The colour of money

An entirely new phenomenon known as private banking and wealth management for high net worth individuals has developed during recent years. It recognises money as such, but not the colour of money.

STEPHEN LEACOCK might have been rattled by his bankers when he wanted to open an account with his hard-earned $56 and an assurance to deposit $50 each month. If only he had $50 million with him and declared his intention to open an account to the chairman of a big bank, a senior official of the bank would have called on him to get his signature on a piece of paper. The official would have apologised for the inconvenience caused and informed him that the ``boys would complete the paper work.''

An entirely new phenomenon known as private banking and wealth management for high net worth individuals has developed during recent years. It recognises money as such, but not the colour of money. Strictly speaking, it is not an entirely new phenomenon. It has been there for decades. But, what are noticeable during recent times are the staggering volumes of money flows and their increase from year to year.

Tax havens began to proliferate around the globe. Switzerland acquired a unique reputation as the safest place for one's money in the world. Billions of dollars are moved across banks spread over countries and from one shelter to another. Transfers through electronic systems such as SWIFT make them faster and more intractable. And finally, they end up as legal tender in developed countries like the U.S. or the U.K. That these countries mount a high moral podium and advise developing countries on the need for good-governance and for efficient and well supervised banking systems is a different story.

One UN report brought out in 1998 estimated that around $500 billion to $1 trillion of international criminal sources and another unknown sum in hundreds of billions of illegal flight capital are sent across and deposited in private bank accounts annually. A model proposed by John Walker estimates global money laundering flows around $2.85 trillion a year.

Connivance in laundering operations

These operations cannot be put through without the knowledge or connivance of major banks and their limbs. Sadly, some of them are very old and, on all accounts, seem respectable. When queried, they would feign ignorance and refer to third parties who introduced the parties and who knew the clients. They will also quote legal texts, international agreements or court rulings obligating them to honour confidentiality of customer relations. It is becoming more and more evident that these legal masks wear thin on OECD faces.

October 1999 was a month of events in money-laundering history. Major financial papers were awash with stories of famous banks having handled the money looted by the deposed Nigerian chief, General Sani Abacha. It was estimated to be over $4 billion. Credit Suisse was indicted by the Swiss Federal Banking Commission (SFBC) before the Swiss Bankers Association, a self- regulatory agency, which has the power to fine Swiss banks. In Credit Suisse's case, the fine was estimated at Sw.Fr. 10 billion ($5.9mn.).

The SFBC also revealed that much of Gen. Abacha's money had entered and left Switzerland via U.K. banks. Nigeria's own investigations led to the finding that London offices of 15 banks were involved. These included Citigroup, Merrill Lynch, Barclays, HSBC and Australia and New Zealand Group. The U.K. government was requested to help in tracking these monies deposited in London banks. The matter was however tossed between the Home Office and the Serious Fraud Office. Home Office would not act unless the offenders were charged in a court in Nigeria and SFO would not act unless Home Office agreed to the Nigerian request. India's Bofors probe in Switzerland is not very different.

The U.K.'s Financial Services Authority (FSA), the supervisory agency, was accused of inaction over these complaints. The Financial Times commented in its editorial that the British authorities were lethargic and unhelpful to those investigating the charge that London had been used to launder huge sums stolen from Nigeria. The FT's own investigation bemoaned the lack of urgency in London in disturbing contrast with the actions taken in Switzerland, Luxembourg, Liechtenstein and Jersey, traditional havens of banking secrecy.

On the other side of the Atlantic, Citibank claimed that it was duped by two sons of Gen. Abacha. It came out during Nigerian investigations that the London office of Citibank held accounts for several companies controlled by Gen. Abacha and his associates. More facts emerged when the matter came up for a hearing by a U.S. Senate sub-committee investigating the wealth accumulated by several rulers including Gen. Abacha. Though it was said that the banks exercised due diligence in 1988 when the two sons of Gen. Abacha commenced business with them, they pleaded that they did not know that they were dealing with the sons of the General in spite of the fact that huge amounts flowed into and out of the accounts over eight years and some without any justifiable business connections. In 1998 it moved $39m out of the London account even while investigation by the new Nigerian government was on. The account was closed in 1999. All that the Chairman of the Citigroup could tell the sub-committee was that like all similar institutions they had had problems and made mistakes.

Diversion of IMF aid

The Senate sub-committee had requested the U.S. General Accounting office (GAO) to study and report on the suspicious banking activities of some corporations and how it was possible for foreigners to use U.S. banks to launder money. The GAO's Report (No.GAO-01-120) released on the October 31, 2000 startled the public. It disclosed that one Russian (anonymous in the GAO Report but identified as Irakly Kaveladze by major dailies in the U.S.) set up more than 2000 corporations in Delaware for Russian brokers and operated bank accounts for them. It reported that a number of Russians and East Europeans moved more than $1.4 billion through accounts at Citibank of New York and Commercial Bank of San Francisco. A good part of IMF assistance to Russia was also siphoned away through these accounts.

The manner in which accounts had been opened in the names of unknown or undisclosed persons and entities shocked the committee. Approvals had been obtained on bunches of blank applications which were filled in later. The GAO Report concluded that it was relatively easy for foreign individuals or entities to hide their identities while forming shell corporations that could be used for the purpose of laundering money. While the banking industry points to voluntary know your customer policies as implementing the requirements of the act, in this case two banks violated the principles of those policies. The GAO had in 1998 reported similar violations by Citibank in laundering money on behalf of Raul Salinas.

Wolfsberg guidelines

When these press reports were creating an adverse opinion about the bonafides of major banks, the banking industry, in its turn, was busy with an independent exercise. Eleven major private banks (ABN AMRO, Barclays, Banco Santander Central Hispano, Chase Manhattan, Citibank, Deutsche Bank, HSBC, JP Morgan, Societe General and UBS) joined with Transparency International and agreed to bind themselves to certain guidelines governing private banking. Since these guidelines were settled in Wolfsberg, a Swiss resort, they are described as Wolfsberg AML (anti-money laundering) Principles.

Association of T.I. (Transparency International) is to lend respectability to the new guidelines. If one studies them closely, one will find that there is nothing new in these guidelines. They elaborate the process of knowing one's client including beneficial owners and propose certain checks and verification methods. But all these should have been in place in any bank conforming to business ethics, regulatory requirements and prudential operations. Even the principle that private bank accounts should be overseen by more than one person is not a radical departure or a novel idea. In all cases of doubt or uncertainty, especially when large value funds are involved, experienced bankers discreetly make or should make third party checks. The requirement that there should be heightened scrutiny when accounts are opened by politicians and public officials and their families is to lend credence to the pretence that senior bankers operating globally are unable to distinguish between honest and corrupt officials. How many of the honest public officials have approached these banks for opening accounts in Switzerland or other havens? In most quarters the very fact of opening Swiss accounts implies corruption or ill-gotten money.

There is the expectation that if major banks agree to abide by the new AML principles other banks may also fall in line. The psychology in banking circles over money laundering accounts is that it is cheap money which has its own advantages. If one bank does not tap it, there are others who would and you would have lost out substantial business. When decades of statutory and regulatory measures have failed to curb money laundering, it is straining credibility to assume that a voluntary code finalised by some banks would succeed. Violations and circumvention of national laws are well documented.

Mr. Robert Baker has done valuable work on money laundering as a guest scholar with the Brookings Institution of Washington. He reports that in Germany 99.99 per cent of criminal money presented for laundering passes successfully through the banking system's regulatory roadblocks. For Switzerland the estimate is the same. Though the U.S. has its Bank Secrecy Act since 1972 requiring banks to report to the Treasury cash deposits ($10,000 or more) and U.S. banks have established elaborate machinery to exercise due diligence procedures, money laundering has not been curtailed to any perceptible degree over the past quarter century.

One of the consequences of statutory regulation is said to be that the cost of laundering has gone up. Now criminals pay a commission of 20 per cent as against 6 per cent some years ago! The GAO Report documents the ways in which bank accounts were opened to facilitate money laundering.

FATF's sustained efforts

At the international level work has been going on for more than 20 years. The Vienna Convention was adopted in 1988. The Council of Europe Convention was adopted in November 1990. The Basle Committee has also issued a statement of principles covering identification of customers, avoiding suspicious transactions and cooperating with enforcement agencies. The G-7 at its Economic Summit of 1989 set up the Financial Action Task Force (FATF) which is perhaps the only body engaged in sustained and comprehensive efforts to deal with money laundering issues. The FATF has made 40 recommendations covering all aspects attached to money laundering and there are also efforts, alongside, to work out orderly tax regimes with a view to preventing tax avoidance.

The FATF's work is elaborate and tedious. It has an OECD bias since no major developing country is represented in the group. Only Hong Kong, Singapore and the Gulf Council countries are represented. It is not clear when it would complete its work. At present, much of its time is taken up in disciplining tax shelters and bringing them in line with OECD tax regimes. Between the FTAF and the Basle Committee, certain elaborate principles to deal with money laundering have also been identified.

The Wolfsberg AML Principles do not measure up to the groundwork already done by these groups. One may therefore wonder why the Wolfsberg AML Principles are being promoted at all. Is it more a damage prevention exercise than a serious attempt to cooperate with national authorities? Is it a coincidence that the banks which have taken the initiative are the very banks accused of laundering General Abacha's money? Have they begun to recognise the colour of money?

K. Subramanian

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