Corruption Profiles: Prosecution of Financial Intermediaries that Facilitate Corruption

1. Corruption Profiles: Prosecution of Financial Intermediaries that Facilitate Corruption Steven Durham, Deputy Chief Fraud and Public Corruption Section U.S. Attorney for the District of Columbia U.S. Department of Justice

2. 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.

3. 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.

4. 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)

5. 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

6. 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).

7. 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

8. Criminal Enforcement • 31 USC 5322: Willful failure to report suspicious transactions; Willful failure to have effective AML compliance program • Systemic Failure/Pervasiveness

9. 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

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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

21. 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.

22. 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.