequently contradicted themselves
by stating that an assistant to Citibank London's Private Banking
Officer did have information concerning Mr. Salinas.\14 The
documentation, which they provided to support this assertion,
illustrated a paper trail that could not be understood unless
explained by someone involved in the transactions. We were informed
that Citibank Switzerland had documentation of a connection between
Mr. Salinas and Trocca, which is required by and confidential under
Swiss bank secrecy law.
The Citibank representative explained that the VP of Citibank New
York's Mexican Division had discussed broad strategies with Mr.
Salinas concerning how to invest his money through Trocca. Citibank
New York relayed Mr. Salinas's decisions to Citibank London and
Citibank Switzerland, which upon receipt of the Trocca funds invested
them using the specifics of the investment strategy.\15 Confidas was
then responsible for tracking and reporting the profits/losses of the
Trocca investments, as well as for other administrative functions.
--------------------
\13 As we noted in a previous report, Money Laundering: Regulatory
Oversight of Offshore Private Banking Activities (GAO/GGD-98-154,
June 29, 1998), banking regulators have expressed some concern that
such private investment companies, among other offshore entities, may
serve to camouflage money laundering and other illegal acts. This
may occur because these accounts are formed, among other reasons, to
maintain clients' confidentiality and anonymity.
\14 During lengthy discussions with us in April-May 1998, the
Citibank representative provided information regarding key points
discussed in this report and frequently provided documentation to
support his statements. In subsequent discussions, officials of
Citibank New York recanted a few points but provided no or convoluted
supporting documentation. We will note these points where
appropriate.
\15 The Inspector in charge of Switzerland's ongoing investigation of
Mr. and Mrs. Salinas for money laundering and drug trafficking has
confirmed the accuracy of our investigative findings concerning the
flow of funds.
THE FUNDS TRANSFER
---------------------------------------------------------- Letter :3.2
To facilitate the periodic wire transfer of Salinas funds from Mexico
to Citibank New York, Citibank New York's Mexican Division VP
introduced Mrs. Salinas, Patricia Paulina Rios Casta¤on de Salinas,
to officials of Citibank Mexico under the name Patricia Rios. The
Citibank representative initially told us that Mrs. Salinas's true
identity and connection to Mr. Salinas was disguised from Citibank
Mexico officials reportedly because Mr. Salinas did not want to
reveal that he was moving large sums of money out of Mexico. He
added that Mr. Salinas believed such knowledge could be harmful
politically to his brother, the then president of Mexico. The
Citibank representative stated that introducing Mrs. Salinas as Ms.
Rios had not violated Citibank policy. Later, the representative and
another Citibank official recanted the position concerning Citibank
Mexico's lack of knowledge, saying that someone in the Mexican bank
knew both that the so-called Ms. Rios was connected to Mr. Salinas
and that the funds belonged to Mr. Salinas. The officials told us
they had no supporting documentation.
Throughout the transactions, according to Citibank's representative,
Mrs. Salinas withdrew funds from what is believed to be at least
five Mexican banks\16 and had the bank checks made payable to
Citibank. The representative acknowledged that it was possible that
the bank checks had been obtained by using cash and not funds
withdrawn from Mexican bank accounts. After obtaining the bank
checks and hand carrying them to Citibank Mexico, she--using the name
Ms. Rios and although she had no account there--had Citibank Mexico
convert the value of the bank checks from Mexican pesos to American
dollars before it wired the funds to Citibank New York.
Documents supporting the transactions further convoluted the paper
trail, disguising the origin and destination of the funds and
preventing them from being traced to Mr. Salinas. According to one
internal document provided by Citibank New York, Citibank Mexico
documented one conversion as being made by Tyler Ltd. (see fig. 1).
Another document--an internal Citibank Mexico transfer-confirmation
document to Confidas--was signed with the initials "PS" (Paulina
Salinas). The initials were used and accepted as a signature even
though (1) bank officials knew the signer as Patricia Rios and (2)
for some of the signatures, she was not yet married to Mr. Salinas.
Citibank Mexico then wired the converted funds, at the direction of
Citibank New York's Mexican Division VP, to Citibank New York. The
first two wire transfers occurred on October 13, 1992. One transfer,
which was derived from a bank check drawn on Bancomer and which
carried
Mr. Salinas's signature, was deposited in the Salinas Citibank New
York checking account.\17 The other transfer went into a
concentration account--a Citibank New York business deposit account
that commingles funds of a number of bank branches/affiliates and
bank customers. Subsequent wire transfers\18 on behalf of Mr.
Salinas went to the concentration account.\19 The use of (1) Tyler
Ltd. as the "person" requesting the Mexican funds conversion, (2)
the name Patricia Rios, (3) "PS" (Paulina Salinas) as the signature
of Ms. Rios, and (4) the concentration account deposits all served
to break the paper trail of the Mexican funds by disguising the
origin and destination of the funds.
Citibank then wired the funds from the concentration account to the
Trocca accounts in Citibank London and Citibank Switzerland. See
figure 2. The two offshore banks then invested the wired funds as
directed by Citibank New York and agreed to by Mr. Salinas. On
occasion, however, Mr. Salinas had direct contact, concerning his
investments, with a private banker at Citibank Switzerland where his
confidentiality was ensured under Swiss bank secrecy laws.
Figure 2: Flow of the Salinas
Funds
(See figure in printed
edition.)
According to the Citibank representative, the funds wired through
Citibank Mexico and Citibank New York to Citibank London and Citibank
Switzerland totaled between $90 million and $100 million. This
Citibank official and others acknowledged that the fund transfers
could have been wired to the Salinas checking account in Citibank New
York or directly to Citibank London or Citibank Switzerland, thus
retaining a paper trail. The representative stated, however, that
Citibank had believed that the movement of the funds could be
expedited by having them deposited first to the Citibank
concentration account. When asked, the Citibank representative could
not explain how the transfers were thus expedited.
--------------------
\16 Documentation listed the Mexican banks as Bancomer, Somex, Banca
Cremi, Banorte, and Banco Mexicano. According to knowledgeable
sources, Mr. Salinas's accounts at these banks were under fictitious
names.
\17 These funds were not transferred to offshore Trocca accounts.
\18 The last check copy we viewed was dated in October 1994.
\19 According to the Citibank representative, one additional wire
transfer, amounting to $20 million, was made to a Trocca account.
The transfer originated from a Cayman Island bank account of Carlos
Peralta, an associate of Mr. Salinas. This wire transfer also went
first to the Citibank New York concentration account before being
forwarded to a Trocca account.
THE 1995 SALINAS ARRESTS AND
SUBSEQUENT ACCOUNT ACTIONS
---------------------------------------------------------- Letter :3.3
In early February 1995, according to Citibank's representative, the
VP of Citibank New York's Mexican Division questioned Mr. Salinas
concerning media accounts about his possible involvement in a murder
of a government official that had taken place in Mexico. Mr.
Salinas reportedly denied any involvement. But later that month, Mr.
Salinas was arrested and jailed in Mexico for murder.\20 At that
time, rather than before accepting Mr. Salinas as a customer as was
Citibank policy, Citibank prepared a very brief financial profile on
Mr. Salinas. The profile cited no Citibank/Trocca accounts and no
source of wealth other than a reference to an unidentified
construction business.
Upon reportedly learning in early March 1995 that the arrested Mr.
Salinas was a Citibank private banking customer, the Citibank
representative, as Vice President for Legal Affairs, put a watch on
the Salinas Citibank New York accounts and Trocca's Citibank London
and Citibank Switzerland accounts. Under the watch, he would have
been notified by bank officials if Mr. Salinas attempted to move
funds in those accounts and had the discretion to stop Mr. Salinas
from doing so. However, according to the Citibank representative,
the Mexican Division VP personally contacted
Mrs. Salinas in Mexico in the summer of 1995, without the
representative's knowledge or consent, and advised her to move all
funds associated with Trocca out of Citibank. Mrs. Salinas was
arrested in Switzerland in November 1995 for money laundering and
drug trafficking while attempting to withdraw funds from a Swiss
bank.
After Mrs. Salinas's November 1995 arrest, according to the Citibank
representative, Citibank New York filed a criminal referral form with
the U.S. Attorney's Office, Southern District of New York, sending
copies to the Federal Bureau of Investigation and the Drug
Enforcement Administration. One purpose of a criminal referral form
was to notify law enforcement officials concerning suspicious
financial activities. However, the only Salinas accounts listed on
the form were those in Citibank New York. The form did not cite the
existence of Trocca or the Trocca accounts in Citibank London or
Citibank Switzerland, purportedly because no official U.S.
documentation existed although Citibank New York had facilitated the
accounts' formation. At this time, Citibank updated
Mr. Salinas's financial profile; but it still did not contain
pertinent information.
According to Citibank's representative, Citibank earned about $1.1
million in fees associated with the Salinas/Trocca accounts, which
are still active.
--------------------
\20 Subsequently, Mexican law enforcement officials also charged Mr.
Salinas with money laundering and "illegal enrichment." It has been
reported that he was acquitted of one money laundering charge in May
1998 and that the illegal enrichment charge was dropped. However, as
of October 1998, he remained in jail pending resolution of the murder
charge. It is unclear whether additional money laundering charges
are still pending.
CITIBANK VIOLATION OF ONE
ASPECT OF KNOW YOUR CUSTOMER
POLICY
------------------------------------------------------------ Letter :4
Most of the actions of Citibank New York's Mexican Division did not
violate Citibank policy. However, the one aspect of Citibank's know
your customer policy that was violated--preparation of a financial
profile--could have assisted in verifying the source of Mr.
Salinas's wealth and transferred funds. Citibank policy was revised
in 1997.
A VIOLATION OF CITIBANK KNOW
YOUR CUSTOMER POLICY
---------------------------------------------------------- Letter :4.1
The Citibank representative stated that the Division VP's failure to
complete a financial profile verifying Mr. Salinas's financial
history and the source of his wealth or to request a waiver of this
requirement violated Citibank know your customer policy. These
profiles would have included information to help verify Mr.
Salinas's financial history and his source of wealth. Citibank did
not investigate Mr. Salinas's background and did not file a
financial profile until after Mr. Salinas was arrested in February
1995.
According to the Citibank representative, Citibank New York's Mexican
Division believed that all of Mr. Salinas's funds had been obtained
legally, with a large portion resulting from the sale of a
construction company that he owned. However, Citibank reportedly
knew no details about the construction company including its name,
who had purchased it, or the amount of money generated by the
sale.\21 The representative also stated that Citibank had waived the
holding period on funds derived from the bank checks brought to
Citibank Mexico and wired to Citibank New York. Although this
procedure held an element of risk for Citibank, it had not violated
Citibank policy.
In addition, when opening Mr. Salinas's accounts, Citibank waived
the requirement for two references for him. If Citibank had used its
most common reference source, i.e., bank references, it could have
obtained such information as length of association with the account
holder and size of the Mexican accounts. According to Citibank
officials, the reference waiver did not violate internal bank policy.
Then bank policy also stated that the reasons for waiving references
should be documented and placed in the account file. Citibank's
private banking application document, dated May 28, 1992, cited
"Known client & referred by a very valuable client of long standing"
as the reasons for waiving bank references.
When asked if bank references were an important part of Citibank New
York's know your customer policy, the Citibank representative stated
that Citibank private bankers had told him that bank references
provided little value or information. We pointed out that if bank
references had been obtained and checked, Citibank could have
established the value of assets Mr. Salinas possessed in those banks
and a banking history of those assets, both significant points for
determining future suspicious account activity including money
laundering. Such checks would have revealed if the accounts were
under fictitious names. In answer, Citibank officials reiterated
their position that bank references had little value.
--------------------
\21 According to the Citibank representative, Citibank New York's
Mexican Division, International Private Bank section failed
Citibank's internal audits from 1996 to 1997. These failures
occurred because of problems and deficiencies in the Private Banking
section's due diligence and know your customer practices. The
Citibank representative was unable to provide the results of internal
audits conducted prior to 1996.
CURRENT CITIBANK POLICY
---------------------------------------------------------- Letter :4.2
Citibank's know your customer policy has been revised since the
Salinas accounts were opened. As of September 1997, the policy
contains more specific minimum standards of information for accepting
a new customer. However, any element of the policy can still be
waived for a new or existing customer if (1) approved by both the
Market Region Head (e.g., Western Hemisphere Head) and the Regional
Compliance and Control Head representing the prospect's or client's
country, (2) documented in writing, and (3) placed in the account
documentation file. Waiver approval by the compliance/control head
was not required when Citibank accepted Mr. Salinas.
CITIBANK COMPLIANCE WITH
LAWS/REGULATIONS GENERALLY
UNDETERMINED; RECENT FEDERAL
RESERVE GUIDANCE REGARDING
VOLUNTARY POLICIES
------------------------------------------------------------ Letter :5
Although neither we nor the Federal Reserve could make a
determination concerning Citibank compliance with law or regulation,
OCC stated that Citibank's actions did not result in civil violation
of the Bank Secrecy Act. However, recent Federal Reserve guidance
pertains to voluntary know your customer policies; and Federal
Reserve representatives have indicated that regulations are needed in
the areas of those policies.
CITIBANK'S GENERAL
COMPLIANCE WITH LAWS AND
REGULATIONS WAS UNDETERMINED
---------------------------------------------------------- Letter :5.1
We could not determine whether Citibank's actions regarding Mr.
Salinas's private banking relationship had violated then applicable
laws and regulations. We were denied access to Department of Justice
officials involved in the ongoing investigation of the
Salinas/Citibank relationship. We were also denied access to the
principal Citibank officials involved with that relationship,
although Citibank designated bank officials to provide us with
detailed information.
We asked the Federal Reserve to comment on whether Mr. Salinas's
private banking relationship with Citibank New York and Citibank's
movement of Mr. Salinas's funds had complied with then applicable
laws and regulations. According to Federal Reserve representatives,
the facts of the Salinas/Citibank matter, as known to the Federal
Reserve when we inquired, did not provide sufficient information for
it to make a determination about whether any law or regulation had
been violated. However, the Federal Reserve is continuing to monitor
the Department of Justice's investigation.
We also briefed OCC officials, including OCC's Director, Enforcement
and Compliance Division, on the Salinas/Citibank actions. At that
time, we requested that OCC provide us an opinion concerning whether
these actions had violated any banking law or regulation. OCC later
stated, on the basis of our description of the actions, that no civil
violations of the Bank Secrecy Act had occurred.
RECENT FEDERAL RESERVE
GUIDANCE
---------------------------------------------------------- Letter :5.2
Although the Federal Reserve has been developing regulations
concerning know your customer policies, no regulation or law
currently exists to stipulate what know your customer policies should
consist of or that they must be followed.\22
Further, any financial institution can deposit an individual's funds
in the institution's concentration account because no law or
regulation precludes it.
In 1996 and 1997, the Federal Reserve Bank of New York (FRBNY)
undertook an initiative on behalf of the Federal Reserve, focusing on
private banking at about 40 domestic and foreign banking institutions
in the FRBNY's district,\23 including Citibank New York.
Deficiencies noted by FRBNY centered primarily on poor internal
controls and procedural weaknesses involving such problems as
insufficient documentation and inadequate due diligence standards.
Recognizing that banks have a legal obligation to prevent money
laundering, FRBNY set out guidance in July 1997 as a result of its
review. That guidance focused primarily on the significance of sound
voluntary know your customer policies and procedures in managing
risks inherent in private banking activities. The guidance stated
that sound know your customer policies should require, among other
elements, that a client's source of wealth and funds be corroborated
and that, as an element of due diligence, institutions obtain
preferably detailed client references from reliable, independent
sources. It also stated that senior bank management should expect
compliance with these policies as a matter of course, that waivers
should be the exception, and that reasons for such exceptions should
be documented.
In addition, according to the guidance, sound practice for private
banking dictates that all client transactions go through the client's
own accounts and not through the banking institution's concentration
or suspense accounts. According to the guidance, going through
concentration or suspense accounts "effectively prevents association
of the clients' names and account numbers with specific account
activity, could easily mask unusual transactions . . ., and could
easily be abused."
Further, representatives of the Federal Reserve have told us that a
need exists for regulation regarding know your customer practices and
that self-policing by some banking entities with regard to these
practices is not working.
--------------------
\22 The House of Representatives passed H.R. 4005, which required
the Secretary of the Treasury to promulgate know your customer
regulations for financial institutions. The Senate was unable to
complete consideration of this bill during the 105th Congress. The
bill's overall purpose was to deter money laundering.
\23 GAO/GGD-98-19R, Oct. 30, 1997.
COMPARISON OF CITIBANK'S
ACTIONS WITH A CITIBANK
OFFICIAL'S 1994 TESTIMONY
------------------------------------------------------------ Letter :6
The requested comparison of Citibank actions regarding Mr. Salinas
and a Citibank official's testimony in a 1994 money laundering
case\24 illustrated that the two were inconsistent. Citibank New
York's actions did not reflect the importance that its Mexican
Division VP placed on the bank's due diligence/know your customer
practices when testifying.
The head of Citibank New York's Mexican Division, International
Private Bank section, who was also involved in the Salinas matter,
appeared as an expert witness for the government in the 1994 money
laundering trial. The trial involved two private banking
relationship managers employed by American Express Bank International
who were convicted. The Mexican Division VP was a government
witness, based on her position at Citibank New York, concerning (1)
the bank's position on know your customer issues and (2) her previous
supervision of one of the defendants.\25
In sworn testimony, the division VP explained the importance of due
diligence principles and Citibank's know your customer policy in
accepting and working with private banking customers. The VP cited
the principles and policy as part of Citibank's "culture" and "the
way you do things." The VP said, in essence, that not knowing a
customer's background could lead to a bank's damaged reputation and
penalties against the bank and the individual relationship manager.
However, Citibank actions regarding Mr. Salinas contrasted sharply
with the VP's sworn testimony with concern to the importance of
knowing the customer.
Testimony--The Citibank VP affirmed that Citibank New York's
international relationship managers were to make an extensive effort
to know their potential customers, as a way of protecting the bank,
before accepting them. It was "too risky not to . . . do the due
diligence, not to know who you're dealing with" before accepting a
prospective customer's funds in a private banking relationship.
Citibank's Action--In contrast, Citibank made no attempt to
investigate Mr. Salinas's background before accepting him. Citibank
was unable to confirm if the division VP had met Mr. Salinas before
accepting him as a Citibank private banking customer. Further,
Citibank did not file a financial profile, or a financial background
check, as part of due diligence.
Testimony--The Citibank VP considered the know your customer policy
as ongoing and not just for the initial customer-acceptance phase.
As such, according to the testimony, the VP and other Citibank
relationship managers visited customers' homes and businesses
frequently--"10 to 12 times a year in their country"--to "know what's
going on." They discussed prospective customers--including who
referred them and what they did for a living--with supervisors
throughout the acceptance process, which could take between 3 to 9
months.
Citibank's Action--According to the Citibank representative, the
Citibank VP never visited Mr. Salinas's place of business but may
have visited his home only after he had been accepted as a private
banking customer. Further, the division VP believed that the
majority of Mr. Salinas's wealth had resulted from the sale of a
construction company yet knew no specifics about the sale, including
the name of the company or the price paid for it.
Testimony--Citibank's VP acknowledged during the testimony that no
reporting requirements were needed regarding the amounts or source of
funds transferred by wire (as were needed for cash transfers of
$10,000 or more) because most identifying information--source bank,
source account, amount transferred, target account, and target
bank--was automatically recorded. Only ownership of the accounts was
not included.
Citibank's Action--However, the automatic recorded information
provided with the transferred Salinas funds did not contain
identifying information as to the source of the funds. Further,
Citibank actions regarding these wire transfers defeated one main
purpose of know your customer policy--to help financial institutions
identify unusual or suspicious transactions. This purpose included
knowing a transaction's origin and destination. Indeed, Citibank's
action obscured almost all of that automatic information:
the Salinas funds did not originate at Citibank Mexico from where
they were wired;
the Salinases did not have an account at Citibank Mexico;
all funds that went into Trocca accounts were first wired to a
concentration account, not to an individual account, at Citibank New
York;
the documentation in the United States that purportedly connects the
Trocca accounts or Mr. Salinas to the wire transfers from Citibank
Mexico requires an individual who is knowledgeable about the
transactions to explain the connection, since no official
documentation regarding the connections exists in the United States;
and
the Citibank London receiving account held no recognizable tie to
Mr. Salinas and the Citibank Swiss account information is held under
Swiss secrecy law.
--------------------
\24 United States v. Giraldi, No. 93-CR-28-6 & 7 (S.D. Tx. 1994).
\25 One defendant, Antonio Giraldi, had previously worked at Citibank
New York as a relationship manager for the Mexican Division VP and
had a drug-money launderer from Mexico as a client while at American
Express Bank. The conviction of the two defendants was based largely
on know your customer matters. The case also resulted in the largest
monetary penalty ever imposed on a bank because of money
laundering--$35 million in forfeitures, fines, and penalties.
STATUS OF SALINAS CASE
------------------------------------------------------------ Letter :7
CITIBANK
---------------------------------------------------------- Letter :7.1
Although the Salinas/Trocca accounts have been frozen, they remain in
Citibank New York's control. Citibank, with the cognizance of the
Department of Justice, continues to pay certain expenses of the
Salinas family, such as mortgage payments, from the family's Citibank
accounts. In addition, Mr. Salinas continues to be a Citibank
private banking customer, according to the Citibank representative.
DEPARTMENT OF JUSTICE
---------------------------------------------------------- Letter :7.2
After the arrest in November 1995 of Mrs. Salinas, Citibank prepared
and delivered a criminal referral form to the U.S. Attorney for the
Southern District of New York. An investigation by the U.S.
Attorney is ongoing.
CONCLUSIONS
------------------------------------------------------------ Letter :8
The Congress and the Federal Reserve have recognized that financial
institutions could abuse voluntary policies with regard to potential
money laundering. This is evident in HR 4005 and the Federal
Reserve's current effort to promulgate regulations that establish
minimum standards and uniform requirements for know your customer
policies. We determined in the Salinas scenario that Citibank's
voluntary controls did not work. Citibank, while violating only one
aspect of its then policies, facilitated a money-managing system that
disguised the origin, destination, and beneficial owner of the funds
involved.
METHODOLOGY
------------------------------------------------------------ Letter :9
Our investigation took place between February and September 1998. We
were denied access to Citibank principals and Department of Justice
investigative officials. However, we interviewed representatives of
the OCC and the Federal Reserve System and designated representatives
of Citibank. We also interviewed representatives of the Swiss
Federal Police, including the Inspector in charge of the ongoing
Swiss investigation of the money laundering and drug trafficking
charges against Mr. and
Mrs. Salinas. We reviewed Citibank policies regarding private
banking in general. We also reviewed Citibank documents pertaining
directly to the Salinas private banking transactions. During
discussions with us, Citibank New York's VP for Legal Affairs
provided (1) information regarding key points discussed in this
report and (2) documentation to support certain statements. In
subsequent discussions, Citibank New York officials recanted a few of
those points but provided no or convoluted supporting documentation.
In addition, we obtained and reviewed federal court transcripts and
documents regarding a money laundering prosecution pertinent to our
investigation.
---------------------------------------------------------- Letter :9.1
As agreed with your office, unless you announce its contents earlier,
we plan no further distribution of this report until 7 days after the
date of this letter. At that time, we will send copies of this
report to interested congressional committees, the Federal Reserve,
and OCC. We will also make copies available to others upon request.
If you have questions about our investigation, please contact
Assistant Director Ronald Malfi at (202) 512-6722. Major
contributors to this report are listed in appendix II.
Sincerely yours,
Eljay B. Bowron
Assistant Comptroller General
for Special Investigations
APPELLATE DECISION REGARDING 1994
MONEY LAUNDERING TRIAL
=========================================================== Appendix I
One defendant in the 1994 money laundering trial,\26 Antonio Giraldi,
appealed his conviction. In the appellate decision,\27 the court
based its decision to uphold the conviction, in part, on Mr.
Giraldi's responsibility as a relationship manager "for screening
potential clients to determine if their wealth was legitimate," which
Mr. Giraldi had not done. The appellate court concluded that the
jury in Mr. Giraldi's initial trial could have reasonably determined
that Mr. Giraldi had known or had been willfully blind\28 to the
source of his customer's funds, proceeds from a Mexican drug lord.
The court stated that Mr. Giraldi (1) had been specifically charged
with investigating and knowing his client, (2) had not followed
prescribed procedures before taking the initial deposit, and (3) had
extensive background and experience with international banking.
In denying Mr. Giraldi's appeal of his guilty verdict, the court
stated, "A rational jury could have found it incredible that
carelessness and honest mistakes could account for the complexity of
financial gerrymandering required to give [the Mexican drug-money
launderer's] transactions the appearance of legitimacy." The court
held that had know your customer practices been used, the wealth of
Mr. Giraldi's client would have been exposed as illegitimate.
--------------------
\26 United States v. Giraldi, No. 93-CR-28-6 & 7 (S.D. Tx. 1994).
\27 United States v. Giraldi, 86 F. 3d 1368 (5th Cir. 1996).
\28 U.S. money laundering law requires that (1) a person "know" that
a financial transaction represents proceeds of an unlawful activity
or (2) proof be provided of the person's "willful blindness"--the
conscious avoidance of knowledge of facts--to an illicit origin. (18
U.S.C. 1956) Courts have held that circumstantial evidence is
sufficient to prove such knowledge and have equated willful blindness
with actual knowledge in a money laundering prosecution.
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II
OFFICE OF SPECIAL INVESTIGATIONS,
WASHINGTON, D.C.
Ronald D. Malfi, Assistant Director for Financial and General
Investigations
John J. Ryan, Senior Special Agent
M. Jane Hunt, Senior Communications Analyst
OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C.
Barbara C. Coles, Senior Attorney
*** End of document. ***