Banks and Dictators, A Global Witness Report

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Undue Diligence
How banks do business with corrupt regimes
CONTENTS
Summary
1. Introduction: breaking the links between banks, corruption and poverty
2. Who is your customer?
3. Riggs and Equatorial Guinea: doing business with heads of state
(Plus: Where did Equatorial Guinea’s oil money go after the demise of Riggs?)
4. Barclays and Equatorial Guinea: doing business with the sons of heads of state, Part I
(Plus: Who banks for President Bongo of Gabon since Citibank closed its doors to him?)
5. Bank of East Asia and Republic of Congo: doing business with the sons of heads of state, Part II
6. Citibank, Fortis and Liberia’s logs of war: doing business with natural resources that are fuelling conflict
7. Deutsche Bank and Turkmenistan: doing business with a human rights abuser
8. Oil-backed loans to Angola: doing business with an opaque national oil company
9. The problem with the Financial Action Task Force
10. Conclusions and recommendations
Glossary
Summary
What is the problem?
The world has learnt during 2008 and 2009 that failures by banks and the governments that regulate them have been responsible for pitching the global economy into its worst crisis in decades. People in the world’s richest countries are rightly angry at the increasing job losses and house repossessions.
What is less understood is that for much longer, failures by banks and the governments that regulate them have caused untold damage to the economies of some of the poorest countries in the world.
By doing business with dubious customers in corrupt, natural resource-rich states, banks are facilitating corruption and state looting, which deny these countries the chance to lift themselves out of poverty and leave them dependent on aid.
This is happening despite a raft of anti-money laundering laws that require them to do due diligence to identify their customer and turn down illicitly-acquired funds. But the current laws are ambiguous about how far banks must go to identify the real person behind a series of front companies and trusts. They fail to be explicit about how banks should handle natural resource revenues when they may be fuelling corruption. And if a bank has filed a report on a suspicious customer as required by the law, but then the authorities permit the transaction to go ahead, the bank can legally take dirty money. So it may be possible for a bank to fulfil the letter of its legal obligations, yet still do business with these dubious customers.
By accepting these customers, banks are – directly or indirectly – assisting those who are using the assets of the state to enrich themselves or brutalise their own people. Corruption is not just done by the dictator who has control of natural resource revenues. He needs a bank willing to take the money. It takes two to tango.
This report presents a series of case studies about bank customers in Equatorial Guinea, Republic of Congo, Gabon, Liberia, Angola and Turkmenistan. In these countries, the national resource wealth has or had been captured by an unaccountable few, whether for personal enrichment, to maintain an autocratic personality cult that violated human rights, or to fund devastating wars.
The banks doing business with these customers include Barclays, Citibank, Deutsche Bank, and HSBC. Nearly all of the banks that feature in this report are major international banks and all of them make broad claims about their commitments to social responsibility. Yet there is a grotesque mismatch between rhetoric and reality. Their customers are heads of state or their family members, state-owned companies used as off-budget financing mechanisms by their parent government, central banks in states that have been captured by one individual, and companies trading natural resources out of conflict zones. Banks should have been extremely wary about doing business with any of them.
Why does it matter?
Natural resource revenues offer a potential way out of poverty for many developing countries. But too often, resource revenues that could be spent on development are misappropriated or looted by senior government officials, or are used to prop up regimes that oppress their own people. Banks have a crucial role to play as the first line of defence against corrupt funds, but they are not doing a good job of it.
The key step banks are already required to perform to prevent corrupt funds entering the international system is due diligence, to find out who their customer is and where his or her funds have come from. But the current system is full of loopholes, whether in the anti-money 2
laundering laws themselves, or the way that they are enforced. The result is that the international banking system is complicit in helping to perpetuate poverty, corruption, conflict, human suffering and misery.
This is a serious matter of public interest, both in the countries whose natural resources ought to be paying for development but are not, and in the countries whose taxpayers are funding aid to the developing world to fill the gap that is left by corruption and other forms of illicit capital flight. Global Witness is publishing this report in order to provide a tool for productive debate and, hopefully, to contribute to an improvement in banking regulation and enforcement that will have a positive impact on development outcomes for the world’s poorest countries. In the current climate of banking meltdown, the report’s focus on transparency and the need for assurance that the financial regulatory system is working effectively is of particular public interest.
What can be done?
The changes in financial regulation that are on the way as a result of the global financial crisis also present a chance to tackle the financial industry’s ongoing facilitation of corruption.
While the multiple causes of a complex banking crisis are different to the relatively straightforward factors which allow banks to do business with corrupt regimes, there are two identical underlying themes. The first is that when it comes to sticking to the rules, bankers are doing the minimum they can get away with. They aggressively exploit the loopholes and ambiguities in regulations and arbitrage their responsibilities to the lowest level. The second is that regulation by individual national governments is too fragmented to be effective, is hindered by bank secrecy laws, and is not backed by political will.
Global Witness is making the following recommendations, which need to be adopted globally, with effective information sharing across borders. There would be no point in tightening anti-money laundering rules only in Europe and the US if that meant that dirty money then flowed, for example, towards Asia.
1. Banks must change their culture of know-your-customer due diligence, and not treat it solely as a box-ticking exercise of finding the minimum information necessary to comply with the law.
Banks should adopt policies so that if they cannot identify the ultimate beneficial owner of the funds, or the settlor and beneficiary if the customer is a trust, and if they cannot identify a natural person (not a legal entity) who does not pose a corruption risk, they must not accept the customer as a client. They should adopt this standard even if they are not legally required by their jurisdiction to do so.
2. Banks must be properly regulated to force them to do their know your customer due diligence properly, so that if they cannot identify the ultimate beneficial owner of the funds, or the settlor and beneficiary if the customer is a trust, and if they cannot identify a natural person (not a legal entity) who does not pose a corruption risk, they must not accept the customer as a client.
Anti-money laundering laws must be absolutely explicit, and consistent across different jurisdictions, that banks must identify the natural person behind the funds, investigate the source of funds, and refuse the customer if they present a corruption risk. Regulators are in the front line of ensuring that this is enforced, and should treat the prevention of corrupt money flows as a priority.
This is the scandal at the heart of the system, because customer identification has been the crucial element of money laundering laws since their inception in the 1980s. Yet inconsistencies and a failure by many jurisdictions to be sufficiently explicit about what is
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required from banks in practice mean that there are still too many loopholes that can be exploited.
While it is important that banks develop their own effective know-your-customer policies, as per the previous recommendation, leaving banks to do it on their own without regulatory oversight will not work, because the avoidance of corrupt funds inevitably involves turning down potential business, and not all banks are willing to do this. The subprime crisis and ensuing credit crunch have shown, among other things, that allowing banks to self-regulate does not work. They consistently claim that they employ the cleverest people in the world and can be allowed to manage their own risk. But if, as they have shown, they cannot safely manage the task that is of greatest importance to them – making a profit – then it seems clear that they cannot be expected to self-regulate when it comes to ethical issues.
3. International cooperation has got to improve. A necessary first step is to overhaul and strengthen the workings of the Financial Action Task Force (FATF), a little known and opaque inter-governmental body that sets the global standard for the anti-money laundering rules that are supposed to prevent flows of corrupt funds. FATF must use its powers to name and shame more effectively, must open itself up to external scrutiny, and cooperate with other organisations and government agencies working on corruption.
FATF’s members – which include the states that are home to the world’s major economies – also need to get their own houses in order before they lecture the small island tax havens who have frequently been FATF’s targets. For example, of 24 FATF member states evaluated in the last three years, none were fully compliant with Recommendation 5, which requires countries to have laws in place obliging banks to identify their customer and none have legislation in compliance with FATF’s Recommendation 6 which says countries must require their banks to perform enhanced due diligence on politically-exposed persons (PEPs: senior government officials or their relatives and associates, who because of their access to state resources are a heightened money laundering risk). Only four countries are ‘largely compliant,’ two are ‘partially compliant,’ eighteen, including the UK, are non-compliant.1 (See table on page 85)
4. New rules are needed to help banks avoid corrupt funds.
• Each country should publish an online registry of the beneficial ownership of all companies and trusts, and an income and asset declaration database for its government officials.
• National regulators should be required by FATF to assess the effectiveness of the commercial databases of PEPs on which banks rely to carry out their customer due diligence.
• Banks should not be permitted to perform transactions involving natural resource revenues unless they have adequate information to ensure that the funds are not being diverted from government purposes; should be required to publish details of loans they make to sovereign governments or state owned companies, as well as central bank accounts that they hold for other countries; and should develop procedures to recognise and avoid the proceeds of natural resources that are fuelling conflict, regardless of whether official sanctions have yet been applied.
(See page 93 for a full explanation of these and other recommendations.)
The governments of the world’s major economies must stand up to make these things happen. If they do not, no other jurisdictions will either. Governments that have bailed out banks and whose taxpayers now own a stake in them have even more incentive to do so. Those governments that have committed themselves to making poverty history, and that claim to be pushing good governance and accountability through their aid interventions, are guilty of
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hypocrisy if they fail to take responsibility for how their financial institutions and the financial system which they regulate are contributing to corruption and therefore poverty.
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1. Introduction: breaking the links between banks, corruption and poverty
On 28 May 2005, Denis Christel Sassou Nguesso, son of the president of Republic of Congo, went shopping in Paris. He spent €2,375 in Dolce & Gabbana, followed by €6,700 in Aubercy Bottier, a high-end bootmaker. Less than three weeks later, on 14 June, he was back: another €4,250 on shoes at Aubercy and €1,450 at a designer handbag shop. A month later, on 15 July, he burned another €2,000 at Aubercy, apparently his favourite shoe shop at the time.
Most of the population of Congo cannot afford beautiful handmade Parisian shoes. This is because they can barely afford to live at all. Seventy per cent of the population live on less than a dollar a day, and one in ten children dies before their fifth birthday. Yet Congo is rich in oil, and in 2006 oil revenues reached around $3 billion.2 It was the proceeds of Congo’s oil sales which appeared to be paying for Denis Christel’s designer shopping sprees. His personal credit card bills, along with those of another Congolese official, were paid off by offshore companies registered in Anguilla which appear to have received, via other shell companies, money related to Congo’s oil sales.
Denis Christel is not only the president’s son, he is also responsible for marketing Congo’s oil. Yet he was able to open a bank account at one of Hong Kong’s largest banks, into which the proceeds of oil sales were deposited, and out of which these personal credit card bills were paid.3
This is one of a number of stories covered in this report in which the wealth of a nation has been captured by those who run it.
PULL OUT QUOTE: How are we going to make poverty history if we can’t make corruption history?
Sorious Samura, Sierra Leonean journalist 4
The report shows how, despite a raft of anti-money laundering measures which should prevent flows of corrupt money, banks are finding ways to do business with dubious customers in corrupt, resource-rich states. The current laws are ambiguous about how far banks must go to identify the real person behind a series of front companies and trusts. They also fail to be explicit about how banks should handle natural resource revenues when they may be fuelling corruption. So it may be possible for a bank to fulfil the letter of its legal obligations, yet still do business with these dubious customers.
The report focuses on a particular cluster of states in West Africa and Central Asia which see some of the most egregious examples of the ‘resource curse’ in action. In these countries, the national resource wealth has or had been captured by an unaccountable few, whether for personal enrichment, to maintain an autocratic personality cult that violates human rights, or to fund devastating wars – or some combination of these. All of them are countries whose natural resources – oil, gas and timber – are in great demand by the world’s developed and rising economies.
By doing business with these customers banks are – directly or indirectly – assisting those who are stripping their state of its assets and their people of an economic future. Corruption is not just done by the dictator who has control of natural resource revenues. He needs a bank willing to take or process the money. It takes two to tango.
The key step banks must perform to prevent corrupt funds entering the international system is due diligence to find out who their customer is and where his or her funds have come from. 6
But the current system is full of loopholes, whether in the laws themselves, or the way that they are enforced.
The result is that the international banking system is complicit in helping to perpetuate poverty, corruption, conflict, human suffering and misery.
The case studies in this report show how:5
• Barclays was holding a personal account for Teodorin Obiang, son of the president of oil-rich but dirt-poor Equatorial Guinea, one of the world’s worst kleptocracies. Despite his $4,000 a month salary as a minister in his father’s government, Teodorin owns a $35 million mansion in Malibu and a fleet of fast cars, and claimed to a court hearing in South Africa that in Equatorial Guinea it is normal for ministers to end up with a sizeable chunk of government contracts in their pockets.
• HSBC and Banco Santander hid behind bank secrecy laws in Luxembourg and Spain to avoid revealing the owners of accounts they held which received suspicious transfers of millions of dollars of Equatorial Guinea’s oil money.
• Despite the fact that the US bank Riggs collapsed and was sold at a discount after a Senate inquiry investigated its handling of Equatorial Guinea’s oil funds (which included numerous payments into the president’s personal accounts), unknown commercial banks are still holding the Equatorial Guinea oil funds, with no transparency over their location and use. When Riggs collapsed in 2004 the oil funds were at $700 million; they are now at more than $2 billion.
• Citibank, through correspondent banking relationships, enabled Charles Taylor, the ex-president of Liberia now on trial for war crimes, to use the global banking system to earn revenues from timber sales, which were fuelling his war effort as well as being diverted into his personal bank account. Fortis was also involved in processing payments for timber that was fuelling Liberia’s brutal conflict.
• Deutsche Bank was the banker for the late President Niyazov of Turkmenistan, whose regime was notorious for human rights abuses, repression and impoverishment of the population. Deutsche Bank held the central bank accounts for gas-rich Turkmenistan for 15 years, despite the fact that the money was being kept out of the national budget and was effectively under the personal control of Niyazov.
• Bank of East Asia, Hong Kong’s third largest bank, and offshore companies in Hong Kong and the UK Overseas Territory of Anguilla helped funnel Republic of Congo’s oil money into an account controlled by the president’s son, Denis Christel Sassou Nguesso, which he used to pay his personal credit card bills after frequent luxury shopping sprees.
• Huge oil-backed loans from large consortia of banks to Angola’s state-owned oil company Sonangol helped to fuel corruption and support a system of parallel financing, beyond public scrutiny, which provided opportunities for cash to be diverted to the shadow state and into private pockets. While there have been some limited improvements to Angola’s provision of information about its oil revenues, huge transparency concerns remain. Yet the oil-backed loans continue, in new forms, with no parliamentary or civil society oversight to prevent potential diversion of funds.
These are nearly all major international banks and all of them make broad claims, to a greater or lesser extent, about their commitments to social responsibility. Six of the banks mentioned
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in this report – Banco Santander, Barclays, Citigroup, Deutsche Bank, HSBC and Societé Générale – are among the eleven members of the Wolfsberg Group, which has developed a set of voluntary principles to help banks fulfil their anti-money laundering requirements.6 This report will show that the Wolfsberg Principles are little more than a statement of intent and have no real power to prevent banks doing business with dubious customers.
There is a grotesque mismatch between rhetoric and reality. The customers that feature in this report are heads of state or their family members, state owned companies used as off-budget financing mechanisms by their parent government, central banks in states that have been captured by one individual, and companies trading natural resources out of conflict zones. Banks should have been extremely wary about doing business with any of them.
Supporting the shadow state
For many of the poorest countries in Africa, South America, and Asia, the biggest inflow of wealth from the rich world for the foreseeable future will be payment for oil, minerals, and other natural resources. In 2006 exports of oil and minerals from Africa were worth roughly $249 billion, nearly eight times the value of exported farm products ($32 billion) and nearly six times the value of international aid ($43 billion).7
This huge transfer of wealth could be one of the best chances in a generation to lift many of the world's poorest and most dispossessed citizens out of poverty. Yet so far it has not worked out that way. Economist Paul Collier recently noted that of the world’s poorest one billion people, one-third live in resource-rich countries.8
None of this is news to Global Witness, which has been working to expose the links between conflict, corruption and natural resources for the past twelve years, and was a driving force behind the Kimberley Process, to control the trade in conflict diamonds, and the Extractive Industries Transparency Initiative, which sets a global standard for extractives companies to publish what they pay and for governments to disclose what they receive.9 During this time we have worked in some of the world’s most resource-rich countries: Angola, Sierra Leone, Liberia, Republic of Congo, Democratic Republic of Congo, Cambodia, Kazakhstan and Turkmenistan. These are countries which by rights should have significant natural resource revenues to spend on development. Instead they are impoverished, institutionally corrupt, and prone to violent instability.10
What binds these resource-rich countries is the emergence of a ‘shadow state’; one where political power is wielded as a means to personal self-enrichment and state institutions are subverted to support those needs. Behind the façade of laws and government institutions of such states is a parallel system of personal rule. Through the wholesale subversion of bureaucratic institutions and control of force, the leaders of such states are able to exploit their country’s resources in order to enrich themselves, and to pay for the means to stay in power, both through patronage and a bloated military and security apparatus.11 Where self-enrichment becomes the overriding aim, the style of government can be described as a kleptocracy.
A shadow state’s kleptocratic elite generates much of its illicit wealth via the expropriation of national assets, particularly the natural resources which should belong to the country’s people and should be utilised for the common good. The amounts involved are catastrophic for the country’s economy. However, asset stripping at this level is not just an economic crime. Its real effect occurs in the social destruction that follows when such vast amounts of capital are siphoned off into overseas private bank accounts.
It is a poverty problem in Angola, which has now overtaken Nigeria as Africa’s biggest oil producer but where, six years after the end of the war, life expectancy is still 42 and one in
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five children die before their fifth birthday.12 It is a poverty problem in Democratic Republic of Congo, a country blessed with most of the minerals that mankind finds useful, but where 45,000 people are still dying every month from appalling deprivation brought by years of resource-fuelled conflict.13 It is a poverty problem in Cambodia, where the current regime and its cronies control access to all the state’s resources, but where an estimated 35% of the population live below the poverty line, and the vast majority without electricity or mains water.14
In short, mismanagement and outright looting of natural resources fundamentally undermines the ability of the state to provide basic services for its people, diverts funds intended for development, and destabilises whole societies. In the worst cases, it leads to conflict and failed states. The consequence is extreme poverty and human suffering, and in this context, it needs to be understood as an assault on fundamental human rights.
PULL OUT QUOTE: A small minority of bankers are living on the profits from holding deposits of corrupt money. We have a word for people who live on the immoral earnings of others: pimps. Pimping bankers are no better than any other sort of pimp.
Paul Collier, Professor of Economics at Oxford University, in ‘The Bottom Billion: why the poorest countries are failing and what can be done about it’15
This much is known, and has been given names: the paradox of plenty, the resource curse. But the crucial point, less well recognised, is that the leaders of shadow states cannot loot the national coffers without help from outside. They need companies to pay for the extraction of natural resources, and they need banks to look after their money and to borrow from. Power confers both the ‘resource privilege’ – the right to strike deals for resource extraction – and the borrowing privilege – the right to borrow in the name of the country you lead.16 But these privileges conferred by the international legal order can be subverted towards personal enrichment. The rulers of shadow states are abusing the badge of state legitimacy in order to build their personal fortunes at the expense of their impoverished citizens, yet the financial sector appears unable or unwilling to differentiate, and appears happy to do business with them regardless. This needs to change, and this report discusses how it can be done.
When running such a shadow state system it is helpful to keep funds well away from the national budget and the national treasury, by whatever means. A parallel financial system, held offshore or operated through a state-owned enterprise is what allows rulers to keep funds to pay people off when necessary, maintain control of favours, and in many cases to take funds for their own luxurious lifestyles. In addition, the calculated chaos created by shadow state leaders in order to maintain their own rule also makes their own countries highly unsuitable venues for the safekeeping of their stolen wealth, which is why they prefer to keep it offshore.
Therefore by doing business with such regimes and their state owned companies, banks are aiding and abetting the survival of the shadow state. Corruption is not just something that happens in developing countries when bribes are paid and money is looted: it is also something that happens in the world’s major financial centres and offshore financial centres when financial institutions and corporate service providers do not care enough about who they are doing business with.
The rules don’t work
In each case, the report examines what has happened from three perspectives: the bank’s ethics (which are essentially a voluntary matter), the bank’s regulatory obligation to know its customer, and the duty of the bank’s regulators to enforce these obligations.
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The available evidence leads to one clear conclusion across each of the cases: the end result is that the bank has done business with a high profile customer who is involved in some way with the capture of the state’s resource revenues. This casts immediate doubt over the bank’s ethical decision making. The other two perspectives – the bank’s obligation to know its customer, and the regulator’s duty to enforce this obligation – are harder to disentangle, given the available evidence. It is not clear that by doing business with these customers the banks have failed in their regulatory obligation to ‘know their customer,’ because the standard set by the regulation may be insufficient, even if met, to prevent banks doing business with such dubious customers.
In some examples, such as the Turkmenistan and Angola cases, it is clear that the regulations – both at national level and the international standard – do not yet extend to these situations, and there is a need for new guidance. The banks are treating these customers as, respectively, central bank accounts and a state-owned commercial enterprise, without considering the fact that the governments behind them cannot – or will not – publicly account in full for their country’s natural resource revenues.
In other cases, the bank does have a regulatory obligation to ‘know its customer.’ In most countries, with national variations in the detail, the current anti-money laundering legislation puts a legal or in some cases supervisory requirement (an obligation set by the regulator, without legal force) on banks to find out about their customer, a process known as ‘due diligence’, and to make a suspicious activity report (SAR) to the authorities if they suspect tainted money. (See Box 2 on page 18 on how anti-money laundering laws are supposed to work.)
The question posed in this report is whether fulfilment of these regulatory requirements – to tick the customer identity box and file a SAR if there are suspicions – is enough, in reality, to prevent banks doing business with potentially corrupt customers. The answer is that it does not seem to be. Without reference to any particular case, a bank may not have found the ultimate customer behind a chain of ownership, or have made sufficient enquiries into their source of funds.
Or, if a bank has suspicions and files a SAR, the authorities may not respond, or may allow the transaction to proceed for intelligence or political reasons. Global Witness understands that some governments are struggling to respond effectively to the volume of SARS filed. Industry insiders have also suggested to Global Witness that there may be political and diplomatic issues behind some decisions to permit transactions to take place after a SAR has been filed. While the SAR regime does produce useful leads for law enforcement, it can also allow a moral cop-out. It allows everyone to feel like they’re doing something, but not actually necessarily to address the problem. A bank suspects the money is dirty, it tells the authorities the money may be dirty, but if they give the go-ahead, the dirty money ends up in the bank and corruption has been facilitated. If law enforcement immediately kicks into action, the system has worked. But too often it does not.
The report also poses other questions. Are banks really prepared to turn down profitable business? How strong is the culture of compliance within banks? How much influence do the compliance officers have on decisions made by the relationship managers? And crucially, what is the point of due diligence if not to weed out who you shouldn’t do business with?
By asking banks to identify their customers, and to file suspicious activity reports where they suspect dirty money, the anti-money laundering laws are effectively asking banks to be whistleblowers. This is very difficult for banks when their main purpose is making money. This is what sets up the appalling tension in banks between the compliance function, whose job is to ensure that due diligence is done, and the dealmakers, who of course want to complete the deal if it will be profitable. This is why Global Witness argues that while banks
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must change their culture of due diligence so that it is not just a box-ticking exercise, they also require strong regulatory oversight to ensure that they are doing it properly, and to provide more support to the compliance function within banks.
PULL OUT QUOTE: ‘From my professional experience, if you speak up as a compliance officer they listen to you but at the end of the day what’s going to happen is the business is accepted. There are so many ways to get around and make it look like the funds are not criminal… you set up companies worldwide and more the money around so you can’t see where it came from or the business behind it’ Former compliance officer, 200817
Compliance too often is solely about avoiding reputational risk, rather than a concern not to take corrupt business. The UK’s regulator, the Financial Services Authority, noted this in 2006 with a survey of 16 banks’ systems to deal with Politically Exposed Persons (PEPs – the senior government officials or their family members and associates who as a result of their position present a higher corruption risk). It found that banks were far more interested in the likelihood that there might be a public scandal which might affect the bank’s reputation, than in the likelihood that their customer was corrupt. ‘A PEP with a high profile or impending “whiff” of scandal might be immediately turned away. However a PEP with a lower risk of public controversy may be more likely to be accepted. This risk assessment was regardless of the source or legitimacy of the PEP’s funds,’ the FSA said. It went on to warn: ‘Reputational risk and financial crime risk are not the same and steps to mitigate reputational risk will not always reduce financial crime risk.’18 What this may show, in Global Witness’s view, is that banks are operating on the basis of: if the customer is corrupt, we don’t care; what we do care about is being found out to have done business with them.
Global Witness believes that there are certain circumstances in which banks should not do business with a person or entity because they cannot sufficiently minimise the risk that natural resources revenues and government funds are being mismanaged or misappropriated, however many due diligence boxes are ticked. If the mechanisms of government have been hollowed out by the corrupt shadow state behind it, or indeed if grotesque human rights violations are being committed, the argument that a bank has ticked the box by doing its due diligence, or that it is dealing with a sovereign entity, should not be enough.
Global Witness wrote to the world’s top fifty banks (as of July 2008) to ask them if they had a policy of prohibiting accounts for heads of state or senior officials or their families from countries with a reputation for large-scale corruption, or even – for what might seem obvious to banks that claim to take their human rights commitments seriously – for heads of state of the world’s most repressive regimes.19 Sixteen of them wrote back: none of these banks have taken a policy decision to prohibit accounts from heads of state or senior officials from the most corrupt states, or from the world’s most repressive regimes.
The establishment and constant expansion of anti-money laundering regulations has been inextricably linked with the framing of money laundering as a problem for global security. Anti-money laundering measures were deemed to be essential in order to combat drug trafficking, organised and serious crime such as the trafficking of women and children and, most recently, terrorism. Underlying this threat discourse has been the goal of protecting the stability of the international financial system. The irony behind banks’ failure to adequately know their customers from corrupt shadow states is that it is precisely these environments that provide an ideal breeding ground for all of the above.
So the huge effort – backed by political will – that has gone into tracking down terrorist funds now needs to go into recognising – and curtailing – potentially corrupt funds.
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The need for reform?
In certain inter-governmental and policy-making circles, there is currently a lot of talk about asset recovery: the means by which countries whose rulers have looted state assets and deposited them in banks elsewhere can trace, freeze and repatriate the funds. It is a fiendishly difficult and expensive process, for reasons which will become clear throughout this report but not least of which are the facts that (a) it usually takes a change of regime before a government is willing to ask for the money back, and (b) the many ways that ownership of money can be hidden in the financial system means that it is very hard to see where the funds are. Organisations such as the World Bank’s Stolen Asset Recovery Initiative (StAR), which aim to help by providing technical and financial assistance to requesting nations, are proliferating.
The very fact that these asset recovery efforts exist is testimony to the fact that corrupt money ends up in banks through loopholes in the regulatory and enforcement system. While Global Witness supports these asset recovery efforts we believe it would be far cheaper, easier and more effective to focus on tightening up the holes in the system which allow dirty money to enter banks in the first place.
The term ‘moral markets’ has been used by British Prime Minister Gordon Brown when talking about solutions to the financial crisis. ‘Moral markets’ can refer to a number of aspects of cleaning up the financial system, but it certainly applies to this issue. While dealing, as they must, with the problems that banks have created in the developed world, governments are also being presented with a chance to help lift millions of people out of poverty in the developing world, in a way that aid flows will never achieve.
It is vital to understand that one of the key aspects of the international financial system that has contributed to the current banking crisis is also what allows corrupt money to circulate and disappear, and that is asymmetric information: knowledge that is held by one party but not the other. Banks (and their regulators) did not have enough information to understand the liabilities inherent in the complex derivatives packages they were buying, and the consequences for the economy have been terrible. The answer, many commentators agree, is more disclosure, more transparency.
Meanwhile, the moving and disappearance into the financial system of corrupt (and indeed, other criminal, as well as terrorist funds) is facilitated by the many jurisdictions that peddle secrecy for a living and do not require disclosure of the beneficial ownership of companies or trusts, as well as by the banking secrecy rules that hinder the few subsequent investigations that do take place. The answer to this problem, too, is more disclosure, more transparency.
Economists will agree that markets function most efficiently when there is symmetrical disclosure of key information, and that problems always arise from non-disclosure.
In the case of the banking crisis, it has been the investors, pension funds and subsequently the companies and populations of rich countries (as well, of course, as the banks themselves) that suffer as a consequence of lack of information about the bad debts. In the case of the stories in this report, it is the impoverished populations of the countries whose rulers are looting their state coffers who bear the brunt of this lack of transparency. In the rich countries, the consequence will be some years of belt tightening, job losses, house repossessions. Nobody is saying it will be pretty. But the populations of some of the poorest countries in the world already suffer far more every day, with no hope of respite unless the international community intervenes to change the rules.
As banks tumble, there is growing recognition that if you provide an enabling environment, one in which secrecy can flourish, you create an environment that encourages and stimulates bad practice. During 2008, two interesting developments reignited the question of whether a
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minority of jurisdictions can continue to help those from other countries avoid their obligations. Both situations concerned tax evasion, but the arguments are equally applicable to corrupt funds, since both tax evasion and corruption involve depriving a government of its legitimate sources of funds.
PULL OUT QUOTE The only purpose of all of this is to make it extremely complicated for law enforcement agencies to follow the trail, as each step serves as a filter to hide the track of the client's money.
Heinrich Kieber, a whistleblower now in a witness protection programme, in testimony to the US Senate Permanent Subcommittee on Investigations, talking about shell company structures used by the Liechtenstein bank LGT, 17 July 200820
Last year an employee of the Liechtenstein bank LGT, which is owned by Liechtenstein’s ruling family, leaked details of 1,400 account holders who were evading tax in their home countries; eleven countries including Germany and the UK are now pursuing tax investigations.21 In February 2009, the Swiss bank UBS was fined an extraordinary $780 million by the US authorities for facilitating tax evasion. The bank was forced to hand over the names of its US customers who had knowingly concealed $20 billion from the American tax authorities.22. Meanwhile a Senate committee called both UBS and LGT to account for helping US citizens hide billions from the taxman.23 These moves are starting to make dents in the walls of banking secrecy that have been used to shield those with ill-gotten gains.
In the run up to the G20 summit in early 2009 the leaders of key G20 states were starting to make strong statements that a global crackdown on tax havens would be essential in the reshaping of the financial regulatory system.24
Finally the truth is on the front pages: light touch regulation has not worked. This is the right time to throw in a new question about the regulation of banks: is enough being done to prevent banks helping corrupt officials who impoverish their countries? The answer is no, and as the financial regulatory architecture is rebuilt in the aftermath of the current crisis, the opportunity to do something about it has arrived.
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2. Who is your customer?
Banks make their profits performing a vast array of services these days, some involving financial instruments so complex that, as the banking crisis has shown, not even senior figures in the bank fully understood them. But at the heart of it all, banks are, and always have been, enablers and agents. By providing funds, they enable businesses to develop. By guaranteeing a transaction, they allow trade payments to be made. By holding accounts, they help money to be stored safely and marshalled for use when and where required.
Without a bank providing these services, business would not be able to develop, payments for goods would not be made, money could not be kept safely for later use. In this sense, banks are like other agents that do not produce goods themselves but help the business deals of others to go ahead.
Global Witness argues in this report that without the involvement of banks, large-scale diversion of natural resource revenues would not be able to take place. Of course, banks are not the only enablers of corruption. Auditors, lawyers, trust and company service providers and the regulatory structures in secrecy jurisdictions are all part of the system that is able to exploit regulatory and enforcement loopholes to move dirty money around the world, and some will play a part in the stories that follow. But for now, in this publication, Global Witness is focusing primarily on the role of banks – and the governments that regulate them.
Of course, like other agents and enablers, banks have a choice in which customers they provide these services for. These choices can be made on at least two levels: the country, and then the individual person or company.
Which country?
The country choice, except in extreme cases where sanctions have been applied, such as North Korea, is up to the bank.25 ‘Country risk’ is one of the key types of risk that is taken into account when banks decide where to do business. It includes an analysis of the economic, political and social factors that may affect the willingness or ability of a government to meet its obligations, or the policy decisions made by a government which may impact on the ability of private individuals or companies to do business in that country. Country risk, as with all of the other types of risk that banks analyse before taking on a client, is about making sure that the bank’s loans are repaid and that its profit stream is assured. While regulators are interested in country risk in the context of its impact on ‘credit risk’ – the risk that money will not be repaid, affecting the bank’s capital ratio – it is not a matter that carries criminal penalties.
What country risk does not include, however, is an analysis of the ethics of doing business with a particular regime, one that, for example, abuses human rights, or one that fails to use its oil windfall to benefit the vast majority of the population. Banks are free, of course, to choose the countries in which to operate based on the ethics of dealing with particular regimes. As this report will show, ethics do not always win when banks make decisions about where to do business, despite the claims in their corporate social responsibility materials to take ethical decisions seriously.
As Chapter 8 will show, for example, some of the banks that have provided oil-backed loans to Angola’s state oil company are proud of their relationship with the country, despite the fact that this is a government presiding over the highest levels of child mortality relative to national income in the world, and which persists in refusing to provide transparent and audited information about the fate of its oil revenues.
Global Witness wrote to the world’s top 50 banks (as of July 2008) to ask them if they had a policy of prohibiting accounts for heads of state or senior officials or their families from 14
countries with a reputation for large-scale corruption, or even – for what might seem obvious to banks that claim to take their human rights commitments seriously – for heads of state of the world’s most repressive regimes.26
Only sixteen banks responded: Barclays, Bayerische Hypo-und-Vereinsbank, BNP Paribas, Calyon, Commerzbank, Credit Agricole, Credit Suisse, Danske Bank, Fortis, HSBC, ING, JP Morgan Chase, National Australia Bank, Rabobank, Royal Bank of Scotland, and UBS.27 Of these, all but one did not explicitly answer this question. Rabobank said that it did not have such policies. Those who replied all elaborated at length about how their policies were of course in line with the anti-money laundering regulations, which require them to identify accounts of potential corruption concern and perform enhanced checks, and a number mentioned their compliance with sanctions regimes which prevent anyone doing business with certain countries.
But none of these banks have taken a specific policy decision to prohibit accounts from heads of state or senior officials from the most corrupt states, or from the world’s most repressive regimes.
Which company or individual?
Then there is the decision about which individual or company to do business with. Due diligence is the process that banks go through in order to decide whether to do business with somebody. It means finding out who your customer is, whether you’re loaning them your money, or banking their money. It has always been in banks’ interest to do due diligence when making loans and investments, because they need to strictly control the risk that they will not get their money back.
Since the 1980s, however, increasingly stringent anti-money laundering regulations have required banks to do due diligence before accepting customers’ money, in an attempt to prevent the proceeds of crime from entering the global financial system. The requirement to do ‘know-your-customer’ due diligence forms the core of anti-money laundering regulations: who is this customer, can they prove who they say they are, and how did they make their money? If a bank cannot find answers to these questions – which might suggest that the customer is trying to hide their identity, and thus has something to hide – then it should not accept the business. Nor should a bank accept the funds if it suspects that they have been illicitly earned.
The compliance function within banks is responsible for making sure that this happens. As the complexity of the regulations has increased, so has the amount that banks have to spend on compliance systems: specialised compliance staff, training for all other bank staff, database systems to screen potential customers. Meanwhile a huge and lucrative industry of commercial databases, newsletters, conferences and consultants has sprung up around the requirement to know your customer (which now also applies to lawyers, insurers, estate agents and casinos as well as banks). Banks’ corporate social responsibility materials all make a big deal out of their compliance with anti-money laundering regulations.
Global Witness has had conversations with a number of compliance officers currently working in banks and the message is usually the same. ‘Compliance officers are paid so that senior management doesn’t receive any surprises,’ one told us. ‘My job is to prevent the sky falling on our heads,’ said another. They clearly understand their importance to the bank.
But the conversations Global Witness has had with other professionals in the industry – external anti-money laundering consultants, lawyers and law enforcement officials, as well as ex-compliance officers – add a different dimension to the story, one which contrasts with the banks’ own public messages. The message that comes through in these conversations is that the compliance function is too far down the food chain within many banks:
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• while the head of compliance may – sometimes – report to a member of the bank’s board, they do not sit on the board;
• it is usually the relationship manager’s job, rather than the compliance officer’s, to ensure that due diligence is done;
• research done by the compliance officer may be overridden by a relationship manager wanting to go ahead with the business.
Too often, they tell us, the pressure not to do due diligence is enormous, and if the bank can find a way to pretend it is not doing business with a politician but with his crony, it will do. In the words of one former insider, ‘as long as senior management is not told that you’re dealing with a scumbucket through his lawyer in, say, Malta, that’s ok.’
One former compliance officer told Global Witness: ‘From my professional experience, if you speak up as a compliance officer they listen to you but at the end of the day what’s going to happen is the business is accepted. There are so many ways to get around and make it look like the funds are not criminal… you set up companies worldwide and move the money around so you can’t see where it came from or the business behind it.’
Global Witness has itself been in the extraordinary position of being asked by a major global bank to retract its previously published statements about a businessman with whom the bank wished to do business, but over whom its compliance team had raised concerns.
Global Witness wrote to the world’s top 50 banks (as of July 2008) to ask:
• whether the relationship manager or compliance officer is responsible for ensuring that due diligence is done;
• to whom their head of compliance reports;
• what access the head of compliance has to the board;
• what mechanisms are in place for reviewing compliance procedures.
Sixteen banks responded. Of the seven that explicitly answered the first question, six said that the relationship manager was responsible in the first instance for ensuring that due diligence was done and only if there were concerns was it escalated to the compliance function; one of them, Commerzbank, said that the compliance department was responsible.
Of the nine that explicitly answered the second question, two said that the head of compliance reports directly to the CEO, one to the chair of the Executive Board, three to the group general counsel, one to the CFO, one to the Chief Risk Officer, and one to the Group General Manager. Only six banks responded to the question of whether the head of compliance had a seat on the board; the answer from all was no. Twelve of the responding banks answered the question about mechanisms for reviewing compliance procedures: these involved banks’ own internal audit functions. Four banks mentioned that their external auditors are involved in reviewing compliance procedures. Thirty four banks did not reply.
Is compliance working?
Global Witness is concerned that even if all the systems are in place as required by the regulations, compliance may too often be a box ticking exercise rather than a real attempt to weed out business that should not be done. ‘Due diligence is a lifesaver,’ said a finance professional at an offshore industry conference during 2007, in the context of explaining that if you do your due diligence then you’ll be in compliance with the growing flood of overlapping and headache-inducing regulations that apply to the financial industry, and avoid the fines that are meted out in some jurisdictions to banks that do not have a compliance system in place.
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Too often, compliance is solely about avoiding reputational risk, rather than a concern not to take corrupt business. When the UK’s financial regulator, the Financial Services Authority, visited 16 financial institutions in 2006 to assess their systems to deal with politically exposed persons (PEPs – those who hold public office and therefore could potentially be in a position to divert public funds), it found that banks were defining the reputation risk of PEP business as ‘the risk that a PEP might be involved in a public scandal, not that they were actually corrupt. A PEP with a high profile or impending ‘whiff’ of scandal might be immediately turned away. However a PEP with a lower risk of public controversy may be more likely to be accepted. This risk assessment was regardless of the source or legitimacy of the PEP’s funds.’ It went on to warn: ‘Reputational risk and financial crime risk are not the same and steps to mitigate reputational risk will not always reduce financial crime risk.’28 [emphasis added] What this may show, in Global Witness’s view, is that banks are operating on the basis of: if the customer is corrupt, we don’t care; what we do care about is being found out to have done business with them.
Compliance provides a safety net: if you can say you’ve done your due diligence, procured the client’s passport, ticked the boxes to say you know your customer, then you’re in compliance with the law, and you’re covered. What this means in reality, though, is once the boxes are ticked, you’ve covered your back, and the question of whether the business in question actually contributes to corruption is of much less interest.
Certainly, the cases outlined in this report – which ought to have raised serious questions at the time of due diligence – suggest, perhaps, that there is strong pressure from the deal-makers and relationship managers to go ahead, even if the research of the compliance department has thrown up concerns.
The story behind the recent fine imposed on Lloyds TSB in the US clearly illustrates the desire by banks to keep doing the business if at all possible, even if concerns have been raised within the bank. In January 2009, Lloyds was fined $350 million by the American authorities for deliberately ‘stripping’ customer information from dollar wire transfers made on behalf of Iranian, Libyan and Sudanese banks into the US. Between the mid-1990s and 2007 Lloyds systematically violated US sanctions by removing all information such as customer names, bank names and addresses, on outgoing payments so that they would not be blocked by the US. In the case of Iran, Lloyds had a unit dedicated to manually removing this information.
In 2002 bank staff raised concerns that this process might violate US law. In response Lloyds itself stopped stripping customer information. However, the bank then trained its Iranian customers how to bypass US sanctions for themselves. Between 2002 and 2007 Lloyds transferred $350 million of Iranian, Libyan and Sudanese money in contravention of US law.29
In April 2003 Lloyds’ Group Executive Committee decided to suspend the US dollar service it provided for Iranian banks. But the bank continued to strip customer information on behalf of Sudanese banks until September 2007.30 According to press reports there are another nine banks, including Credit Suisse and Barclays, under investigation for violating US sanctions.31 This case highlights the pressures on banks to continue doing lucrative business if at all possible: Lloyds continued to process payments for sanctioned banks for five years after staff had first questioned the legality of these transfers.
PULL OUT QUOTE: I would say that one of the things we need to do is make sure that financial institutions, world, global financial institutions … are called to task and held accountable for their role in this criminality … These people, with their striped suits and their high incomes ... are accomplices to criminals … the financial institutions that take that money are accomplices to that crime.

[miriammuraba]

Dana Rohrabacher (Republican Congressman), May 200732
A bank is not a monolith, it consists of many people with different duties. How many people have to NOT say something in order for business such as this to go ahead? It should only take one person to put up their hand and say let’s not take this business; but that person has to be empowered to say no, and has to be listened to.
So there are two levels at which banks can make decisions to avoid involvement with corruption – by choosing not to do business with a corrupt or human rights abusing country, or by choosing not to do business with an individual or company that might be involved in corruption. The country-based decision concerns the ethical character of the bank, and is set – or in some cases, it seems, not set – at director level. In addition, it is determined by current sanctions regimes. Meanwhile the day-to-day frontline decisions about individuals are backstopped by an assessment by a compliance officer in the bank.
The compliance officer does not get into a macro level judgment about doing business with a country per se, but deals with individual names that come up. The compliance officer’s job is already difficult, because he or she may have to argue against the relationship manager, whose career benefits if the deal goes ahead. But if there is no culture being set from the top of the bank on avoiding business with unethical regimes that refuse to account transparently for their natural resource revenues, then it becomes even more difficult for the compliance department to argue against a particular piece of business.
This brings us to the final perspective from which the cases in this report will be analysed. Each case looks at not only the bank’s ethical policy about what kind of regimes it will deal with, and the likelihood that the bank has sufficiently investigated the identity of its customer and their source of funds as required by its regulator, but also examines whether the regulators have themselves taken action. With the example of Riggs, there was a clear dereliction of the regulator’s duty. In many other stories presented here, such as the account held in Hong Kong by Denis Christel Sassou Nguesso’s shell company (see Chapter 5), the regulator concerned has not been permitted to tell Global Witness whether or not it has taken any action. And in some cases, such as Deutsche Bank and its Turkmenistan accounts, there has been no action from regulators because the regulations that they are responsible for enforcing do not yet cover the issue in question: in this case, the question of state accounts from a state that has been captured by one person.
Now we are going to go on a journey, to the oil-producing countries of the Gulf of Guinea as well as to Central Asia, to witness the corrosive and devastating effects of banks being willing to do business with corrupt regimes. With each story, the effectiveness of the bank’s ethical standards, compliance with due diligence requirements, and regulatory action will be examined, as far as the available evidence permits. Many of the examples in this report raise serious questions about how well a bank really knew its customer, even if it had been able to tick the regulatory box to say it had done its due diligence; and about whether compliance with the letter of regulations that require identification of the customer is sufficient to prevent banks doing business that contributes to corruption.
Box 2: How the anti-money laundering laws are supposed to work
Money laundering is the process by which the proceeds of crime are disguised so that they can be used without being detected. In order for money laundering to take place, there needs to have been a crime in the first place, which has produced a profit: the proceeds of crime. This initial crime is referred to as the predicate offence. In the case of corruption, the predicate offence is usually stealing or misappropriating state funds, or accepting a bribe.
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Money laundering involves three stages: placement, where the money is moved into the financial system; layering, where it is moved via a series of transactions to break the link with its origins and make it harder to trace; then integration, where it is used or invested by the criminal once its origins have been disguised. The easiest of the three stages to detect is the placement stage, when the money is moved into the financial system for the first time.
This is why financial institutions have been put in the front line of money laundering prevention. Because the money has to be introduced to the financial system, often through them, they have been given the responsibility of checking where it comes from.
The principle behind the anti-money laundering laws which, with national variations, exist in most countries is that banks and other financial institutions (and these days, lawyers, estate agents, and insurers too) are required to find out the identity of their customer, and the source of their customer’s funds. If the customer is a company or a legal entity such as a trust, they must do due diligence to find out who is the ‘beneficial owner’ – the person at the top of the ownership chain (as opposed to another company) who really controls the funds. If they cannot do this, they should not accept the customer. If they have concerns that the funds might be the proceeds of crime, they should submit a ‘suspicious activity report’ (SAR) to the national law enforcement authorities – without tipping off the customer that they are doing so.
Certain categories of customer are deemed higher risk. Those who pose the greatest risk of bringing corrupt funds to a bank are ‘politically exposed persons’ or PEPs. A PEP is a senior government official, as well as his or her family members and associates, who could, as a result of his or her position, potentially have access to state funds or could be in a position to take bribes. To say that somebody is a PEP is not to say that they are corrupt; the head of every state in the world is a PEP, for example. It simply means that there is potentially a greater risk that this customer could have acquired their funds corruptly.
Anti-money laundering regulations require banks to take measures to identify PEPs, then subject them to ‘enhanced due diligence’ on their source of funds and to ongoing scrutiny of transactions through their account, with senior management approval required within the bank in order for the account to be opened. 33 This means that banks are not prohibited from taking PEP accounts, but they should establish whether there is a risk of corruption associated with that person, and should not accept the account or a particular transaction (and should file a SAR) if they believe the funds may be corruptly acquired.
Anti-money laundering laws were not originally designed to stop the proceeds of corruption. They were initially imposed in the 1980s, led by the US, as part of the ‘war on drugs,’ in an attempt to prevent drug traffickers moving their profits through the financial system. They were later broadened to include other organised crime and corruption, and after 9/11, terrorist finance.
Anti-money laundering laws are imposed in each jurisdiction by national governments, and compliance with them is monitored by national regulators. But at the international level, an inter-governmental body called the Financial Action Task Force (FATF) sets the global standards for what anti-money laundering laws should look like, in the form of its 40 Recommendations, last updated in 2003. The latest version is called the 40+9 Recommendations, and includes nine recommendations specifically on avoiding funds destined for terrorist finance.
Broadly, the FATF recommendations cover five basic obligations for states:
• Criminalise the laundering of the proceeds of serious crimes and enact laws to seize and confiscate them 19
• Oblige financial institutions to identify all clients, including all beneficial owners of financial property, and to keep appropriate records
• Require financial institutions to report suspicious transactions to national authorities
• Put into place adequate systems to control and supervise financial institutions
• Enter into agreements to permit each jurisdiction to provide international cooperation on exchange of financial information and other evidence in cases involving financial crime
FATF members perform ‘mutual evaluations’ on each other, to assess whether each jurisdiction is in compliance with the 40+9 Recommendations. FATF also produces ‘typologies’, or analyses of particular money laundering techniques, based on real case studies, to help banks identify when such techniques are being used.
FATF has 34 members, largely the world’s richest countries. Other countries are members of ‘FATF-style regional bodies’ for Europe, Eurasia, the Middle East and North Africa, Asia/Pacific, Eastern and Southern Africa, West Africa, the Caribbean, and South America.
Outside of finance ministries, FATF is a little-known organisation with a tiny secretariat based at the OECD in Paris. Driven by its key members, particularly the rich OECD nations that are home to some of the world’s largest financial centres, it is largely responsible for the fact that there are now anti-money laundering laws of some form or another in the majority of countries in the world – although, as this report will discuss, the question of whether they are effectively implemented is quite another matter.
FATF is the best option available to the international community for ensuring that the money laundering laws in each jurisdiction are of a sufficient standard – and, crucially, are being implemented and enforced to a sufficient standard – in order to prevent flows of corrupt funds out of the developing world.
But it has four serious weaknesses that must be tackled before it can do this effectively. None of these weaknesses are inherent in FATF’s structure. They can be tackled with the political will of its member states.
1. FATF has no legal enforcement powers of its own, due to its status as an intergovernmental body that consists of its member states. But although it has no official sanction powers, it is not even sufficiently using the non-legal powers that are at its disposal: naming and shaming, and public pressure.
2. FATF appears to operate in isolation from many of the other actors who are working on anti-corruption efforts.
3. FATF’s focus on terrorist financing has not been matched by equal attention to the fight against corrupt funds, and might even have distracted from it.
4. There are loopholes in the standards that FATF promotes, which means that the anti-money laundering framework that it is promoting is not sufficient to curtail the flows of corrupt money.
These weaknesses – and Global Witness’s proposed solutions – are discussed in more detail in Chapter 9.
Box 3: Private banking and some of its clients
Private banking is the provision of financial services to wealthy individuals and families. Its watchwords are discretion and personalised service. The whole point of it is secrecy: these are clients that do not want their wealth to be known. This is all very well, but what if the client is in fact a corrupt politician? Private banking poses a particular risk for money laundering partly because it attracts rich clients, a small minority of whom will have obtained their money illicitly, but also because the nature of the service is one of close relationships between
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the client and the private banker, which could potentially result in the banker being unwilling to probe too deeply into the source of funds.
The old systems of international private banking, set up over decades to attend discreetly to the finances of the very rich, had by the 1980s also become a route for the laundering of criminal and corrupt proceeds.34 From the 1990s the news started to come out: the millions, and perhaps billions, stolen by Ferdinand Marcos in the Philippines, Suharto in Indonesia, and Mobutu Sese Seko in former Zaire, which had made their way into banks in Europe and the US.35 In 2001, the UK banking regulator, the Financial Services Authority (FSA), found that 23 banks in London, including UK banks and London branches of foreign banks had handled $1.3 billion of the $3-5 billion looted from Nigeria by the late dictator Sani Abacha. The FSA did not name the banks involved.36 Other Abacha funds were located or had been transferred through banks in Switzerland, Luxembourg, Liechtenstein, Austria and the US.37 As a consequence, the anti-money laundering regulations now explicitly recognise private banking as a specific risk.
But despite the scandals associated with it, and the ongoing risks posed by a minority of clients, private banking remains an attractive business, particularly when other sources of banking income may be drying up: a 2007 survey of European private banks by McKinsey found that average pre-tax profit margins are 35%.38 The private banking industry grew by 44% globally during 2007, a year in which the banking industry overall began to take huge hits as the subprime loan market started to unravel. A survey of 398 private banking and wealth management institutions by Euromoney in January 2008 found that private banking assets under management worldwide were up 120% on the previous year to $7.6 trillion which, as Euromoney pointed out, was equivalent to:
• The combined GDP of France, Germany and the UK
• More than one and a half times the market capitalisation of all the companies listed on the London Stock Exchange
• 20 million Ferrari 599s.39
If the private banking industry is growing compared to the rest of the banking sector, then the potential risks that it poses become proportionally greater, and require ongoing attention from banks.
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3. Riggs Bank and Equatorial Guinea: Doing business with Heads of State
Riggs Bank provides the ultimate textbook example of failure to conduct due diligence on politically exposed persons. The Washington bank, an august institution which had banked for Abraham Lincoln and billed itself as the bank of presidents, fell apart in 2004 after a US Senate committee investigation and federal criminal investigators found it had been holding accounts for President Obiang of Equatorial Guinea, his family members, and his corrupt government, as well as for Augusto Pinochet, the former Chilean dictator.40
Riggs was hit with a $25 million civil fine from its regulators in May 2004 for failure to implement money laundering regulations, and pleaded guilty in January 2005 to federal criminal charges of failing to file suspicious activity reports, agreeing to a $16 million criminal fine.41 In 2005 the bank was sold off, at a discount, to PNC Financial Services Group in Pennsylvania, and the Riggs name disappeared. Between PNC’s first offer in 2004, and the final agreed discounted price in 2005, twenty per cent of shareholder value, or about $130 million, was lost.42
The story of what happened – of how Riggs ignored recently-tightened money laundering regulations, turned a blind eye to evidence of foreign corruption, and allowed suspicious transactions to take place without reporting them to law enforcement – is the bogeyman story now used worldwide to train bank compliance officers about the risks of doing business with politically exposed persons. The rest of the banking industry tends to view Riggs as a special case, because of the high number of foreign embassy accounts which led to high risk business, and therefore does not see it as particularly applicable to other banks.
With its high number of embassy accounts, Riggs was indeed in some ways a special case, but that does not mean it should be relegated to the ‘history’ section at the back of compliance handbooks. The first reason for this is that the Riggs case is a startling illustration of failures at each of the levels examined throughout this report: the bank’s ethical culture; the bank’s compliance system; and the action of the regulators. It is unusual to be granted a view inside a bank, to see how records are kept – or not – on high profile customers, how decisions are made and who makes them. As a result of Riggs’ meltdown, it all came out: a detailed anatomy of how a bank helped members of corrupt resource-rich government to siphon off oil funds for their own benefit.
But this is not the main reason that we are revisiting the Riggs story here. Despite the huge scandal caused by Riggs banking for Equatorial Guinea and its rulers, significant and disturbing questions still linger about where the Equatorial Guinea oil money has gone, how banking secrecy laws have impeded the tracking of its progress, and whether the regulators have since upped their game. These questions are relevant for other banks and their regulators, as well as governments.
Box 4: Equatorial Guinea
Equatorial Guinea is a tiny coastal country in West Africa, sandwiched between Cameroon and Gabon, with a population of only half a million. Over the last decade it has become Africa’s third largest oil exporter, with an economy that until 2006 was growing at an average rate of 37% per year43 and annual oil revenues of around $3.7 billion.44 Per capita, it should be one of the richest countries in the world. But this is far from the case: the majority of the population still lives in miserable poverty. ‘An urgent priority is to ensure that … an emphasis is placed on human resource development. Progress in alleviating poverty and meeting the Millennium Development Goals has been slow,’ wrote the IMF in May 2008.45 Life expectancy was only 50 in 2005.46
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Management of the country's vast oil wealth remains a ‘state secret' according to President Teodoro Nguema Obiang. He has ruled since 1979 when he executed his brutal uncle to seize power, and has maintained his power through repression and human rights abuses. Members of Obiang’s family control key government ministries. Opposition parties are banned, and political prisoners are beaten and tortured in custody.47
In March 2008, Saturnino Ncogo Mbomio, a member of a banned political party, died in police custody after being tortured. Other political detainees were held without charge.48
Mass forced evictions have been carried out when the government wants access to land. Hundreds of homes were destroyed in the capital Malabo in 2006, with no consultation or compensation.49
Freedom House rates Equatorial Guinea near the bottom of its survey of repressive countries, above only Burma, Cuba, Libya, North Korea, Somalia, Sudan, Turkmenistan and Uzbekistan, for offering ‘very limited scope for private discussion while severely suppressing opposition political activity, impeding independent organising, and censoring or punishing criticism of the state.’50
Meanwhile, the ruling family continues to enrich itself. At the end of 2006 Global Witness revealed that the president’s playboy son had bought a new $35 million dollar home in California. He has been reported as earning a $4,000 a month salary as the country’s Minister of Agriculture and Forestry.51
1. Failures at Riggs: no ethical culture, a complete failure of compliance systems, and breaking its own rules
News that Riggs was holding Equatorial Guinea’s oil money, in accounts under the personal control of the president, was first broken by the Los Angeles Times and Global Witness in January 2003.52 In March 2004, the Global Witness report Time for Transparency reported a conversation with the Equatoguinean ministers of the Treasury, and Departments of Justice and Energy, in which they said that the oil money was indeed held offshore, partly because the Treasury building is not secure and lacks a safe. The report also showed that Simon Kareri, the account manager at Riggs, had helped Obiang and his family members to buy two mansions in Maryland and a townhouse in Virginia.53 Neither Riggs nor Kareri responded.
Four months later, in July 2004, the US Senate Permanent Subcommittee on Investigations released a d**ning report into the failures at Riggs. With subpoena powers, the Senate investigators had sifted through boxes of paperwork from the bank to find out the real dimensions of its relationship with Equatorial Guinea. The contents of the report were incendiary, complete with picaresque details such as the Equatorial Guinea account manager, Simon Kareri, carrying suitcases of cash into the bank for deposit. Kareri himself later pleaded guilty to fraud and conspiracy after diverting more than a million dollars into his own accounts, and was sentenced to 18 months’ imprisonment.54
Between 1995 and 2004, Riggs Bank administered over 60 accounts for senior members of the Equatoguinean government with total deposits of between $400 and $700 million at any one time.55 Without conducting any due diligence to ascertain how state officials had acquired such enormous wealth, Riggs opened personal accounts for President Obiang himself, his wife, and other relatives. The bank also helped establish offshore shell companies for Obiang and his sons. Over a three year period, from 2000 to 2002, Riggs accepted nearly $13 million in cash deposits into accounts controlled by the president and his wife.56
On one occasion, the bank accepted without due diligence a $3 million cash deposit into an account of one of Obiang’s offshore shell companies.57 On another, Riggs opened an account
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for the Equatoguinean government to receive funds directly from oil companies, allowing withdrawals with only two authorising signatures – one from Obiang and another from his son or his nephew. Riggs then allowed $35 million to be wired from this account to two unknown companies which had accounts in jurisdictions with bank secrecy laws.58
This was not a case of junior staff failing to do their job properly. The senior management were well aware of the Equatorial Guinea accounts, and met with Obiang or his officials on a number of occasions. A letter to Obiang in May 2001, signed by Riggs’ chairman, CEO, another bank president and the Equatorial Guinea account manager, says:
‘We would like to thank you for the opportunity you granted to us in hosting a luncheon in your honor here at Riggs Bank. We sincerely enjoyed the discussions and especially learning about the developments taking place in Equatorial Guinea…. Following your request to us to serve as Financial Advisors to you and the Government of Equatorial Guinea, we have formed a committee of the most senior officers of Riggs Bank that will meet regularly to discuss our relationship with Equatorial Guinea and how best we can serve you.’59
Other internal bank documents that emerged from the investigation included:
• A memo between bank staff from 2001 calling for a meeting to discuss the growing funds in the Equatorial Guinea accounts. ‘Where is this money coming from? Oil – black gold – Texas tea!’ one of them gloats.60
• A memo from Simon Kareri, who handled the Equatorial Guinea accounts, to Larry Hebert, his boss, following a media article about President Obiang’s corruption. Kareri claims:
‘Regarding the issue of he President of Equatorial Guinea being corrupt, I take exception to that because I know this person quite well. We have reviewed … the transactions of Equatorial Guinea with Riggs since inception and not once did Riggs send money to any ‘shady’ entity or destination.’61
Kareri wrote this on 12 December 2002, by which time the majority of the transfers from the Equatorial Guinea accounts that were later identified by the Senate report as suspicious had already taken place.
• Documents relating to President Obiang’s personally-owned offshore shell corporation, Otong SA, which received deposits of $11.5 million. Currency transaction reports filed by the bank, in accordance with regulations requiring them to be submitted for any transaction over $10,000, mis-characterised Otong as making its profits from timber, although bank staff knew that it belonged to the President himself.62 No suspicious activity reports were ever filed despite millions of dollars being paid into the accounts of an offshore corporation owned by Obiang.63
Belatedly, once the Senate investigators were already on its back in January 2004, Riggs did file a suspicious activity report relating to Otong, which Global Witness has seen. It reveals the extraordinary after-the-fact reason given by the bank to justify suspicious money movements into the Otong account. The SAR reports seven cash deposits between September 1999 and April 2002, totalling $11.5 million. They had been made by the Equatoguinean ambassador in Washington, and the explanation given by Michael Parris, of Riggs’ embassy banking division, was that ‘the cash deposits were made with funds the president received from closing CD’s [certificates of deposit] in foreign banks, and not wanting those banks to know where he was re-depositing the money, he opted not to conduct wire transfers, rather,
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maintain the funds in cash to avoid calls from would-be marketers looking for reinvestment opportunities.’64
It seems highly unlikely that Riggs had an organisational ethical culture of not doing business with unpleasant regimes such as Equatorial Guinea’s. At the regulatory compliance level, the bank also failed miserably. The Senate investigators concluded that the Equatorial Guinea accounts were not aberrations but ‘the product of a dysfunctional AML program with long-standing, major deficiencies,’ including an inability readily to identify all the accounts associated with a particular client, absence of any risk assessment system to identify high risk accounts, and inadequate client information.65 Any know-your-customer policies the bank did have were not implemented; the bank did not even follow its own rules.
Failures by the regulators
The bank’s internal systems were not the only controls that failed in the face of a powerful client. The next line of defence should have been the regulators. Located in the centre of Washington, Riggs was about as close as it was possible to be to the centre of regulatory power, in the country that has done most to push banks’ anti-money laundering responsibilities. Yet it was able to get away with having deficient systems for several years. From 1997, examiners from its primary regulator, the US Office of the Comptroller of the Currency (OCC) had repeatedly reported major anti-money-laundering deficiencies at Riggs, which Riggs repeatedly failed to correct. Yet no further action was taken.66
Even more seriously, they were overruled by their superiors. The senior OCC Examiner-in-Charge for Riggs, R. Ashley Lee, was found by the Senate investigators ‘to have become more of an advocate of the bank than an arms-length regulator.’67 In 2002 Lee ordered colleagues not to include a memo on the Pinochet investigation in the OCC’s database. After failing to take action during 2001 and 2002 for anti-money laundering deficiencies at Riggs, he was then hired by the bank, creating an obvious conflict of interest. The OCC acknowledged ‘there was a failure of supervision’ and ‘we gave the bank too much time’.68
The Senate investigators concluded that this was not just an isolated failure by federal regulators. The General Accounting Office (the US government’s audit office) had identified a number of other occasions where regulators had failed to take action despite persistent and repeated failure to address anti-money laundering failures at other banks.69 In July 2005 an internal OCC review also criticised the fact that the OCC directed insufficient resources to anti-money laundering compliance.70
Global Witness asked the OCC if the Riggs debacle had changed the way it oversaw banks’ anti-money laundering systems. A spokesperson said that the OCC had performed a ‘top down scrub internally’, and that ‘we’ve really changed, we’re almost a different organisation, it was a priority of the new comptroller’ [John Dugan, who came in during 2005]. All bank examiners, whether or not they are money laundering experts, have received extra training on anti-money laundering issues, to enable them to spot problems and bring an expert examiner in if necessary. There is also a mandatory ‘cooling off’ period of one year before regulators can take up a post with a bank. Other changes to how the OCC supervises banks, however, are part of the broader tightening up of regulations as a result of the 2001 US Patriot Act, and are not so much a result of Riggs. Banks are now provided each year with the latest Bank Secrecy Act manual, which clearly sets out their regulatory obligations and how their regulators expect these to be met, whereas before, said the OCC spokesoman, ‘all the different regulatory agencies were going at this unilaterally, which was perplexing for the banks.’71
Failure to find the money 1:
What happened to the Equatorial Guinea money left in Riggs when it closed the accounts?
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However, the question of what happened to Equatorial Guinea’s oil money remains. When the accounts were closed there was about $700 million left in the Equatorial Guinea accounts at Riggs.72 This could make a huge difference to development in Equatorial Guinea; for example, it would take only $17 million to provide essential medical care for the whole population.73 But where is this $700 million of state funds now?
Riggs closed the Equatorial Guinea accounts shortly before the publication of the Senate report in July 2004. Harpers magazine reported two years later that they had been taken by Independence Federal Savings Bank in DC.74 However, Global Witness sources in a position to know have said that this did not in fact go ahead. Global Witness wrote to Independence Federal Savings Bank asking if it could confirm if it took the Equatorial Guinea accounts; it did not reply. Other sources, unconfirmed, have suggested that the money went to banks in France, Germany, Switzerland or South Africa.
That $700 million has now grown threefold. And despite what happened to Riggs, it is still being kept in commercial banks outside of Equatorial Guinea. According to a recent IMF report, as of 2006 Equatorial Guinea was keeping $2.1 billion of its government revenues in commercial banks abroad, some in actively managed accounts and some in conventional deposit accounts. This figure was projected to rise to nearly $3 billion in 2007, and to $5.4 billion by 2011.75
Other funds are kept in the Bank of Central African states (BEAC, in its French acronym), a regional bank in Cameroon that holds treasury accounts. According to the IMF, the Equatoguinean authorities are concerned about the low rate of interest their deposits receive at the BEAC, and have said they will remit the funds currently held abroad once CEMAC (Economic and Monetary Community of West Africa) undertakes reforms that would increase the amounts that BEAC deposits can earn.76
But in the meantime, what due diligence are these commercial banks, wherever they are, doing on payments from the accounts, in order to ensure that state funds are not continuing to be diverted? Who are the signatories on the accounts? Crucially, which and where are these banks? How well are they regulated? How are their regulators ensuring that sufficient due diligence is being done?
It seems quite extraordinary that despite a credible investigation publicly identifying corrupt oil funds in a bank, and the bank having foundered as a consequence, that the people of Equatorial Guinea still do not know where a large chunk of their oil money is being held, and whether there is sufficient oversight. While the IMF has publicly reported that more than $2 billion of Equatorial Guinea’s oil money is held abroad in commercial banks, it has not identified these banks. Given the history of poor management of Equatorial Guinea’s oil funds, if the IMF knows where this money is, it should say so. This would help to increase public pressure for accountability over the funds.
Failure to find the money 2:
What happened to the suspicious transactions made out of the Equatorial Guinea accounts at Riggs?
Further serious questions relate to the destination of funds that had been transferred out of the Equatorial Guinea accounts by Riggs. These ‘suspicious’ wire transfers, as the Senate investigators put it, included three transfers totalling more than a million dollars to the account of a company called Jadini Holdings, owned by the wife of the Equatorial Guinea account manager at Riggs, and three transfers totalling nearly $500,000 that were sent to the personal bank accounts of a senior Equatoguinean official. They also included suspicious transfers to accounts of companies unknown to Riggs:
• 16 transfers worth $26.5 million to the account of a company called Kalunga Co. SA at Banco Santander in Madrid, between June 2000 and December 2003;
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• Another ten transfers worth $8.1 million to the accounts of a company called Apexside Trading Ltd, nine of them at Credit Commercial de France in Luxembourg, and one at HSBC in Luxembourg, between July 2000 and August 2001.
• Transfers had also been made to the account of another company (which remained unnamed by the Senate report) at HSBC in Cyprus.77
These transfers were suspicious because they raised the possibility that Obiang or his associates were moving millions of dollars of Equatorial Guinea’s oil money out of Riggs.
The Senate investigators said they had ‘reason to believe’ at least one of Apexside and Kalunga ‘may be owned in whole or in part’ by President Obiang.78
The first question is: what due diligence did Banco Santander, HSBC and Credit Commercial de France (owned by HSBC since July 2000, the date of the first Apexside transfer) do in order to identify the ultimate beneficial owners of these companies when the accounts were opened? Did they find out who the beneficial owners were? If not, why did they open the accounts? The next question is: did they submit suspicious activity reports related to these huge payments from the Equatorial Guinea oil accounts at Riggs? Global Witness wrote to HSBC and Banco Santander to ask these questions; HSBC said it could not answer them because of confidentiality; Banco Santander did not reply to this letter, although it did reply to a subsequent letter that posed related questions, see below.79
Global Witness wrote to Luxembourg’s regulator, the Commission du Surveillance du Secteur Financier, to ask whether it had investigated this matter and if so what action was taken, and whether Credit Commercial de France or HSBC made any suspicious activity reports regarding these transfers. It replied to say that it could not respond.80
The Spanish media reported in April 2005 that an investigation by the Spanish public prosecutor for anti-corruption into alleged money laundering by Banco Santander’s president Emilio Botín and its CEO Alfredo Saénz relating to the Kalunga transfers from Riggs had been closed due to lack of evidence. According to the media reports, Banco Santander had on its own initiative made suspicious activity reports about the transactions to SEPBLAC, the Spanish financial intelligence unit, and had subsequently responded to requests from SEPBLAC for further information. It also, according to the reports, provided the necessary information so that SEPBLAC could respond to a request for information from the New York District Attorney in September 2004.81
The public prosecutor’s office confirmed to Global Witness that this investigation had indeed been closed.82 Global Witness asked SEPBLAC to confirm if Banco Santander had, as reported in the media, filed suspicious activity reports to SEPBLAC, responded to a request for further information about Kalunga, and provided information so SEPBLAC could respond to enquiries from the New York District Attorney’s office. We also asked SEPBLAC if it had investigated the matter and if so, what action had been taken. SEPBLAC replied to say that it could not respond to these questions.83
In October 2008, a criminal complaint was submitted to the public prosecutor in Spain by the NGO Asociación Pro Derechos Humanos de España (APDHE), alleging money laundering by senior Equatoguinean officials and their family members. The complaint summarised the findings of the US Senate Subcommittee’s report on Riggs, and alleged that the money paid to the Kalunga account was used to buy properties in Spain:
‘The Subcommittee concluded that Riggs Bank had failed to comply with its anti-money laundering obligations in connection with certain transactions relating to the accounts held by Equatorial Guinea and that, without any room for doubt, such transactions had their criminally unlawful origin in corruption practices (embezzlement) in that country.
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‘During the course of the investigation, it was discovered how, over a period of three years, various transfers had been made from the Equatorial Guinea Oil Account at Riggs Bank... to an account in the name of the company Kalunga Company S.A. held at a branch of Banco Santander in Madrid, in the amount of 26,483,982.57 U.S. dollars.
‘This “laundered” money was apparently used by the Equatorial Guinean personalities and their families for their own benefit, for the acquisition of properties in various Spanish provinces.’84
Global Witness offered Banco Santander the opportunity to comment on the media reports about the closure of the case in 2005 as well as the new complaint submitted by APDHE, and asked if it could confirm whether it had made any suspicious activity reports. It did respond to this letter, saying that it was aware of these media reports and did not have any comment or clarification, and that Spanish law prevented it providing any other confirmation. It added, ‘I reassure you that in connection with the transactions investigated by the US Senate Permanent Subcommittee, Banco Santander complied in full not only with all its internal manuals and procedures but also with all Spanish Anti-money Laundering laws and regulations, before, during and after the investigations by the Subcommittee.85
PULL OUT QUOTE: I’m not sure that banks understand just how much corruption money there is. They don’t want to understand, they don’t want to find out.
Anti-money laundering expert, 200886
The second question is: what due diligence were these banks required to do by their regulators? Global Witness has a number of concerns about the effectiveness of FATF (see Chapter 9), but even by FATF’s current standards, Spain and Luxembourg’s regulatory regimes have failed to achieve compliance with FATF’s Recommendations.
In 2006, Spain was found only partially compliant with the crucial FATF Recommendation 5 on customer due diligence, which is what is at issue here. The comment on ‘identification of beneficial owners’ was that ‘financial institutions are left with very general and imprecise requirements (this raises the issue of effective implementation of the requirement)’. It also noted that ‘there is no legislation that requires reporting financial institutions to refuse to establish a customer relationship or carry out a transaction if customer identification (including beneficial owner identification) cannot be carried out’.87
When Luxembourg’s anti-money laundering controls were evaluated by the IMF in 2004, the legal requirement to identify customers was found to be ‘generally in line with international standards,’ but that ‘given the variety of structures operated in and from Luxembourg to legally separate the apparent from the real ownership of bank accounts and other assets managed by financial professionals there, identification of the true beneficial owner in each case, as required by law, can present a difficult challenge... this is an important risk factor .. and a threat to the reputation of Luxembourg.’ There were also ongoing risks with customer due diligence on accounts opened by ‘lawyers, notaries, accountants, auditors and other such professionals…given the scale and importance in Luxembourg of business sourced through these professionals…’88
So there are question marks hanging over the issue of customer due diligence standards in Spain and Luxembourg. But that is not the only problem. Even more disturbing is the impact of bank secrecy in these jurisdictions.
Once the questioning from the Senate investigators started, Riggs wrote under Section 314 of the Patriot Act to Banco Santander and HSBC USA, asking them to share information about the beneficial owners of these accounts.89 But both banks said they could not provide this information, because the accounts were opened at their affiliates in Spain, for Banco
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Santander, and Luxembourg and Cyprus, for HSBC. Bank secrecy laws in these jurisdictions, they both said, barred disclosure of information not only to third parties, but to staff of the same bank who were outside that country.90
So banks which have received transfers identified in another jurisdiction as suspicious are able to shelter behind bank secrecy laws and refuse to identify the account owners, even to their own branches elsewhere. This is an extraordinary situation.
PULL OUT QUOTE: As the ability to move capital has speeded up the ability of tax collectors and law enforcement has not kept pace. The regulators are in the position of police on a freeway without a speed limit using bicycles to stop Ferraris.
Jack Blum, lawyer and money laundering expert, in, testimony before the US Senate Committee on Finance, 24 July 200891
These secrecy laws do not only impede the tracking down of money that has already gone. As the Senate investigators commented, ‘The position taken by Banco Santander and HSBC USA means, in essence, that banks in the United States attempting to do due diligence on large wire transfers to protect against money laundering are unable to find out from their own foreign affiliates key account information. This bar on disclosure across international lines, even within the same financial institution, presents a significant obstacle to US anti-money laundering efforts.’92
This raises a disturbing question, applicable not just to US anti-money laundering efforts, but globally. How can banks say they are doing their due diligence, as required by anti-money laundering laws, when their subsidiaries operate in jurisdictions with banking secrecy laws?
It means that not only can they not find out the identity of account owners in other jurisdictions to whom they might be requested to transfer funds, as identified in the quote from the Senate investigators above, but also that they cannot ensure that their foreign branches are upholding sufficient standards.
Effectively, a bank has a correspondent relationship with each of its branches in other jurisdictions.93 A correspondent bank is one which holds an account for another bank, allowing the second bank to provide services to its customers in a country in which it does not itself have a presence. A bank cannot know who all of its correspondent bank’s individual customers are, which makes correspondent relationships a higher risk for money laundering. The regulations therefore recognise this: FATF Recommendation 7 requires countries to require their banks banks to collect enough information to fully understand their correspondent’s business, and to assess the quality of its anti-money laundering controls and how well it is supervised.94
Under US law the responsibility of a US bank is to assure itself that its correspondent banks have appropriate due diligence procedures.95 So to take the example of the Apexside transfers from the Equatorial Guinea account at Riggs:
• HSBC USA has accepted HSBC Luxembourg as a correspondent client.
• HSBC Luxembourg has a client, Apexside, over whom serious questions have been raised in the US regarding the source of its funds (ie a state’s oil revenue, potentially diverted by its president), and the identity of its beneficial owner (potentially the president of Equatorial Guinea) to the point where HSBC USA might not be able to accept this client.
• HSBC USA cannot, however, find out about this client, and who its ultimate owner is, from its own branch in Luxembourg.
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How, then, can HSBC US claim to know its correspondent bank HSBC Luxembourg – which is effectively a correspondent client because HSBC US holds accounts for it – if it has no means of finding out who HSBC Luxembourg’s clients are? And how can it assess how effective HSBC Luxembourg’s due diligence is when it cannot find out anything about the clients that it chooses to take? ‘They’re playing the jurisidiction game with their own branch standards,’ one US banking expert told Global Witness. ‘When you have cases that indicate different sets of standards, how can you accept their standards, yet say you’re upholding the higher standards?’
Global Witness wrote to HSBC to ask on what basis HSBC USA can claim to know its correspondent customer HSBC Luxembourg, when, according to bank secrecy laws which prevent the sharing of information, it has no means of finding out who HSBC Luxembourg’s clients are.
HSBC did not answer this, stating only that ‘We did [...] cooperate fully with the relevant Senate Subcommittee. This cooperation included providing guidance to them as to how to make cross-border information requests in respect of non-US accounts. It is a common principle of banking relationships world-wide that banks are subject to strict duties of confidentiality and can supply information to third parties only with customer consent or pursuant to a formal request from legally competent authorities.’96 The equivalent question was posed to Banco Santander, which did not reply to that letter.97 The standards articulated by the Wolfsberg Group, a voluntary grouping of 11 banks which sets standards for customer due diligence, and of which HSBC currently holds the chair – say nothing about this problem.
Interestingly, FATF Recommendation 4 requires countries to ensure that financial institution secrecy laws do not inhibit implementation of the FATF recommendations – which include the requirement to do due diligence on your correspondent banking clients. When Luxembourg was evaluated in 2004 (against the previous version of the FATF recommendations, which were updated in 2003), it was found to be ‘largely compliant’ with the equivalent recommendation, although it was noted that ‘further steps are needed to ensure that secrecy laws do not inhibit effective implementation of AML/CFT measures.’98 When Spain received its latest FATF mutual evaluation in June 2006, it was found to be compliant with Recommendation 4.99
What is going on here? Global Witness wonders how seriously FATF is taking its responsibilities to create an effective global network of anti-money laundering laws. It has given full marks on banking secrecy laws to one key member state, Spain, in which a bank has recently invoked these laws to hinder an inquiry into evident corruption. Buried deep in a report, it has rapped another key member state, Luxembourg, lightly over the knuckles for needing ‘further steps’ when it too plays host to a bank that has done the same. FATF claims to evaluate both the laws and their implementation,100 but in these cases, the implementation part of the story seems to have fallen by the wayside.
Of course, requests from one branch of a bank to another branch abroad are not the only way for information to travel across borders, although they are perhaps the most important for prevention of money laundering. Other processes are available when money needs to be tracked down. Financial Intelligence Units (FIUs) – the national agencies responsible for receiving suspicious activity reports from banks and passing them on to law enforcement – are able to exchange intelligence internationally, and the Egmont Group, their membership organisation, has a set of principles for them to do so.
Meanwhile, law enforcement officers seeking evidence for prosecution or asset forfeiture can request information from other jurisdictions in a process known as Mutual Legal Assistance. This can be facilitated either by bilateral mutual legal assistance treaties (MLATs) or through multilateral treaties such as the UN Convention against Corruption and the OECD Convention
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on Combating Bribery, both of which prohibit their signatories from denying mutual legal assistance on the grounds of bank secrecy.101 However, anecdotal stories abound of the practical difficulties of gaining evidence through mutual legal assistance.
Global Witness has spoken to contacts in the US Treasury and US Department of Justice who have not been able to confirm or deny if any of these other processes have been used by the US authorities to follow up on the transfers from the Equatorial Guinea accounts at Riggs to Luxembourg and Spain after the Senate investigators hit a wall. The only information about a possible US investigation has come from the Spanish media reports about the closed investigation into Banco Santander (see above), which suggested the New York District Attorney’s office had made enquiries of the Spanish authorities. Global Witness asked the District Attorney’s office if any such investigation had taken place; it could not confirm or deny this.
So a high profile investigation has taken place in the US, a bank has failed as a result – and yet the money has effectively been able to flee. Not only is this an extraordinary situation, it also makes any bank’s claim to be a good facilitator of cross-border business seem, at best, extremely ironic. HSBC, for example, advertises its HSBC Premier service, for wealthy private customers, under the heading ‘Banking without Boundaries.’102
But ‘banking without boundaries’ clearly does not extend to chasing the money after it has gone. So that’s ‘banking without boundaries’ if you’re a customer or a banker wanting to move money around. But as soon as anyone needs to find out where the money has gone and who it belongs to, banks hide behind the shield of national jurisdictions which use the force of their laws to permit banking secrecy. This is the fundamental dislocation at the heart of the financial industry and the way it is regulated: modern instant globalised movement for money, and old-fashioned jurisdictional obstacles to following it after the event.
If secrecy laws such as these are not tackled, attempts by any single jurisdiction to deny use of the banking system to the corrupt will only ever be temporary, because the money can just go elsewhere.
Conclusion
Riggs was an example of a bank that appeared to have no ethical culture determining which types of regimes it would deal with, whose compliance system failed and, despite it being situated at the heart of regulatory power in Washington DC, whose regulators were asleep at the wheel for far too long. It was left to a legislative committee to unravel the mess. The story demonstrated that oil money, in the immense volumes in which it can descend on a small state with poor governance, can potentially affect bankers’ judgment.
Riggs repeatedly assured its regulators that everything was in order, and the regulators failed to take action when they did find failings. In the end, the truth only came about because journalists and NGOs including Global Witness started asking difficult questions about where Equatorial Guinea’s oil money was going, which ultimately helped prompt the Senate subcommittee to do its laudable investigation into the bank.
Now that the Riggs story has revealed the potential gap between assurances and reality, on what basis are the people of resource-rich but desperately poor countries supposed to believe other banks, and their regulators, when they are told now that the systems are in place to prevent the movement of corrupt money? Whenever banks say that everything is in place to prevent them taking corrupt money, they will think of Riggs.
The problems have not gone away though. HSBC pointed out to Global Witness that the anti-money laundering regulations have moved on since these events occurred. Indeed, they have.
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But many of the important issues highlighted in this chapter have still not been solved. Banking secrecy laws that are incompatible with the modern anti-money laundering regime meant that millions of dollars worth of suspicious transactions, paid into accounts that might be controlled by Obiang, could not be traced by the Senate investigators. It is not clear if any other official investigation has taken place.
Meanwhile the $700 million that was in Equatorial Guinea’s Riggs accounts at the point when Riggs closed them has now grown to at least $2.1 billion. The IMF knows the money is offshore in commercial banks; if it does know which banks these are, it is not saying so. So the people of Equatorial Guinea still do not know where their oil money is being kept.
It also appears that other banks have not learnt the lesson about the risks of holding accounts for members of the Obiang family, as the next chapter will show. As soon as the money moves beyond the US, nobody seems to care. Riggs may be held up as an example to scare compliance officers, but is anybody listening?
Action needed:
• The IMF should find out and disclose the names of the commercial banks that are holding Equatorial Guinea’s oil revenues and ensure that there is proper oversight of the funds held in them.
• Banks should be required by regulation to respond to requests for information from other banks or their own overseas branches that are subject to supervision by any regulator from a country that is broadly in compliance with FATF standards without falling foul of banking secrecy laws, whether the request is being made in connection with an inquiry relating to money laundering, terrorist finance, or tax fraud risk.
• Each jurisdiction should publish information annually detailing the number of requests for cross-border legal assistance in financial investigations that it has received, specified by the country of origin, the type of offence to which the investigation relates, the total amount of funds involved for each country making a request, and the proportion of these requests that it has been able to fulfil.
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[miriammuraba]

4. Barclays, HSBC, BNP Paribas: doing business with the sons of Heads of State Part I
Obiang accounts
Despite the huge questions raised by the US Senate report about the source of the Obiang family’s wealth, a branch of Barclays in Paris continued to hold a current account for Teodorin Obiang, one of president Obiang’s sons. Account number 30588 61204 61483680101 was still open as of November 2007.103
This account information emerged after three French non-governmental organisations – Sherpa, Survie and Fédération des Congolais de la Diaspora – filed a legal complaint in France alleging that the ruling families of Angola, Burkina Faso, Congo Brazzaville, Equatorial Guinea, and Gabon had acquired millions of euros of assets in France that could not be the fruits of their official salaries.104
An initial police investigation took place during the second half of 2007, undertaken in response to the complaint. It uncovered evidence in France of tens of millions of dollars worth of luxury properties and cars, and dozens of bank accounts belonging to the rulers of Congo, Equatorial Guinea and Gabon, as well as their family members and close associates. Teodorin Obiang’s car purchases alone came to €4.5 million ($6.3 million) over the last decade.105
Teodorin is minister for agriculture and forests in his father’s government, for which he earns a salary of $4,000 a month.106 However, he spends much of his time jetting around the world as a wannabe international playboy, running a hip hop record label, reportedly dating glamorous rap stars, and collecting fast cars.
In 2006 Global Witness revealed that he had bought a $35 million dollar mansion in Malibu, California, complete with its own golf course and extensive ocean view.107 It would have taken him 730 years on his salary – or at the very least, extremely advantageous mortgage terms – to purchase the house, which raises questions about where, in oil and timber-rich Equatorial Guinea, he did find the money.
Further evidence of institutionalised corruption in Equatorial Guinea emerged when Teodorin testified to a South African court in 2006, during a commercial case relating to the seizure of other luxury properties. He stated to the court that public officials in Equatorial Guinea are allowed to participate in joint ventures with foreign companies bidding for government contracts and, if successful, receive ‘a per centage of the total cost of the contract.’ He outlined that this means that ‘a cabinet minister ends up with a sizeable part of the contract price in his bank account.’108 (This was even more blatant than his father, the president, pointing out in TV interviews in 2003 that the country’s oil money was indeed under his personal control because that was the only way that he could be 100% certain that it was safe.109)
While a corrupt state such as Equatorial Guinea may have failed to make such behaviour illegal, this does not mean that it is an environment with which banks should want to be associated.
PULL OUT QUOTE: [We] discovered that bank secrecy was not only for money laundering, tax evasion, drugs and corruption, but also for terrorism; we have since circumscribed the use of bank secrecy for terrorism – and thus we have shown that it can be done. But we have chosen not to deal with the problems of corruption and tax
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evasion which are so enervating to the developing countries and deprive them of so much needed money.
Joseph Stiglitz, Testimony to the House Financial Services Committee, 22 May 2007110
Yet despite these disturbing indications of corruption, and despite the public meltdown of Riggs, which should have been a terrifying reminder to the banking world of the risks of doing business with Equatorial Guinea’s ruling elite, Teodorin’s Barclays account was still open as of November 2007. The account was originally opened in September 1989, before Equatorial Guinea’s current oil boom had taken off. But what ongoing due diligence has Barclays done on its customer Teodorin Obiang in the years since the oil money has been flowing? Riggs collapsed largely because of the accounts held by Teodorin’s father, in a case now used to warn banks about the risks of PEPs, so on what basis had Barclays reassured itself that these were manageable risks?
Global Witness and Sherpa asked Barclays what due diligence it had done on its customer Teodorin Obiang and whether it had ever filed any suspicious activity reports in relation to transactions through the account. Barclays responded that its legal obligation of customer confidentiality precluded it from ‘commenting on any specific relationship or transaction or, indeed, whether we have entered into a transaction or provide financial services to a person or entity.’ It did, however, helpfully enclose a copy of its policy positions on bribery, corruption and anti-money laundering.111
Barclays is a member of the Wolfsberg Group, which has published statements on fighting misuse of the financial system through corruption, and principles on anti-money laundering for private banking.112 It is unclear how Barclays’ membership of Wolfsberg squares with its holding an account for Teodorin Obiang.
Global Witness and Sherpa have seen the 200-page dossier from the French police investigation which resulted from the NGOs’ complaint. It makes for extraordinary reading. The Barclays account was just one of several bank accounts used by Teodorin to pay for his extravagant collection of luxury cars. In June 1998, he wrote a cheque from the Barclays account for 200,000 francs (€30,490113) towards the purchase of a Ferrari 550 Maranello.114
The remaining payment of 812,639.87 francs (€123,886) for this car was drawn from another account (number 00825/00083719) at BNP Paribas.115
He also had an account at CCF Banque Privée Internationale, which has been owned since July 2000 by HSBC.116 Teodorin wrote a cheque from this account (number 01931200002) for 1.2 million francs (€182,938) to pay for a Ferrari 512M on 7 December 2000.117
Of course, the fact that someone is a PEP does not in itself mean that a bank cannot open an account for them. But Teodorin is not just a PEP, he’s a PEP from a country with a significant and well-documented history of corruption, whose family’s accounts have already brought down an American bank. So the question is whether the banks who hold or have held accounts for him have been able to reassure themselves that he does not present a corruption risk.
Global Witness and Sherpa asked BNP Paribas and HSBC about the due diligence they had done on their customer Teodorin Obiang and whether they had ever filed any suspicious activity reports in relation to transactions through the accounts. HSBC responded that it was unable to answer questions about specific third parties, accounts and transactions, and said that ‘global standards and practices to counter the now well-known risks associated with providing banking services to politically exposed persons have advanced significantly since the time of the incidents about which you have written, and HSBC has more than kept pace with these developments.’ BNP Paribas said it could not respond, as ‘over and above our 34
bonds of professional confidentiality certain of your questions fall within our banking secrecy obligations.’118
More recently, during 2006 and 2007, Teodorin has been a reliable customer to the luxury car manufacturer Bugatti, purchasing two Veyrons for a million euros apiece and putting down a deposit on a third.119 The Bugatti Veyron was built to be the fastest production car in the world, a record which it briefly held during 2006-7 (although it has recently been overtaken), with a top speed of 253.8 miles per hour.120
For less than the cost of just one of these Bugatti Veyrons, a long-lasting insecticide-treated mosquito net could be provided for every child in Equatorial Guinea. This could cut deaths from malaria by up to 44 per cent.121
Teodorin’s Bugattis were paid for by wire transfers, some of them through French banks, from a company belonging to Teodorin. A subsequent investigation into these specific payments by Tracfin, the French anti-money laundering service, concluded in November 2007 that: ‘the financial flows […] are […] likely to be the laundered proceeds of misappropriated public funds’.122
Yet it was only a week later that the investigation initiated as a result of the NGOs’ complaint was closed. The Public Prosecutor found that the offences were insufficiently substantiated and the case was not allowed to go further.123
This investigation, the first of its kind in France, should have been a key test of President’s Sarkozy’s call for a new ‘partnership between equal nations’ with Africa, and France’s global commitments against corruption.124 This new partnership seems to have failed at the first hurdle. Sherpa, together with Transparency International France, and with the cooperation of citizens of Gabon and Congo, is now launching a civil party petition calling for a more detailed investigation.125
French banks have not just been banking for the Obiang family. The police file that resulted from the investigation also lists more than 20 banks in France as holding nearly 200 separate accounts for family members of President Omar Bongo of Gabon and President Sassou Nguesso of Republic of Congo.
Bongo accounts
In 1999, Citibank in New York closed its accounts for President Bongo after a Senate subcommittee investigation used them as a case study to illustrate its concerns about the risks of private banking being used for money laundering. Yet the French police file shows that as of October 2007, President Bongo had at least six accounts at BNP Paribas in Paris, and another four accounts, two in Paris and two in Nice, at Crédit Lyonnais. The Crédit Lyonnais accounts and two of the BNP Paribas accounts had been open since before the US Senate investigation; four of the BNP Paribas accounts were opened after it, two in 2001 and two in 2006.126
Box 5: Citibank’s Bongo accounts
In 1999, Citibank in New York had suffered severe embarrassment when the US Senate Permanent Subcommittee on Investigations published a report and held a hearing on private banking and money laundering risks, focusing on Citibank’s accounts for high profile clients including President Bongo of Gabon.127
Between 1985 and 1999, funds moving through the Bongo private bank accounts exceeded $130 million, as well as multiple, multi-million dollar loans collateralised by his deposits.128
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The Senate investigators made it clear that their primary concern was the apparent acceptance by the bank that government funds were a legitimate source of funds for the private bank accounts of a president.
Citibank’s initial client records on Bongo’s source of wealth did not elaborate beyond the fact that the country was an oil producer and the president had oil interests. When pushed by its regulator to do so, Citibank then said it understood that $111 million, or 8.5% of the Gabonese government budget, was available to be used at the discretion of the president.129 As the subcommittee noted, ‘the plain meaning [..] is that the private bank was identifying Gabon government funds as a primary source of the funds in the Bongo accounts.’130 But Gabon budget experts at the IMF and World Bank rejected the suggestion that the President received $111m for his personal use. 131
The Senate report also highlighted how the OCC, in its role as regulator, did not question the bank over the alleged source of funds in the accounts – government funds and oil revenues – and gave its approval to the bank’s management of the accounts.132
The accounts were closed in 1999, but Citibank management told the Subcommittee that this was decided because of the cost of answering questions about them, rather than because of specific concerns about the source of funds or the reputational risk.133
It seems that use of government funds for private spending may still be occurring in Gabon. According to the same French police file that resulted from the NGOs’ complaint, in 2004 President Bongo’s wife, who is not a government official, purchased a €300,000 Maybach luxury car that was entirely paid for by the Gabonese Treasury.134 Meanwhile Gabonese anti-corruption activists continue to face harassment from the authorities, including being arrested on trumped-up charges.135
So once again, despite huge questions having been raised in the US about the source of Bongo’s funds following which his accounts at Citibank were closed, French banks have continued to hold accounts for Bongo.
The French police dossier does not reveal the source of funds into Bongo’s private accounts at BNP Paribas and Crédit Lyonnais. Global Witness and Sherpa asked these banks what due diligence they had done on their client Omar Bongo and his sources of wealth, particularly given the concerns raised over Bongo’s accounts by the US inquiry eight years ago. BNP Paribas said it could not respond; Crédit Lyonnais did not reply.136
Global Witness asked the French regulator, the Secrétariat Général de la Commission Bancaire, if it was aware of any of these accounts at French banks, if it had ever monitored them, or if any suspicious activity reports had ever been filed that related to them. It replied that it could not answer questions about individual matters.137 Given that one of the banks, Barclays, is a UK bank, Global Witness asked the Financial Services Authority, the UK regulator, if it was responsible for regulating overseas branches of UK banks. It said it was not, this is the responsibility of the local regulator.138
Global Witness asked the banks named in this chapter what kind of documentation they obtain to establish the source of funds in a client’s account when that client is a politically exposed person from an oil-rich state, and whether they consult international financial institutions about budgetary transparency in resource-rich countries when PEPs state that some of their income is derived from resource revenues. BNP Paribas’s response did not acknowledge these questions; Barclays’ letter indicated its policy positions document and sustainability report, which do not mention these issues; Crédit Lyonnais did not respond.
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HSBC did not answer these specific questions, but pointed to HSBC’s ‘comprehensive and robust policies, principles and procedures… developed to counter the use of its services for corrupt practices.’139 So none of these banks chose explicitly to answer this crucial question.
Conclusion
This chapter shows how it has been possible for investigators in the US to raise huge concerns about the source and destination of funds in accounts controlled by the Obiangs and Bongos, resulting in the closure not only of accounts but of an entire bank – and for British and French banks to hold accounts for them regardless. What kind of due diligence are these banks doing on their obviously high-risk clients? And are their regulators in France actively monitoring what they are doing, or passively waiting for the next scandal to strike?
In the case of Equatorial Guinea and the Obiang family, a high-profile US investigation resulted in criminal charges, fines, and the sale of the bank with huge loss of shareholder value. Anything to do with the Obiangs should be hugely high risk for other banks as a consequence. It would of course be interesting to know what due diligence CCF and BNP Paribas did on their client Teodorin Obiang and his source of funds. But the French police file provides a snapshot of which banks held accounts for him in 2007, and by this point, they no longer did. While Teodorin used his accounts at CCF, now owned by HSBC, and BNP Paribas to pay for some of his luxury car purchases in 1998 and 2000, and while this of course should have raised huge due diligence questions for the banks, the fact that these accounts were no longer open at the time of the 2007 French police investigations means that we do not know when they were closed, nor whether they remained open after Riggs’ collapse in 2004-5.
The account which raises the most questions, therefore, is Teodorin’s Barclays account, which was still open as of the end of 2007. This was three years after Riggs collapsed. Here is a British bank continuing to hold an account for Obiang’s son, someone who has publicly declared that it is normal to take a cut from government contracts, and when the Riggs debacle has already decisively demonstrated that banking for Obiang is appallingly high risk. But Barclays will not say what due diligence it has done on its client.
In the case of Gabon and the Bongo family, nearly ten years after Citibank gave up its Bongo accounts, the French banks BNP Paribas and Credit Lyonnais were still banking for Omar Bongo. Four of the accounts at BNP Paribas were opened after the Citibank accounts were closed. So banks can be steered away from high risk clients in one jurisdiction, and the banks in other jurisdictions don’t have to know. There is nothing requiring banks to know about action taken in other jurisdictions regarding their clients.
Meanwhile, another set of accounts revealed by the French police file were, as of late 2007, four accounts at Société Générale in Paris that appear to belong to Denis Christel Sassou Nguesso, son of the president of Congo-Brazzaville and a government official responsible for marketing Congo’s oil.140
As the next chapter will show, creditor court judgments from 2005 onwards have raised significant questions about Mr Sassou Nguesso’s handling of Congo’s oil receipts. A separate judgment in the UK High Court in July 2007 said: ‘It is an obvious possible inference that [Sassou Nguesso’s] expenditure has been financed by secret personal profits made out of dealings in oil…’ and that documents relating to one of his companies, ‘unless explained, frankly suggest’ that Mr Sassou Nguesso and his company were ‘unsavoury and corrupt.’141 Yet a Hong Kong bank and a company services provider had allowed him to move these ‘secret personal profits’ around the world without hindrance.
Global Witness asked Société Générale what due diligence it had done on its client Mr Sassou Nguesso; it did not respond. Société Générale is a member of the Wolfsberg Group, whose
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document on PEPs highlights the potential risk presented by PEPs at the helm of state-owned companies.142
Action needed:
• The French government should reopen the investigation into the French assets of foreign rulers that could not have been purchased with their official salaries.
• Banks wishing to handle transactions involving natural resource revenues should be required by regulation to have adequate information to ensure that the funds are not being diverted from government purposes. In cases where no such information exists, they should not be permitted to perform the transaction.
• FATF should set up a taskforce specifically to tackle the proceeds of corruption, including the prominent role played by natural resources in corrupt money flows. External experts including law enforcement officials who are at the coalface of fighting corruption and money laundering should be invited to take part.
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5. Bank of East Asia and Republic of Congo: doing business with the sons of Heads of State Part II
Between February 2004 and August 2006, Denis Christel Sassou Nguesso, son of the president of Republic of Congo, went shopping. Many times. Mostly in Paris, but also in Hong Kong, Monaco, Dubai and Marbella. He spent hundreds of thousands of dollars on designer names including Lacroix, Gucci, Escada, Louis Vuitton, Christian Dior and Roberto Cavalli.
In addition to being the president’s son, Mr Sassou Nguesso is head of Cotrade, a public agency which sells Congo’s oil on behalf of the government.143 His personal credit card bills, along with those of another Cotrade official, were paid off by offshore companies registered in Anguilla which appear to have received, via other shell companies, money related to Congo’s oil sales.
Oil accounts for around 80 per cent of Congo’s income and in 2006 oil revenues reached around $3 billion.144 Despite this, Congo remains one of the poorest and most indebted countries in the world, and its oil wealth has contributed to several bloody civil wars. But while the majority of the population remains mired in poverty, the president’s family are able to live in luxury.
Mr Sassou Nguesso’s credit card spending in just one month, June 2005, came to $32,000. This could have paid for more than 80,000 babies to be vaccinated against measles, which is a major cause of child death in Congo. A third of Congolese babies are not vaccinated against measles, and a single dose of measles vaccine costs as little as 40 cents.145
This chapter tells the story of how the ultimate politically exposed person – the son of the president of an oil-rich yet indebted and poverty-stricken country – was able to open a Hong Kong bank account at Bank of East Asia, from which his credit card bills were paid, apparently from funds derived from Congo’s oil money. A London High Court judge would later go on to find, in a court case brought against Global Witness by Mr Sassou Nguesso, that documents concerning his spending ‘frankly suggest,’ unless proven otherwise, that he and his company were ‘unsavoury and corrupt.’146
The story raises three significant questions about what Bank of East Asia – which describes itself as ‘the largest independent local bank in Hong Kong’ – should, and could, have known.
1. Did Bank of East Asia know that it had opened an account for the son of the president of Congo? If not, why not?
2. Did Bank of East Asia know that the account was receiving questionable transfers of funds derived from Congolese oil payments? If not, why not?
3. Did Bank of East Asia know that the account was being used to pay the personal credit card bills of the son of the president of Congo? If not, why not?
Denis Christel Sassou Nguesso’s account at Bank of East Asia was opened in the name of his Anguilla-registered company, Long Beach. So the first big question arrives immediately: did Bank of East Asia know, or attempt to find out, who really owned Long Beach?
Long Beach was incorporated in the Caribbean secrecy jurisdiction of Anguilla in March 2003, although its business address is stated as being in Hong Kong, the same address as a company services provider called ICS. 147 According to a company information sheet seen by Global Witness and evidence given in Hong Kong court proceedings, Long Beach’s shareholders and directors are Orient Investments Ltd and Pacific Investments Ltd, which are both Anguilla-based companies in the ICS group that provide nominee services.148
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When Long Beach opened a bank account at Bank of East Asia in Hong Kong in November 2003, account number 015-514-25-10518-6, it was Orient Investments which acted as the sole signatory.149 However, a Declaration of Trust document seen by Global Witness shows that Orient and Pacific were actually holding the shares in trust for Mr Sassou Nguesso, who was the ultimate beneficial owner of Long Beach.150
As of November 2003, Hong Kong anti-money laundering guidelines (which, largely, did not and still do not have the force of law, but are merely supervisory requirements set by the regulator) required banks to identify the directors and shareholders of companies opening accounts, and specifically required banks to identify the beneficial owners of shell companies such as Long Beach.151 The ultimate beneficial owner of a company is the person at the top of the chain of ownership; it cannot be a trust and company services provider such as Orient or Pacific Investments, because such a provider is always acting on behalf of a client. A shell company is a legal entity that does not do any actual business but through which financial transactions are conducted.
In situations where a company is introduced to the bank by a professional intermediary acting on its behalf, as was the case with Long Beach, Hong Kong requires the bank to establish whether the applicant is acting on behalf of another person as trustee, nominee or agent, and the bank should obtain information on the identity of the trustees or nominees and the persons on whose behalf they are acting.152
Global Witness asked Bank of East Asia if Orient Investments, as the signatory on the account, had disclosed that it was acting as an intermediary on behalf of a third party client, but it declined to answer. Its answer to Global Witness’s 48 questions was: ‘The Bank of East Asia, Limited is regulated by the Hong Kong Monetary Authority (‘HKMA’) and we have established relevant internal procedures in accordance with the requirements on prevention of money laundering and terrorist financing set forth by HKMA. These internal procedures are for internal circulation only. Moreover, due to the secrecy owed to our customers, our Bank should not disclose any information of our customers without their prior written consent or unless it is obligated to do so under relevant court order or laws.’153
The Hong Kong anti-money laundering guidelines permit banks to rely on intermediaries who introduce customers to perform the due diligence on that customer themselves, however, ‘the ultimate responsibility for knowing the customer always remains’ with the bank.154 If a bank does rely on an intermediary to do the due diligence, it should be using standards equivalent to Hong Kong’s, and it is ‘advisable’ for banks to rely on intermediaries which are regulated by the Hong Kong regulator or an authority performing equivalent functions, or that are incorporated in or operating from a jurisdiction that is a member of the FATF or an equivalent jurisdiction, which it defines as EU, Netherlands Antilles and Aruba, Isle of Man, Guernsey and Jersey.155
So Bank of East Asia was required either to carry out its own due diligence on the owner of Long Beach, or to rely on Orient Investments to do so. But neither Bank of East Asia nor Orient Investments was willing to say whether or not they had actually done this. Bank of East Asia declined to answer any specific questions and Orient Investments and its related companies Pacific Investments and ICS did not respond to queries from Global Witness about what due diligence they had done on their customer Denis Christel Sassou Nguesso.
Hong Kong anti-money laundering guidelines also require banks to carry out enhanced due diligence if they are dealing with a PEP. The guidelines suggest that risk factors to consider when doing business with a PEP should include ‘any particular concern over the country where the PEP is from, taking into account his position.’156 But in order to do this, of course, they must first know that they are dealing with a PEP. Global Witness asked Bank of East
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Asia if it had established whether the owner of the Long Beach account was a PEP, but it declined to answer.
Global Witness notes that Republic of Congo was placed 113 out of 133 countries in Transparency International’s Corruption Perception Index in 2003, the year in which the account was opened.157 The IMF and World Bank have also expressed ‘serious concerns about governance and financial transparency’ in Congo, focused on mismanagement of Congo’s oil sector.158
So the Hong Kong guidelines required Bank of East Asia to know who its customer was. In other words, the bank should have known that it was effectively opening an account for the son of the President of Congo, who was indisputably a PEP simply by connection with his father, let alone the fact that he also was in charge of marketing the state’s oil.
The guidelines suggest that knowing this, Bank of East Asia should have carried out enhanced due diligence, considering his position and concerns about Congo itself. These concerns ought to have included the question of corruption, which had been explicitly raised by the World Bank and Transparency International, in reports which were published and easily available on the internet.
But it is unclear whether or not Bank of East Asia knew who its customer was, whether it knew if he was a PEP, and whether it conducted enhanced due diligence on him, because the bank did not answer questions on this point when asked by Global Witness. Just because a bank can hide behind customer confidentiality and refuse to answer our questions does not, of course, mean that it did not do its due diligence. It does mean, though, that neither Global Witness, nor the people of Congo – who have the real interest in this matter – can see what happened, and whether the bank did do its due diligence. All that we can see is what the documents show: that an offshore shell company of which the son of the President of Republic of Congo was the beneficial owner was able to open an account.
This leads to the second question: How much did Bank of East Asia know about the source of funds (ie oil money) into the account?
Bank of East Asia was in a position to know that the money in the account was likely to come from trading in Congolese oil because, according to Hong Kong court documents, the bank held a customer information sheet on Long Beach, signed by Orient on behalf of Long Beach, describing the company’s main business activities as ‘Trading crude oil, gas and products (mogas, jet, gasoil, kerosene) in Congo.’159 From this it is reasonable to infer that the bank knew that its client’s source of revenue was Congolese oil.
Bank documents show that specific transactions through Long Beach’s account related to Congolese oil proceeds and sometimes to specific oil cargoes.
A Bank of East Asia ‘Daily Transaction Journal’ appears to show that on 12 April 2005 the Long Beach account received a transfer of $149,944.19 from a named individual unknown to Global Witness; the payment details referenced ‘MT Genmar Spartiate B/L 17.1.05’. On 31 May 2005 the Long Beach account received another transfer of $322,132.84 from the same individual; the payment details referenced ‘MT Tanabe B/L 19 Mars 2005’.160
Bills of lading in Global Witness’s possession indicate that ‘MT Genmar Spartiate’ and ‘MT Tanabe’ were vessels carrying oil cargoes.161 It is therefore reasonable to infer that Long Beach was receiving transfers of money relating to particular oil cargoes. On the basis that the bank knew the source of funds in the account was Congolese oil, its ongoing due diligence might reasonably be expected to investigate these particular sources of income.
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Another Bank of East Asia ‘Daily Transaction Journal’ appears to show that on 10 November 2004, Long Beach received a payment of $299,967 from a company called AOGC.162
A London High Court judgment on 28 November 2005 found that AOGC (Africa Oil and Gas Corporation), a private company, was owned by a person who is also the head of Congo’s state oil company, who had used AOGC in a series of ‘sham’ transactions to stop creditors of the Congolese state from attaching state assets such as oil revenues. The court also found that Mr Sassou Nguesso was a party to these sham transactions.163
Since November 2001, Hong Kong anti-money laundering guidelines had required banks to perform ‘ongoing monitoring of accounts and transactions.’ In June 2004, before these transfers into the Long Beach account were made, these guidelines were updated to require banks to ‘perform on-going scrutiny of the transactions and account throughout the course of the business relationship to ensure that transactions being conducted are consistent with the..[bank’s] knowledge of the customer, its business and risk profile, including, where necessary, identifying the source of funds.’164
Global Witness asked Bank of East Asia if it had performed any due diligence on AOGC or the named individual as the source of these payments into the Long Beach account; whether it was made aware of the UK High Court judgment on 28 November 2005, which found that AOGC was used in a series of ‘sham’ transactions, and whether it accepted transfer of further payments from AOGC to Long Beach’s account after this date. The bank declined to answer.
So to recap for a moment: Bank of East Asia opened an account for a shell company owned by the son of the president of a country where corruption was known to be a serious problem. According to Hong Kong anti-money laundering guidelines, the bank should have checked to find out who its customer was, whether directly or indirectly via Orient Investments, but the bank would not tell Global Witness whether it did this or not. The guidelines also require the bank to perform ongoing scrutiny of transactions through the account, but again, it would not tell Global Witness whether this happened. What is clear from the available documentation, though, is that the bank was in a position to know that the funds in the account were likely to come from Congolese oil sales, because the bank’s own records showed that oil was the main business of Long Beach and transfers into the account appear to have come from sales of specific oil cargoes carried in named oil tankers.
This raises the third question: Did Bank of East Asia know that an account for a company that traded Congolese oil was being used to pay the personal credit card bills of the son of the president of Congo?
Four letters on Long Beach letterhead, between May 2004 and September 2006, request that Bank of East Asia arrange for payment, from the Long Beach Limited account, of Mr Sassou Nguesso’s monthly credit card bill. The letters are signed by Orient Investments on behalf of Long Beach. 165
The credit card bills themselves, seen by Global Witness, card numbers 5430 9600 6810 1330 and 5411 2340 4010 1039, are in Mr Sassou Nguesso’s name and are addressed to the Hong Kong address of ICS Trust (Asia) Ltd, one of the ICS group companies.166 It is reasonable therefore to infer that the credit card bills were sent to ICS Trust (Asia), which saw the bills, then instructed its sister company Orient Investments to arrange for payment from the Long Beach account of which it was signatory. Global Witness wrote to ICS and to Orient Investments to verify this but they did not reply. ICS Trust (Asia) Ltd appears to have had a clear opportunity to identify its customer and observe that the credit card bills were for personal spending.
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The instructions for payment, sent on Long Beach letterhead by Orient Investments to Bank of East Asia, mention Mr Sassou Nguesso by name as the owner of the credit card. This was the point at which the bank itself had a very clear opportunity to see that it was dealing with the son of the president of Congo: a quick Google search could have established as much.
The payment instructions have been stamped, most likely by Bank of East Asia, ‘Record of terrorists checked’, suggesting that Mr Sassou Nguesso’s name had been run through at least one due diligence database. This would have been another opportunity to verify his identity as a PEP. However, having established that he was indeed not a terrorist, the bank proceeded to arrange for payment of his credit card bills, out of a bank account which it should have known was receiving the proceeds of Congo’s oil.
As described above, by 2004 Hong Kong’s banks were required to scrutinise transactions through accounts. Interpretative notes to the June 2004 anti-money laundering guidelines suggested that banks refer to Transparency International’s Corruption Perceptions Index when trying to identify risky PEP business.167
In December 2005 Global Witness published information alleging that the head of the Congolese state oil company, Denis Gokana, had sold government oil to his own companies at prices below the market rate in order to profit from subsequent sales to independent traders, and that these deals had been overseen by Denis Christel Sassou Nguesso.168 This information was reported in the media, including by Dow Jones on 13 December 2005.169 Information was therefore in the public domain raising questions over Mr Sassou Nguesso’s role in the dubious sales of Congolese oil. Yet Bank of East Asia was arranging for payment of his credit card bills out of the account of a company that it knew to trade Congolese oil until at least September 2006.
Global Witness asked Bank of East Asia if it had done due diligence into the identity of the credit card owner named on the payment instructions that it received from Long Beach, if it established whether he was a politically exposed person, and what due diligence it had done in order to be able to stamp the payment instructions ‘record of terrorists checked.’ The bank declined to answer.
Global Witness also asked ICS Trust (Asia) and Orient Investments if their own due diligence had revealed that some of Mr Sassou Nguesso’s transactions from the Long Beach account appeared to be in payment of personal expenditure by Mr Sassou Nguesso himself, and that this personal expenditure appeared to involve extensive and regular purchases of luxury goods; and whether this due diligence, against the backdrop of their knowledge that Long Beach’s source of income was Congolese oil, prompted any further investigation into the apparent payment, by a company set up to trade oil and gas products, in respect of luxury personal expenditure by its beneficial owner. They did not reply.
PULL OUT QUOTE: The international banks remain home to corrupt African money under a veil of secrecy. If the money is linked to terrorism the banks are legally required to report it, but if it is merely money looted from the poorest countries in the world the banks can remain silent.
Paul Collier, Professor of Economics at Oxford University and author of ‘The Bottom Billion: why the poorest countries are failing and what can be done about it’170
How these documents came to light
The documentation referred to in this chapter came into the public domain in mid 2007 through creditor litigation by a so-called ‘vulture fund’ in Hong Kong. Vulture funds are so
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described because they buy up distressed debt from poor countries and litigate to gain creditor judgments forcing repayment. In Congo’s case, there have been legal attempts by several companies that bought Congolese debt to attach Congolese oil cargoes as repayment. Global Witness obtained some of the documents and, struck by the fact that litigation for commercial ends had produced information of great significance to those interested in corruption and governance, published the documents on its website. They showed the payment chain all the way from the oil cargoes, through Long Beach, to Mr Sassou Nguesso’s credit card shopping in Paris and elsewhere.
Mr Sassou Nguesso attempted to force Global Witness to take this evidence of his personal spending off its website. A UK High Court judgment in August 2007 dismissed this attempt, saying that ‘it is an obvious possible inference that [Sassou Nguesso’s] expenditure has been financed by secret personal profits made out of dealings in oil sold by Cotrade.’ Mr Justice Stanley Burnton continued that the documents, ‘unless explained, frankly suggest’ that Mr Sassou Nguesso and his company were ‘unsavoury and corrupt’, and that ‘the profits of Cotrade’s oil sales should go to the people of the Congo, not to those who rule it or their families.’171
So to summarise, here is a situation where a president’s son, who is responsible for marketing his country’s oil, is apparently using proceeds from government oil sales to pay for luxury personal expenditure to the tune of hundreds of thousands of dollars, and has been described by an English judge as unsavoury and corrupt. Meanwhile the majority of the population of Congo languish in dire poverty.
How did this happen?
What does this example involving Bank of East Asia tell us about how the requirement to do customer due diligence is interpreted in practice? There are four possibilities, all of which are legitimate interpretations of the available evidence. Without further information, Global Witness does not know which, or indeed if any, of these happened.
Possibility 1: Bank of East Asia did carry out its own due diligence on Long Beach, discovered that its beneficial owner was Mr Sassou Nguesso, opened the account anyway, and allowed him to use it to pay his private bills with what appears, unless proven otherwise, to be corruptly misappropriated Congolese public money.
Possibility 2: Bank of East Asia accepted that the owners of Long Beach were Orient Investments and Pacific Investments. Both Hong Kong’s regulation and the FATF recommendations on which they are based require banks to establish the identity of the ultimate beneficial owner.
If Bank of East Asia took this course, it would not necessarily be breaking any of the rules. According to international anti-money laundering and offshore finance experts consulted by Global Witness, the interpretation of this requirement varies from jurisdiction to jurisdiction. As one expert told Global Witness: ‘Strictly speaking, they should find the ultimate beneficial owner. But in many cases they settle for the trustees to be accepted as the owners. I’ve been talking to compliance officers about this for a long time and they’ve never given me a satisfactory answer.’ This means that banks in some jurisdictions are ticking the box to say that they have found out the ‘owner’, even though that owner is just another company in an offshore haven standing in the way of the real owner. This is an empty gesture, sufficient maybe to tick a regulatory requirement but powerless to prevent politically exposed persons using the financial system to move the proceeds of corruption.
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Possibility 3: The bank did know that the ultimate beneficial owner was not ‘Orient Investments and Pacific Investments’, the owners of the shares in Long Beach, but then relied on assurances from Orient Investments, the signatory on the account, that it had verified the identify of the beneficial owner of Long Beach. While it was permitted to do this by Hong Kong money laundering regulations, as long as Orient Investments is itself properly regulated, the bank retains the ultimate responsibility for knowing its customer.
However, if this last option was the case, then Bank of East Asia would have been relying for its customer due diligence on a company services provider that seems to have ignored even more red flags than the bank itself. The ICS companies, including Orient Investments and Pacific Investments, could see the entire payment chain – much more than the bank could. They set up Long Beach, held its shares in trust for Mr Sassou Nguesso, arranged for its bank account to be opened, knew that Long Beach’s source of income was Congolese oil, saw the credit card bills with their evidence of personal expenditure, and arranged for them to be paid from the Long Beach account. They could see the entire chain of payments. Yet they went ahead to do business with Mr Sassou Nguesso anyway.
Possibility 4: The bank identified its customer as the son of the President of Congo and the source of funds in his account as Congolese oil, filed a suspicious activity report to the Hong Kong Authorities, who either did not respond, or gave the go-ahead for the relationship or transaction. Global Witness does not know if this was the case, because the SARS regime is kept secret by law.
This story did not come out through regulatory action, but through an unlikely combination of a vulture fund and a campaigning NGO. But have the regulators taken any action as a consequence?
Where were the regulators?
Hong Kong regulator
When it came into possession of the documents in 2007, Global Witness wrote to the Hong Kong Monetary Authority (HKMA), which regulates Bank of East Asia, to draw its attention to the transactions.172 There was no response. In July 2008 Global Witness followed up to ask if the case had been investigated or if any other action had been taken. The HKMA responded that it was unable to comment on whether the case had been investigated, but commented: ‘In light of your earlier email, we have looked into the matter and have taken appropriate actions to ensure that our guidelines are being followed by the bank concerned.’173
Global Witness also asked the Hong Kong Department of Justice if it had investigated the role of Bank of East Asia or ICS. It said that it was ‘not in a position to advise on the matter you raised, as it involves investigation by law enforcement agencies. You may wish to consider writing to these agencies to make enquiries.’ Global Witness did so, writing to the Hong Kong Police and the Independent Commission Against Corruption (ICAC). The Hong Kong police said they could not confirm or deny that any enquiries had been made; the ICAC said ‘we have looked into the circumstances including examination of relevant court papers… We have arrived at a decision of taking no further action as the matter does not reveal any allegation of corruption which comes under Hong Kong jurisdiction.’174
In June 2003, five months before the Long Beach account was opened at Bank of East Asia, the IMF had criticised Hong Kong’s anti-money laundering standards on precisely the issue that may be at stake in this case: can a bank rely on intermediaries such as company service providers to verify beneficial ownership of a company opening an account? The IMF’s regular Report on Observance of Standards and Codes175 for Hong Kong’s anti-money 45
laundering system found that while ‘with respect to the customer identification framework… the rules are adequate and are generally well implemented,’176 there were particular problems:
• ‘…identification of beneficial owners of shell companies, especially within the banking sector. Some domestic banks may use intermediaries who may not undertake adequate customer identification.’177
• ‘Some compliance officers, especially in the domestic banks, are not as expert as they could be in recognizing suspicious transactions.’178
• ‘In general there is little investigation of, or enforcement action taken, with respect to AML/CFT requirements of corporate formation/secretarial services companies… Consideration should be given to focus additional law enforcement efforts on the corporate formation/secretarial companies sector.’179
At the time, the Hong Kong authorities’ official response to this aspect of the 2003 evaluation was that ‘In HKSAR, corporate formation/secretarial services generally consist of accountants and lawyers who are already subject to AML/CFT requirements. HKSAR conducts investigations on these services providers in line with its established enforcement policies.’180 In effect, what this appears to be saying is that existing regulation is adequate – in other words, a reluctance to acknowledge the IMF’s concerns. But the entity that set up and attended to Long Beach was not a lawyer or an accountant, it was a trust and company services provider that did not fall under the purview of Hong Kong’s anti-money laundering regulation.
That was in 2003. In late 2007, there was another evaluation of Hong Kong’s anti-money laundering regime, this time by FATF. Global Witness considers that some of FATF’s standards are too lax (see Chapter 9), but even by these standards, it is clear that the problems identified by the IMF four years earlier had not been fixed. Three key problems still stood out:
1. ‘The scope of permissible reliance on third-party introductions within the banking and securities sectors is broad in terms of the type of introducer from whom the introduction may be accepted, and the country of origin of the introducer. In the banking and securities sectors, reliance may be placed on introducers who are not regulated for AML/CFT purposes.’181
FATF Recommendation 9 does allow banks to rely on third parties (such as, in this case, Orient Investments) to do the customer due diligence, as long as the third party is regulated and supervised. It is left to each country to decide in which countries the third party can be based, using information about which countries adequately apply the FATF Recommendations. A footnote to the FATF Methodology for Assessing Compliance elaborates only that ‘countries could refer to reports, assessments or reviews concerning AML/CFT that are published by the FATF, FSRBs, the IMF or World Bank.’182 But there is no specific guidance on how many ‘non compliant’ or ‘partially compliant’ ratings a country has to get in order to be considered not to be ‘adequately’ applying the FATF recommendations. In this case, Anguilla, where the business came from, had, at the point when the Long Beach account was opened, received a number of criticisms in its latest evaluation (even by the less-than-rigorous standards of the current FATF evaluation system), as will be seen later in this chapter. Banks relying on third parties from Anguilla to do their client due diligence should, therefore, have been especially wary.
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2. Key customer due diligence provisions are not required by law, and guidelines do not specifically say that senior management approval is required to continue a business relationship with a customer subsequently discovered to be a PEP.183
This means that in 2003, when the Long Beach account was opened, it was not a legal requirement in Hong Kong for banks to do customer due diligence, but merely a ‘supervisory requirement,’ ie one set by the regulator.184 According to the latest FATF mutual evaluation published in June 2008, this is still the case.185
The HKMA told Global Witness that ‘breach of the regulatory guidelines is a serious matter and may lead to severe supervisory consequences. Having said that, the Government is actively considering the need to enshrine these requirements in legislation in order to be in line with the recommendations of the Financial Action Task Force.’186
What are these ‘supervisory consequences’ that, in the absence of hard law, are imposed if banks failed to do their due diligence? The HKMA said they included imposing a restriction on the institution’s business; bringing in external auditors to review the systems; downgrading the institution’s supervisory rating; withdrawing the consent given to the responsible senior bank officials; requiring the institution to seek advice from an Advisor appointed by the HKMA; and, in an extreme case, suspending or revoking the institution’s authorisation. Global Witness then asked how often each of these sanctions had been imposed over the past five years; and whether any of them had been imposed on Bank of East Asia. The HKMA provided a series of figures about the 342 on-site examinations of banks’ AML controls it had undertaken since 2004, the 21 written warnings to senior management, the 13 cases where internal or external auditors were brought in, and the three cases in which it invoked its statutory powers to require the bank to follow its instructions or risk fines and imprisonment for the directors and chief executive. It could not, however, say whether Bank of East Asia had faced any of these consequences.187
But although it wasn’t a legal requirement to do customer due diligence when the Long Beach account was opened in 2003, it was a legal requirement to report suspicious transactions.188 Global Witness asked Bank of East Asia if it had filed any suspicious transaction reports relating to the Long Beach account, but it declined to answer. The same question to ICS Trust (Asia) and Orient Investments went unanswered. Banks are not legally permitted to disclose information about SARs (the so-called ‘tipping off’ provision), so it is impossible for anyone beyond their regulators to know whether they are fulfilling their requirements. Of course, the regulators will not say anything either, which leaves the public in countries affected by corruption none the wiser about whether anything effective is really being done to stop the banks and company service providers who assist those public officials that are ripping off the public purse. If Hong Kong’s regulatory system was getting full marks from FATF evaluations (which it clearly is not), if FATF was rigorously investigating countries’ enforcement of their laws rather than just their existence (which it is not), and if there were no loopholes in the existing standards pushed by FATF (which there are), then perhaps the interested public might be able to trust the regulators to ensure that dirty money stays out of the financial system. As it is, though, the public is left with the knowledge that somehow, money is getting through, and that not enough is being done about it.
3. As in 2003, the 2007 FATF evaluation of Hong Kong found that trust and company service providers were still not regulated on anti-money laundering and counter terrorist financing issues.189
The HKMA confirmed to Global Witness that: ‘As in many jurisdictions, company and trust service providers in Hong Kong are not currently supervised for AML/CFT purposes.’ It tried to sweeten the pill by pointing out that ‘the Hong Kong Government has made substantial efforts to promote the AML/CFT awareness of designated non-financial businesses and
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professions including trust and company service providers. Both the Law Society of Hong Kong and the Hong Kong Institute of Chartered Secretaries have issued comprehensive guidance to their members on AML/CFT. The Government will continue to monitor the situation and consider the need for a formal regulatory framework for these businesses and professions.’190 While professional associations issuing guidance to their members is a start, it is clearly no substitute for proper regulation.
This means that a Hong Kong company, ICS, which took part in setting up a structure which was apparently used to loot state funds in Congo, is unregulated for anti-money laundering purposes. Meanwhile, a Hong Kong bank is permitted to rely for its customer due diligence on a third party as long as that third party is in a jurisdiction that is adequately regulated. But there is no clear definition of what adequately regulated means and, in fact, the home jurisdiction of Orient and Pacific Investments, Anguilla, has faced a barrage of criticisms of its regulatory system, as will be seen below. Meanwhile there is no law in Hong Kong requiring customer due diligence to be done. These are gigantic loopholes in the Hong Kong regulatory system.
Internationally, company service providers have been covered by the FATF regulations since 2003, so by failing to regulate its company service providers, Hong Kong is failing to meet this requirement. However, Hong Kong is not alone. The US, for example, does not currently require its company formation agents to verify customer identity, although a proposed ‘Incorporation Transparency and Law Enforcement Assistance Act’ introduced in May 2008 by senators Barack Obama, Carl Levin and Norm Coleman would change this. 191 As one international money laundering expert put it to Global Witness, ‘outside the EU, there is considerable ambivalence about their inclusion [in the anti-money laundering requirements].’ So this is not just a Hong Kong loophole, it is a global loophole.
Anguilla regulator
Half way round the world in Anguilla, a small Caribbean island whose financial services industry consists primarily of company and trust services, the anti-money laundering regulations do theoretically apply to such service providers, including Orient and Pacific Investments, the companies that set up Long Beach and held its shares in trust.192
When it obtained the documentation in 2007 Global Witness wrote to the Anguillan regulator, the Financial Services Commission (FSC), to alert it to these transactions.193 In June 2008, alerted by a third party to Global Witness’ continuing interest in the case, Niguel Streete, the FSC’s director, emailed Global Witness to assure us that it had ‘conducted a review of operations of the local agent representing the referenced companies to ensure that adequate due diligence was and continues to be conducted on the companies principals and its operations. We will continue to monitor the companies operations via our regulatory relationship with the local agent.’
Surprised that Long Beach had still been allowed to continue its operations, Global Witness wrote in July 2008 to Mr Streete to ask if the FSC considered that, following the decision of the UK High Court that unless proved otherwise, the documents showed that Mr Sassou Nguesso and his company were ‘unsavoury and corrupt’, it was appropriate that Anguillan companies were continuing to provide services for Mr Sassou Nguesso and his company.
Mr Streete responded six days later to say that measures had been taken to ‘strike the referenced companies off the register of companies operating in Anguilla.’ While it is welcome that Long Beach, a vehicle used by Mr Sassou Nguesso to divert Congolese oil revenues for his own personal spending, has now been closed down, it is unclear why Mr Streete should have delayed a year after Global Witness first alerted the FSC to these transactions to do so. Global Witness asked Mr Streete whether Orient and Pacific Investments, the Anguilla-based companies that set up Long Beach and held its shares in trust
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[miriammuraba]

for Mr Sassou Nguesso, would face any disciplinary action for having done so; and about whether Anguilla had any policies regarding sanctions for its trust and company service providers; he did not respond to these questions. 194
A 2007 report by the UK’s National Audit Office (NAO) into the UK’s management of risk in the Overseas Territories for which it is responsible, including Anguilla, noted that only two suspicious activity reports were filed in Anguilla during 2005.195 In 2003, the IMF had called on the Anguillan authorities to ‘investigate the reasons for the small number of suspicious activity reports filed to date.’196 While regulators do not want to encourage financial institutions to engage in trivial suspicious activity reporting to cover their backs, the NAO noted that ‘global experience shows that as tougher requirements are imposed and enforced, and effective awareness programmes implemented, the number of valid suspicious transaction reports rises substantially.’197 The NAO report also noted that:
• ‘Anguilla has not created a separate agency to market its financial services overseas, freeing the regulator from involvement in this potentially conflicting activity’
• ‘An IMF report in 2003 referred to the need to broaden the professional and managerial capacity of the Anguilla Commission, and to the absence of sufficient skilled persons to analyse and investigate suspicious transaction reports.’
• ‘There are doubts over the extent of compliance with “know your customer” requirements. The IMF’s 2003 review of Anguilla identified difficulties obtaining customer information from overseas sub agents and recommended a tightening of procedures. When the Anguillan Regulator conducted on-site checks in 2004 most agents did not have copies of the code of practice issued by the professional association, and there were numerous instances of deficient or incomplete documentation.’
• ‘The Anguillan regulator’s policy towards non-compliance in anti-money-laundering practice has been to encourage raised standards through education, rather than to apply sanctions on the most deficient agents. It is not evident that this has been a successful strategy. Police and Industry sources in Anguilla expressed the view to us that there are still a minority of financial service providers in the Territory which they believed would accept “any business”.’198
Global Witness asked the FSC if the concerns raised in the 2003 IMF report had been addressed. It did not respond to this question.199 In Global Witness’s view, the IMF’s concerns have been made manifest in the story of Denis Christel Sassou Nguesso and his credit cards.
PULL OUT QUOTE: In a recent speech on terrorism and its financing, the Chancellor of the Exchequer made a clear commitment that HM Treasury will work more closely with the financial sector in identifying suspicious transactions. He compared the forensic accounting measures required to tackle terrorist financing with the groundbreaking achievements at Bletchley Park during the Second World War. This is welcome and should also be applied with the same vigour and supportive resources to the proceeds of corruption as well as the financing of terrorism. After all, if a country’s health budget is misappropriated, for example, the results can also threaten safety.’
Africa All Party Parliamentary Group, The Other Side of the Coin: the UK and Corruption in Africa, March 2006
Regulation of the Anguillan financial services industry is the direct responsibility of the UK-appointed Governor, and thus is also the responsibility of the UK.200 By failing to ensure that
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Anguilla is enforcing appropriate anti-money laundering regulations on its company and trust service providers, the UK also bears some responsibility for Mr Sassou Nguesso’s spending of Congo’s oil money on designer shopping sprees.
Conclusion
This story shows that the PEP provisions, which require banks to do extra due diligence if they are dealing with a PEP, are meaningless if the initial due diligence fails at the first hurdle to identify that the customer is indeed a PEP. This is why the identification of the ultimate beneficial owner of an entity such as Long Beach is so important. If banks cannot do this themselves, all the way to the natural person at the top of the chain, they should not be taking the business in the first place. Banks should not be able to rely solely on intermediaries to do their due diligence for them.
This story also shows that FATF was able to identify some of the failings in the Hong Kong and Anguilla regulatory systems which may have contributed to these transactions taking place. This is one of the things that FATF is able to do: identify problems relating to the current form of the 40 Recommendations.
But then there are two problems. Firstly, Hong Kong, despite the criticisms in 2003, had not raised its game on the most concerning issues by the time of its next evaluation four years later. Had FATF applied enough public pressure to make this happen?
Secondly, the story in this chapter is an example of a loophole that FATF is well aware of, but is not prepared to tackle properly. A FATF typologies exercise on PEPs, carried out in 2003-4, at the time the Long Beach account was being opened, identified precisely the mechanisms used by Mr Sassou Nguesso. It began by commenting that ‘PEPs that come from countries or regions where corruption is endemic, organised and systemic seem to present the greatest potential risk,’ then noted that ‘PEPs involved in moving or concealing illegal proceeds generally do so by funnelling the funds through networks of shell companies… in locations outside his or her country of origin that are not likely to divulge details of relevant transactions. In other cases, their financial operations may be concealed behind various other types of opaque legal arrangements such as trusts. Again, the ability of a financial institution to conduct full due diligence and apply know-your-customer principles to PEPs in this instance is severely restricted.’201
This could be a description of the Long Beach story. FATF knows what the problem is.
But FATF does not seem prepared to do what is necessary to tackle it. The typologies report continued: ‘According to one FATF member, there are two principal ways in which to detect the illegal financial activities of a PEP. The first is when there is a change in government in the home country of the PEP, and his or her illegal activities are revealed by the successor regime. …The second way… is through suspicious or unusual transactions in which persons acting on his or her behalf may be involved.’202
Global Witness would suggest that there is a third, much more powerful way to detect the illegal financial activities of a PEP, and that is our favourite word: transparency. If all jurisdictions published registries of beneficial ownership and control of companies and legal arrangements such as trusts, it would be clear even to the population of the PEP’s country that he, a family member or one of his close advisers was opening shell companies to move money around. The current rules are not sufficient to deal with a problem that FATF itself has identified.
This story therefore also illustrates that FATF needs to do much more, at both levels – what it requires from member states for compliance, and how it ensures that they are enforcing their regulations.
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Each chapter of this report so far has dealt with the misappropriation of natural resource revenues, with examples of poor countries’ patrimony being squandered for the benefit of their ruling elite. The next chapter takes the ultimate example of this, one which led to vicious conflict: Liberia. In this next story, Global Witness investigates the involvement of what was until recently the world’s biggest bank with one of the world’s – at the time – most damaged countries.
Actions needed
• Hong Kong should regulate trust and company service providers to ensure that they comply with anti-money laundering regulations.
• Hong Kong should make it a legal requirement to perform customer due diligence.
• The Anguillan authorities should investigate the role of Orient Investments and Pacific Investments in setting up a corporate structure for Denis Christel Sassou Nguesso, if they have not done so already, and ensure that their officers pass an appropriate fit and proper person test to hold a corporate service provider licence.
• The UK should take responsibility for ensuring that its Overseas Territories do not provide services that facilitate corruption.
• Every jurisdiction should publish an online registry of beneficial ownership of companies and trusts. Such transparency should become a mandatory criterion for jurisdictions to be in compliance with FATF Recommendations 33 and 34, which require countries to prevent misuse of corporate vehicles and legal arrangements such as trusts.
• FATF should undertake a new name and shame list focusing on countries – including its own members – that are not implementing their regulations, rather than on the existence of a legal framework.
• FATF should publish a clearly accessible roster of each country’s compliance status with each of the FATF recommendations, and the date by which that country has to comply, in order to increase the public pressure for compliance.
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6. Citibank, Fortis and Liberia’s logs of war: doing business with conflict resources
There are few more stark examples of a country’s wealth being pillaged and squandered by its ruler than Liberia under Charles Taylor. This one-time warlord, who launched an uprising in the west African state in 1989, became its elected president in 1997 after a devastating civil war. Civil conflict erupted again in 2000.
Taylor stepped down as president in 2003 and is now on trial in the Hague for crimes against humanity in neighbouring Sierra Leone, where he backed a rebel group notorious for savage violence against civilians. 203 The war in Sierra Leone is estimated to have cost 50,000 lives.204
The history of Taylor’s rule reveals a loophole in the regulation of banks, through which the funding for appalling war crimes can flow. This chapter will show that at a time when Taylor was fomenting war and atrocity, funded by Liberia’s timber, he and his cronies were able to access the global banking system via Citibank, until recently the world’s largest bank, and the Dutch/Belgian bank Fortis.
Citibank did not hold an account directly for Taylor or his government. But it acted as a correspondent bank for a Liberian bank, Liberian Bank for Development and Investment (LBDI), that did both these things. As noted previously in the Riggs chapter, a correspondent bank is one which holds an account for another bank, allowing the second bank to provide services to its customers in a country in which it does not itself have a presence. Citibank also acted as a correspondent bank for another Liberian bank, Ecobank, that was receiving payments for the timber that was fuelling the war. A branch of Fortis in Singapore received these payments directly.
PULLOUT QUOTE: The history of Taylor’s rule reveals a loophole in the regulation of banks, through which the funding for appalling war crimes can flow.
So this is a story about how Citibank held correspondent relationships with banks in a country that was in absolute meltdown. Correspondent relationships are normal and legitimate in the banking industry. But in this case, they enabled a vicious warlord to use the global banking system to earn revenues from timber sales, which were then ploughed into his war effort, as well as into his own bank account.
The question raised by this story is: what should Citibank and Fortis have known about Liberia, and about the nature of their clients there? And what should regulators do to prevent the abuse of the banking system by warlords like Taylor?
From January 2001 onwards, Global Witness as well as other NGOs and the UN repeatedly documented how Liberia’s timber exports were being used to pay for weapons and ammunition. Taylor used these arms to support a campaign of terror waged in Sierra Leone by the rebels of the Revolutionary United Front. Timber profits were also used to pay for Taylor’s own security forces in Liberia, which were implicated in numerous human rights abuses.205
At the centre of this trade was the Oriental Timber Company (OTC), run by Dutch national Guus Kouwenhoven, a close associate of Taylor. OTC had been granted the rights to manage a massive 1.6 million hectare logging concession, 42% of Liberia’s total productive forest, and also controlled the port of Buchanan through which arms shipments were entering Liberia. OTC used logging roads to bring the timber out of Liberia, and to move the weapons in and across the border with Sierra Leone. Like other logging companies in Liberia, OTC
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maintained notorious private militias which committed human rights violations against Liberian civilians.206
OTC (also known to Liberians as ‘Only Taylor Chops’) was one of the key props of Taylor’s shadow state, which whittled away the bureaucracy of national government to almost nothing in favour of strategic economic alliances with external actors. These actors included both multinational companies, such as those trading rubber, as well as those operating in the black market such as arms dealers and gem smugglers. These economic alliances with willing international partners – forged before 1997 when Taylor was a warlord, and after the 1997 election with the full weight of sovereignty behind him – were to a great extent the source of Taylor’s strength, affording him the means to sponsor atrocities at home and in neighbouring countries in order to pursue his ambitions of regional destabilisation.207
1. Citibank, the correspondent account and Charles Taylor
In July 2000, the Liberian Ministry of Finance sent a letter to the general manager of OTC, instructing him to transfer $2 million ‘against forestry-related taxes’ to an account at the Liberia Bank for Development and Investment (LBDI). Global Witness has a copy of this letter which gives the number of the account at LBDI as 0020132851-01. The letter said that the transfer was to be made through Citibank, 399 Park Avenue, New York.208
A UN Panel of Experts on Liberia, mandated by the Security Council to ‘investigate sanctions on arms, diamonds, and individuals and entities deemed a threat to regional peace,’ revealed in a 2007 report that this bank account at LBDI belonged to Charles Taylor. The panel published a bank statement issued by LBDI which identifies the holder of account 0020132851-01 as ‘Taylor, Charles G.’ and describes it as ‘US dollar checking accounts – personal,’ as well as a debit ticket for the deposit of the funds into the account.209 In other words, Citibank was processing a payment of government timber revenues to a personal account at a Liberian bank in Taylor’s name.
The role of OTC and timber revenues in propping up Taylor’s brutal rule may not have been well known in mid-2000 when this $2 million transfer took place. Nor was it well known at this point that, as the Panel of Experts was later to report, Taylor’s government hid extra-budgetary income and spending by instructing OTC to make payments to various bank accounts around the world (including those of alleged arms dealers), rather than to the government’s own account for tax receipts.210
But it was well known at the time that Taylor was a former warlord who had plunged his country into a devastating civil war. A series of articles in the Washington Post in 1999 and the first half of 2000 reported on Taylor’s reign of chaos in Liberia as well as his support for the vicious rebels in neighbouring Sierra Leone.211 The US State Department’s annual human rights report for 1999 painted a d**ning picture of the human rights record of Taylor’s regime.212
Banks that hold correspondent accounts cannot be expected to know who all of their correspondent banks’ individual clients are. This is why correspondent banking is recognised as presenting a high risk of money laundering. The best defence that banks have against correspondent risk is careful due diligence of the correspondent bank itself. What are its know your customer procedures? What type of customers does it accept? How well does it keep customer records? How well is it regulated? In other words, if the major bank cannot do due diligence on every single customer of its correspondent, it should at least understand its correspondent’s ability to do so, and the environment in which it is operating.213 Given the well-known and well-reported state of mayhem in Liberia, it is not clear how Citibank could have reassured itself that its correspondent bank, LBDI, had good anti-money laundering systems in place.
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At the time of this payment there was no explicit legal requirement to do due diligence on the correspondent client. (This changed in July 2002 when the correspondent banking provisions of the Patriot Act came into force.214) However, under the 1970 Bank Secrecy Act, US banks were already required to do due diligence on their customers, and guidance on how to meet these requirements, published in 1993 by the OCC, Citibank’s regulator, highlighted that banks needed to know their correspondent banks’ business.215 In its response to a survey of US banks’ correspondent relationships by the US Senate Subcommittee on Investigations, published in February 2000, Citibank said that it did determine an applicant bank’s primary lines of business.216
Global Witness wrote to Citibank in July 2008 to ask what due diligence it had done on LBDI and its know your customer procedures, and whether it had ever filed any suspicious activity reports in relation to LBDI. Global Witness also asked if Citibank knew that one of its correspondent’s customers was the president of Liberia, and whether it knew that government timber revenues were being diverted into his account. Citibank replied but declined to answer these questions: ‘In accordance with Citi policy and general principles underlying applicable law, I am unable to confirm or deny whether a person is a Citi customer or to provide the other information requested.’217
The correspondent account held by LBDI at Citibank in New York featured in another of the letters from the Liberian Ministry of Finance to OTC. Global Witness has a copy of the letter which shows that on 10 April 2001, OTC was instructed to pay US $1.5 million in lieu of forestry taxes ‘to Liberia Bank for Development and Investment through: Citibank, 399 Park Avenue, New York, NY 10043, A/C#36006105.’218
Stephen Rapp, Chief Prosecutor of the Special Court for Sierra Leone, where Taylor is currently on trial, has spoken to the press about his search for Taylor’s wealth. Quoted in a Sierra Leonean newspaper, Rapp mentions ‘two accounts in the US in which there were $5 billion of activity… but a lot of it was money moving back and forth between the two accounts in order to maximize daily interest payments. But at least $375 million we’ve identified as moving out of those accounts into other banks in the US and elsewhere around the world…’219 Mr Rapp subsequently confirmed this information to Global Witness.
The accounts were closed, according to Reuters, in December 2003, four months after Taylor stepped down as President.220 According to Global Witness sources, at least one of the accounts Mr Rapp is referring to is this LBDI account at Citibank.221
A third letter from the Ministry of Finance to OTC, dated 29 May 1999, instructs OTC to pay $2.5 million in lieu of forestry taxes to ‘GOL Tax a/c #111-000043 through ABA-021-000089 Citibank NA, 399 Park Ave, New York NY 10043, A/C#36006105 FFC.’222 FFC is likely to mean ‘for further credit,’ and this last account number is the same as the LBDI account above, suggesting that this payment for the Government of Liberia tax account was also destined for the same LBDI account at Citibank.
Global Witness asked Citibank what due diligence it had done to identify the beneficial owners and source of funds of these accounts; whether it had monitored ongoing transactions through the accounts; and whether it had ever filed any suspicious transaction or suspicious activity reports relating to these accounts. Again, Citibank said it could not answer.223
Over in Monrovia, however, LBDI was rather more forthcoming. In response to Global Witness’s enquiries, it confirmed that it did hold account number 36006105 at Citibank, and that it was opened in the 1960s. The authorised signatories were LBDI ‘Executive Managers’. Global Witness asked LBDI what due diligence it had done on the ultimate beneficiaries of the account, that is, its own customers. It responded: ‘LBDI followed its Know Your
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Customer special operating procedure to the extent possible. The account is a correspondent banking relationship and the ultimate beneficiaries are LBDI customers who are diverse.’224
LBDI enclosed a know-your-customer profile checklist used for new customers, dated 2003 (long after the account was opened). While it asks if a customer’s identity and a transparent source of funds have been identified and verified, there is no mention of politically exposed persons. It does, however, require that customers be informed that ‘their account could and will be monitored from time to time in compliance with the CBL provisions, LBDI regulations and the Patriot Act at the request of our correspondent bank, Citibank’ and that ‘Citibank may cease any transfer deem to the suspicious [sic] by Citibank’. LBDI did not make it clear if this policy was in operation before 2003, and did not respond to further requests from Global Witness to clarify this point.
LBDI said it had never filed any suspicious activity reports relating to the account, as ‘there was never any suspicious activity observed.’
LBDI said that this correspondent account at Citibank was closed in November 2003, and provided correspondence between LBDI and Citibank about the closure. It appeared to have nothing to do with the change of government in Liberia: Citibank was withdrawing from 14 countries for strategic reasons. A representative of Citigroup in Johannesburg wrote to LBDI saying: ‘Citigroup is repositioning its NPC Africa operations to focus on customers in specific countries which we can best serve given our product offering and infrastructure located in Johannesburg. As a result of this repositioning, Citigroup will no longer be able to service customers in Liberia in an appropriate manner. It is for this reason that we are advising you that we will no longer be able to continue maintaining your above-noted account(s) and are requesting that you make alternative banking arrangements.’ The accounts referred to are US dollar accounts 36006105 and 36071783.225 Global Witness does not have any other information about this second account.
This means that Citibank kept its correspondent relationship with LBDI open all the way through Liberia’s worst years, at a time when the last thing the country needed was a US bank willing to process dollar payments into Taylor’s account, and during which Liberian banks had very little ability to find out who their customers were and keep appropriate records. It then ended the relationship just as Liberia was entering a potentially more stable post-Taylor transitional period and was most in need of access to international financial markets in order to rebuild itself.
In May 2008, however, Citibank’s Johannesburg office wrote to LBDI to ‘reiterate our desire as an institution to re-establish correspondent banking activities with LBDI.’ The letter continued, ‘The relationship we had in the past over approximately a 12-13 years period was strong and without any major incident. Unfortunately, as explained in our mails…due to a strategic decision linked to our inability to best serve clients [sic] needs in Liberia, we were forced to end our relationship with your bank… We hope that this letter gives you enough comfort and enables us to rekindle what was once a great partnership.’226 Global Witness asked LBDI if it planned to renew its relationship with Citibank; it did not reply.
2. Citibank, another correspondent relationship, and payments for ‘conflict timber’
As well as the letters from the Liberian Ministry of Finance instructing OTC to make various payments in lieu of forestry taxes, Global Witness also has copies of the invoices OTC sent to its timber-purchasing clients in Europe, Asia and America.
Between November 2001 and April 2002, operating under the name Evergreen Trading Corporation, OTC instructed its timber-purchasing clients around the world to make at least
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37 separate payments for timber through a branch of Citibank at 111 Wall Street in New York. OTC was requesting that its clients settle their bills to Evergreen’s dollar account at Ecobank Liberia, account number 1021-0022-81201-7, routed through the Wall Street branch of Citibank in New York, swift code CITIUS33, ‘For credit to Ecobank Liberia Limited, Account Number 36147565.’227 Given the number of separate invoices with the same bank details, it is reasonable to assume that these payments were indeed being made.
This means that Citibank, through its correspondent relationship with Ecobank, was processing timber payments that were fuelling West Africa’s wars. Global Witness wrote to Citibank to ask about these payments, but it said it could not answer.
As with the LBDI relationship, Citibank cannot be expected to know every single one of its Ecobank’s clients. However, by the time these payments began in November 2001, new guidance had been issued to US banks on knowing their correspondent banks. In September 2000, Citibank’s regulator, the OCC, published the Bank Secrecy Act / Anti-Money Laundering Handbook to help them meet their AML obligations under the 1970 Bank Secrecy Act and the 1986 Money Laundering Control Act. Recognising that correspondent banking relationships represented a higher risk, particularly if they were conducting wire transfers, it said: ‘Information should be gathered to understand fully the nature of the correspondent’s business. Factors to consider include the purpose of the account, whether the correspondent bank is located in a bank secrecy or money laundering haven… the level of the correspondent’s money laundering prevention and detection efforts, and the condition of bank regulation and supervision in the correspondent’s country.’228
Even if Citibank was not able to see the beneficiaries of individual wire transfers through Ecobank’s account in New York, basic research into the type of clients that a Liberian bank such as Ecobank was serving might have revealed the importance of timber to Liberia’s economy. By the time of these payments, the following information was in the public domain linking Liberian timber to funding for the war in Sierra Leone and Liberia:
• In September 2001, Global Witness published Taylor-made: The pivotal role of Liberia’s forests and flag of convenience in regional conflict, which showed how the Liberian timber industry, with OTC at the fore, was being used to fund Taylor’s support for the rebels in Sierra Leone, and which called for sanctions on Liberian timber.229
• In October 2001, a UN Panel of Experts report said that Liberian timber production was a source of revenue for sanctions busting, and said that a payment for weapons delivery was made to an arms trafficking company by the Singapore parent company of OTC, Borneo Jaya Pte.230
• In March 2002, Global Witness published The Logs of War: The Timber Trade and Armed Conflict, which elaborated the ways in which timber companies, and specifically OTC, were deeply involved in supporting the violence in Sierra Leone and Liberia. The report said that ‘the industry cannot claim to be unaware that timber is coming from a country gripped by armed conflict. It is our assertion, that in situations of armed conflict these companies should not be permitted to pursue business as usual.’231
Global Witness asked Ecobank what due diligence it did on its client OTC, and whether it could confirm its correspondent relationship with Citibank. Ecobank responded that ‘our records indicate no activity on that account during the period in question.’ However, it continued, ‘the period to which your enquiry refers was an extremely difficult time in Liberia and, as one might expect, Ecobank was not completely insulated from the crisis. Our offices were looted a number of times, and several of our files and computer systems were taken away or destroyed. This has created significant problems with information retrieval, and made transaction cross-referencing virtually impossible… Ecobank maintains KYC procedures that
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are in line with international standards, and is proactive in dealing with anti-money laundering matters.’232
The fact that Ecobank’s record-keeping system was so compromised during the conflict raises questions as to how Citibank could possibly be confident in its correspondent’s ability to monitor its clients.
Global Witness wrote to Citibank to ask what due diligence it did on its client Ecobank in Monrovia and its customers. We asked if it knew what measures its Liberian correspondent banks were using to assess their personal and corporate clients, and how it could be sure that the Liberian banks knew who their clients were given the instability of the situation in Liberia and the almost complete vacuum where effective government should have been, let alone appropriate financial regulation.
Citibank said it could not answer, adding that ‘Citi takes seriously its obligation to combat money laundering and terrorist financing…. Citi has adopted a Global Anti-Money Laundering and Anti-Terrorist Financing Policy that requires all Citi businesses worldwide to develop and implement effective programs to comply with applicable laws.233
When Citigroup, the owners of Citibank, were contacted in July 2003 by Greenpeace, which was working with Global Witness on the environmental impact of OTC’s logging, Citigroup responded that ‘We have conducted an extensive search of our records and were unable to identify any relationships with the Oriental Timber Company or any of the other associated companies.’234
This would appear to indicate a disturbing inability to trace information relating to correspondent banking relationships at Citibank. Global Witness asked Citibank if it had searched its correspondent banking records, as well as its records of direct banking relationships, when it replied to Greenpeace in 2003, and what action it had taken regarding the accounts after receiving the letter. Citibank said it could not respond.235
3. Fortis: receiving direct payments for conflict timber
OTC’s invoices also show that prior to November 2001, the company instructed its timber-purchasing customers to make their payments directly into an account at Fortis in Singapore.
Between December 2000 and September 2001, OTC instructed its timber purchasing clients in Europe, Asia and America to make at least 20 separate payments, worth at least $2.36 million, to a branch of Fortis in Singapore. OTC was requesting that its clients settle their bills to an account of Natura Holdings PTE Ltd at Fortis in Singapore, account number NSO190 and Swift code MEESSGSGTCF.236 Global Witness has previously documented some of the complex corporate history of Natura Holdings and its relationship with OTC. 237
Again, given the number of separate invoices with the same bank details, it is reasonable to assume that these payments were indeed being made. However, there was no indirect correspondent relationship here; these were payments made directly into an account at Fortis.
This means that Fortis was processing timber payments that were fuelling West Africa’s wars. Global Witness wrote to Fortis to ask about these payments, but it said it could not answer.
At the time of these payments to Fortis, banks in Singapore were required by their regulator to do customer due diligence.238
As the UN Panel of Experts was already publicly documenting, money from timber sales was being used to purchase weapons that were being used against civilians, and OTC had been named as being involved. At the time of the payments to OTC’s dollar account at Fortis, the
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following information about the links between timber and the Liberian conflict was publicly available:
• In December 2000, a UN Panel of Experts highlighted the active role of the Liberian timber industry in arms shipments that were fuelling the civil war in Sierra Leone, and named the Oriental Timber Company as being involved in this trade.239
• In March 2001, the UN Security Council placed Liberia under an arms embargo and imposed sanctions on the sale of rough diamonds from Liberia.240
• From June 2001 until December 2008, Gus Kouwenhoven, OTC’s boss, was put on a UN travel ban list.241
Global Witness wrote to Fortis to ask what due diligence it had had done on its client Natura Holdings Pte and its sources of income, and whether it filed any suspicious activity reports relating to the account. Fortis responded to say that ‘following the strict rules for client confidentiality, more specific those rules that we are subject to under Singapore law,’ it could not comment.242
Even if Fortis did identify its client and its source of income, however, there was not then – and still is not now – any requirement to turn down funds that derive from sales of natural resources that are fuelling conflict.
Global Witness asked the OCC, Citibank’s regulator in the US, and the Monetary Authority of Singapore, which regulates Fortis’s Singapore branch, if their attention had been drawn to these accounts or transactions, and if any action had been taken. The OCC responded that it was unable to comment on the scope, knowledge or extent of its confidential supervisory activities, but added that it would review the information concerning the OTC transactions at Citibank and would ‘forward it to the Examiner-in-Charge of Citibank for supervisory consideration.’243
The Monetary Authority of Singapore pointed out that as part of its supervisory responsibilities it had implemented the 2004 Taylor asset freeze, and commented: ‘when the allegations against a Singapore company, Borneo Jaya Pte Ltd,244 with apparent links to a sanctioned Liberian company, Oriental Trading Company, were first made, Singapore’s Ministry of Foreign Affairs had asked both the UNSC’s Panel of Experts of the Liberia Sanctions Committee and the Sanctions Committee itself for more specific information that would allow Singapore to properly investigate the matter. Unfortunately we did not receive specific information that would have enabled us to investigate the matter further.’245
What happened next?
Global Witness’s concerns about Charles Taylor and his use of Liberia’s timber have since been vindicated.
• Charles Taylor is currently on trial for war crimes at the Special Court for Sierra Leone, sitting in the Hague.
• Timber sanctions were finally imposed on Liberia in July 2003 – after several years of opposition from France and China, both significant importers of Liberian logs.246 Sanctions were lifted in June 2006 despite concerns from Global Witness and other experts that there were not yet sufficient safeguards in place to prevent predatory logging practices.247
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• On 7 March 2003, the Special Court for Sierra Leone called on all states to locate and freeze any bank accounts linked to Taylor and others under investigation for war crimes in Sierra Leone.248
• In March 2004, the UN called on all states to freeze the assets of Charles Taylor, his family members and associates, and other individuals associated with his regime including alleged arms dealers. The freeze was implemented in the US through Presidential Executive Order 13348 of 22 July 2004.249 Global Witness asked Citibank if, in addition to checking its own accounts for these individuals, it scrutinised its correspondent accounts with Liberian banks at this point, in order to ensure that the individuals on the asset freeze list were not able to obtain indirect access to the global financial system. Citibank declined to respond.250
• A multi-stakeholder review of Liberia’s forest concessions in 2005 (which concluded that none of the concessions were in compliance with the minimum legal criteria) found that after Taylor took office in the late 1990s, less than 14% of all timber taxes assessed were actually paid into government accounts and used to fund governmental functions or development.251
As a result of some of these revelations, Guus Kouwenhoven, OTC’s president, was prosecuted in the Netherlands for war crimes and breaking a UN arms embargo. He was initially convicted at trial in June 2006 of breaking the UN arms embargo on Liberia,252 however his conviction was subsequently overturned at appeal in March 2008 on grounds of contradictory witness testimony.253
In 2004 Citibank announced an anti-illegal logging initiative, whereby it requires timber firms seeking loans to make representations about their compliance with logging laws, and bankers managing relationships with companies involved in logging to conduct an annual risk assessment.254
As a result of the US Patriot Act, which belatedly recognised the inherent risks of correspondent banking (which are that a bank cannot know who all of its correspondent bank’s individual clients are), Citibank should since July 2002 have been compelled to implement the new regulatory standards on correspondent banking, which focus on ensuring that the foreign correspondent bank wanting access has got sufficient customer due diligence systems in place and is sufficiently regulated itself. These standards require banks to understand the ownership structure of their correspondent bank and whether it provides correspondent services to other foreign banks, and to conduct enhanced scrutiny of the account and report any suspicious transactions.255 These are similar to the standards set out in FATF Recommendation 7. Global Witness wrote to Citibank to ask how it does customer due diligence on correspondent accounts these days; and whether it still maintains correspondent relationships with Liberian banks; it declined to respond.256
Global Witness understands from its sources that some major banks in the US have terminated some of their correspondent relationships as a result of the new rules.257
Global Witness also asked Citibank and Fortis, as well as LBDI and Ecobank, if they have systems in place to recognise the proceeds of conflict resources, even if they have not directly been embargoed, in order to prevent themselves from being embroiled in such a situation in the future. Citibank, Fortis and Ecobank did not answer the question; LBDI said it did not have such systems in place.258
Global Witness then asked the OCC and the Singaporean and Belgian regulators about the due diligence requirements for a financial institution doing business with a company
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operating in a conflict zone, and what guidance is provided to financial institutions doing business in conflict zones. The Monetary Authority of Singapore did not respond to this question. The Belgian regulator – the Banking Finance, and Insurance Commission – which is one of Fortis’s home regulators, replied: ‘there is to our knowledge no requirement or guidance, either at the international or at the national level, specifically applicable to operations or activities of credit institutions in conflict zones. Nevertheless, the specific risks linked to such operations and activities are included, at a more general level, within the scope of the standards concerning customer due diligence and the prevention of the use of the financial sector for the purpose of money laundering.’ The OCC responded in a similar vein.259
Although banks are already required to do customer due diligence and all claim to have put systems in place in order to comply with their regulators, Global Witness fears that this may not be enough to steer banks away from the devastating and largely unregulated trade in conflict resources, particularly where the international community has been slow to impose sanctions. Specific guidance should be given to financial institutions so that they can identify and avoid doing business with those that are trading natural resources that are fuelling conflict. At the moment, there is no regulation in place that would prevent this situation happening again.
Conclusion
PULL OUT QUOTE: The conflict in Liberia is over. But resource-driven conflict has reignited once again in Democratic Republic of Congo (DRC). Which banks are handling the profits of the minerals that are fuelling Congo’s war?
It ought to have been common sense. It was known internationally that Liberia was in a mess of epic proportions, and that the UN was involved. A bank with ethics would not have been doing business with timber traders at a time when concerns were being raised about timber fuelling the war. Once again, however, it was UN investigators and NGOs who brought attention to this situation, rather than the regulators, who were not required to keep a watch for situations like this. Meanwhile, the banks have allowed their reputations to be besmirched.
The conflict in Liberia is over. But resource-driven conflict has reignited once again in Democratic Republic of Congo (DRC). Which banks are handling the profits of the minerals that are fuelling Congo’s war? The provinces of North and South Kivu, in eastern DRC, are rich in cassiterite (tin ore), gold and coltan. The desire to gain or maintain control of these mines and the resulting trade has been a central motivating factor for all the warring parties since 1998. Ten years on, rebel groups as well as units and commanders of the Congolese national army continue to enrich themselves directly from the mineral trade and are able to access international markets. Some groups dig the minerals themselves, others force civilians to work for them, or extort ‘taxes’ in minerals or cash. The profits they make enable them to keep fighting, exerting an unbearable toll on the civilian population, just as the profits from timber supported Taylor’s wars in Sierra Leone and Liberia.260
Global Witness has already called on the companies that are buying Congolese minerals to exercise stringent due diligence on their mineral supplies.261 But the banks that facilitate payments for these minerals and bank the profits that companies make from them should also exercise stringent due diligence to avoid handling the proceeds of minerals that are fuelling this conflict.
When a country is unstable, there should be an extra duty of due diligence on banks doing business in that country – whether directly or through a correspondent relationship – to ensure that they are not dealing in any way with natural resources that are fuelling conflict. When
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setting up, or maintaining, a correspondent relationship in such circumstances, they must take rigorous steps to satisfy themselves that their potential correspondent bank is not fronting for or doing business with warlords or those who are funding conflict.
The anti-money laundering regulations might have been developed since this time, but they still do not explicitly tackle transactions that may be fuelling conflict. Nor do the standards of the Wolfsberg Group, of which Citibank is a member.
The next chapter moves onto another bank in a relationship with one of the worst regimes in the world: Deutsche Bank and Turkmenistan. However, this is hardly a correspondent relationship, but a major relationship worth billions of dollars.
Action needed:
• Banks should be required to develop systems to recognise and avoid the proceeds of conflict resources, regardless of whether official sanctions have yet been applied.
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[miriammuraba]

read the rest at:
www.globalwitness.org/media_library_get.php/843/en/undue_diligence_lowres.pdf

[afanwi elvis]

Mar 21, 2010 7:58:38 GMT 4 miriammuraba said:

for Mr Sassou Nguesso, would face any disciplinary action for having done so; and about whether Anguilla had any policies regarding sanctions for its trust and company service providers; he did not respond to these questions. 194
A 2007 report by the UK’s National Audit Office (NAO) into the UK’s management of risk in the Overseas Territories for which it is responsible, including Anguilla, noted that only two suspicious activity reports were filed in Anguilla during 2005.195 In 2003, the IMF had called on the Anguillan authorities to ‘investigate the reasons for the small number of suspicious activity reports filed to date.’196 While regulators do not want to encourage financial institutions to engage in trivial suspicious activity reporting to cover their backs, the NAO noted that ‘global experience shows that as tougher requirements are imposed and enforced, and effective awareness programmes implemented, the number of valid suspicious transaction reports rises substantially.’197 The NAO report also noted that:
• ‘Anguilla has not created a separate agency to market its financial services overseas, freeing the regulator from involvement in this potentially conflicting activity’
• ‘An IMF report in 2003 referred to the need to broaden the professional and managerial capacity of the Anguilla Commission, and to the absence of sufficient skilled persons to analyse and investigate suspicious transaction reports.’
• ‘There are doubts over the extent of compliance with “know your customer” requirements. The IMF’s 2003 review of Anguilla identified difficulties obtaining customer information from overseas sub agents and recommended a tightening of procedures. When the Anguillan Regulator conducted on-site checks in 2004 most agents did not have copies of the code of practice issued by the professional association, and there were numerous instances of deficient or incomplete documentation.’
• ‘The Anguillan regulator’s policy towards non-compliance in anti-money-laundering practice has been to encourage raised standards through education, rather than to apply sanctions on the most deficient agents. It is not evident that this has been a successful strategy. Police and Industry sources in Anguilla expressed the view to us that there are still a minority of financial service providers in the Territory which they believed would accept “any business”.’198
Global Witness asked the FSC if the concerns raised in the 2003 IMF report had been addressed. It did not respond to this question.199 In Global Witness’s view, the IMF’s concerns have been made manifest in the story of Denis Christel Sassou Nguesso and his credit cards.
PULL OUT QUOTE: In a recent speech on terrorism and its financing, the Chancellor of the Exchequer made a clear commitment that HM Treasury will work more closely with the financial sector in identifying suspicious transactions. He compared the forensic accounting measures required to tackle terrorist financing with the groundbreaking achievements at Bletchley Park during the Second World War. This is welcome and should also be applied with the same vigour and supportive resources to the proceeds of corruption as well as the financing of terrorism. After all, if a country’s health budget is misappropriated, for example, the results can also threaten safety.’
Africa All Party Parliamentary Group, The Other Side of the Coin: the UK and Corruption in Africa, March 2006
Regulation of the Anguillan financial services industry is the direct responsibility of the UK-appointed Governor, and thus is also the responsibility of the UK.200 By failing to ensure that
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Anguilla is enforcing appropriate anti-money laundering regulations on its company and trust service providers, the UK also bears some responsibility for Mr Sassou Nguesso’s spending of Congo’s oil money on designer shopping sprees.
Conclusion
This story shows that the PEP provisions, which require banks to do extra due diligence if they are dealing with a PEP, are meaningless if the initial due diligence fails at the first hurdle to identify that the customer is indeed a PEP. This is why the identification of the ultimate beneficial owner of an entity such as Long Beach is so important. If banks cannot do this themselves, all the way to the natural person at the top of the chain, they should not be taking the business in the first place. Banks should not be able to rely solely on intermediaries to do their due diligence for them.
This story also shows that FATF was able to identify some of the failings in the Hong Kong and Anguilla regulatory systems which may have contributed to these transactions taking place. This is one of the things that FATF is able to do: identify problems relating to the current form of the 40 Recommendations.
But then there are two problems. Firstly, Hong Kong, despite the criticisms in 2003, had not raised its game on the most concerning issues by the time of its next evaluation four years later. Had FATF applied enough public pressure to make this happen?
Secondly, the story in this chapter is an example of a loophole that FATF is well aware of, but is not prepared to tackle properly. A FATF typologies exercise on PEPs, carried out in 2003-4, at the time the Long Beach account was being opened, identified precisely the mechanisms used by Mr Sassou Nguesso. It began by commenting that ‘PEPs that come from countries or regions where corruption is endemic, organised and systemic seem to present the greatest potential risk,’ then noted that ‘PEPs involved in moving or concealing illegal proceeds generally do so by funnelling the funds through networks of shell companies… in locations outside his or her country of origin that are not likely to divulge details of relevant transactions. In other cases, their financial operations may be concealed behind various other types of opaque legal arrangements such as trusts. Again, the ability of a financial institution to conduct full due diligence and apply know-your-customer principles to PEPs in this instance is severely restricted.’201
This could be a description of the Long Beach story. FATF knows what the problem is.
But FATF does not seem prepared to do what is necessary to tackle it. The typologies report continued: ‘According to one FATF member, there are two principal ways in which to detect the illegal financial activities of a PEP. The first is when there is a change in government in the home country of the PEP, and his or her illegal activities are revealed by the successor regime. …The second way… is through suspicious or unusual transactions in which persons acting on his or her behalf may be involved.’202
Global Witness would suggest that there is a third, much more powerful way to detect the illegal financial activities of a PEP, and that is our favourite word: transparency. If all jurisdictions published registries of beneficial ownership and control of companies and legal arrangements such as trusts, it would be clear even to the population of the PEP’s country that he, a family member or one of his close advisers was opening shell companies to move money around. The current rules are not sufficient to deal with a problem that FATF itself has identified.
This story therefore also illustrates that FATF needs to do much more, at both levels – what it requires from member states for compliance, and how it ensures that they are enforcing their regulations.
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Each chapter of this report so far has dealt with the misappropriation of natural resource revenues, with examples of poor countries’ patrimony being squandered for the benefit of their ruling elite. The next chapter takes the ultimate example of this, one which led to vicious conflict: Liberia. In this next story, Global Witness investigates the involvement of what was until recently the world’s biggest bank with one of the world’s – at the time – most damaged countries.
Actions needed
• Hong Kong should regulate trust and company service providers to ensure that they comply with anti-money laundering regulations.
• Hong Kong should make it a legal requirement to perform customer due diligence.
• The Anguillan authorities should investigate the role of Orient Investments and Pacific Investments in setting up a corporate structure for Denis Christel Sassou Nguesso, if they have not done so already, and ensure that their officers pass an appropriate fit and proper person test to hold a corporate service provider licence.
• The UK should take responsibility for ensuring that its Overseas Territories do not provide services that facilitate corruption.
• Every jurisdiction should publish an online registry of beneficial ownership of companies and trusts. Such transparency should become a mandatory criterion for jurisdictions to be in compliance with FATF Recommendations 33 and 34, which require countries to prevent misuse of corporate vehicles and legal arrangements such as trusts.
• FATF should undertake a new name and shame list focusing on countries – including its own members – that are not implementing their regulations, rather than on the existence of a legal framework.
• FATF should publish a clearly accessible roster of each country’s compliance status with each of the FATF recommendations, and the date by which that country has to comply, in order to increase the public pressure for compliance.
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6. Citibank, Fortis and Liberia’s logs of war: doing business with conflict resources
There are few more stark examples of a country’s wealth being pillaged and squandered by its ruler than Liberia under Charles Taylor. This one-time warlord, who launched an uprising in the west African state in 1989, became its elected president in 1997 after a devastating civil war. Civil conflict erupted again in 2000.
Taylor stepped down as president in 2003 and is now on trial in the Hague for crimes against humanity in neighbouring Sierra Leone, where he backed a rebel group notorious for savage violence against civilians. 203 The war in Sierra Leone is estimated to have cost 50,000 lives.204
The history of Taylor’s rule reveals a loophole in the regulation of banks, through which the funding for appalling war crimes can flow. This chapter will show that at a time when Taylor was fomenting war and atrocity, funded by Liberia’s timber, he and his cronies were able to access the global banking system via Citibank, until recently the world’s largest bank, and the Dutch/Belgian bank Fortis.
Citibank did not hold an account directly for Taylor or his government. But it acted as a correspondent bank for a Liberian bank, Liberian Bank for Development and Investment (LBDI), that did both these things. As noted previously in the Riggs chapter, a correspondent bank is one which holds an account for another bank, allowing the second bank to provide services to its customers in a country in which it does not itself have a presence. Citibank also acted as a correspondent bank for another Liberian bank, Ecobank, that was receiving payments for the timber that was fuelling the war. A branch of Fortis in Singapore received these payments directly.
PULLOUT QUOTE: The history of Taylor’s rule reveals a loophole in the regulation of banks, through which the funding for appalling war crimes can flow.
So this is a story about how Citibank held correspondent relationships with banks in a country that was in absolute meltdown. Correspondent relationships are normal and legitimate in the banking industry. But in this case, they enabled a vicious warlord to use the global banking system to earn revenues from timber sales, which were then ploughed into his war effort, as well as into his own bank account.
The question raised by this story is: what should Citibank and Fortis have known about Liberia, and about the nature of their clients there? And what should regulators do to prevent the abuse of the banking system by warlords like Taylor?
From January 2001 onwards, Global Witness as well as other NGOs and the UN repeatedly documented how Liberia’s timber exports were being used to pay for weapons and ammunition. Taylor used these arms to support a campaign of terror waged in Sierra Leone by the rebels of the Revolutionary United Front. Timber profits were also used to pay for Taylor’s own security forces in Liberia, which were implicated in numerous human rights abuses.205
At the centre of this trade was the Oriental Timber Company (OTC), run by Dutch national Guus Kouwenhoven, a close associate of Taylor. OTC had been granted the rights to manage a massive 1.6 million hectare logging concession, 42% of Liberia’s total productive forest, and also controlled the port of Buchanan through which arms shipments were entering Liberia. OTC used logging roads to bring the timber out of Liberia, and to move the weapons in and across the border with Sierra Leone. Like other logging companies in Liberia, OTC
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maintained notorious private militias which committed human rights violations against Liberian civilians.206
OTC (also known to Liberians as ‘Only Taylor Chops’) was one of the key props of Taylor’s shadow state, which whittled away the bureaucracy of national government to almost nothing in favour of strategic economic alliances with external actors. These actors included both multinational companies, such as those trading rubber, as well as those operating in the black market such as arms dealers and gem smugglers. These economic alliances with willing international partners – forged before 1997 when Taylor was a warlord, and after the 1997 election with the full weight of sovereignty behind him – were to a great extent the source of Taylor’s strength, affording him the means to sponsor atrocities at home and in neighbouring countries in order to pursue his ambitions of regional destabilisation.207
1. Citibank, the correspondent account and Charles Taylor
In July 2000, the Liberian Ministry of Finance sent a letter to the general manager of OTC, instructing him to transfer $2 million ‘against forestry-related taxes’ to an account at the Liberia Bank for Development and Investment (LBDI). Global Witness has a copy of this letter which gives the number of the account at LBDI as 0020132851-01. The letter said that the transfer was to be made through Citibank, 399 Park Avenue, New York.208
A UN Panel of Experts on Liberia, mandated by the Security Council to ‘investigate sanctions on arms, diamonds, and individuals and entities deemed a threat to regional peace,’ revealed in a 2007 report that this bank account at LBDI belonged to Charles Taylor. The panel published a bank statement issued by LBDI which identifies the holder of account 0020132851-01 as ‘Taylor, Charles G.’ and describes it as ‘US dollar checking accounts – personal,’ as well as a debit ticket for the deposit of the funds into the account.209 In other words, Citibank was processing a payment of government timber revenues to a personal account at a Liberian bank in Taylor’s name.
The role of OTC and timber revenues in propping up Taylor’s brutal rule may not have been well known in mid-2000 when this $2 million transfer took place. Nor was it well known at this point that, as the Panel of Experts was later to report, Taylor’s government hid extra-budgetary income and spending by instructing OTC to make payments to various bank accounts around the world (including those of alleged arms dealers), rather than to the government’s own account for tax receipts.210
But it was well known at the time that Taylor was a former warlord who had plunged his country into a devastating civil war. A series of articles in the Washington Post in 1999 and the first half of 2000 reported on Taylor’s reign of chaos in Liberia as well as his support for the vicious rebels in neighbouring Sierra Leone.211 The US State Department’s annual human rights report for 1999 painted a d**ning picture of the human rights record of Taylor’s regime.212
Banks that hold correspondent accounts cannot be expected to know who all of their correspondent banks’ individual clients are. This is why correspondent banking is recognised as presenting a high risk of money laundering. The best defence that banks have against correspondent risk is careful due diligence of the correspondent bank itself. What are its know your customer procedures? What type of customers does it accept? How well does it keep customer records? How well is it regulated? In other words, if the major bank cannot do due diligence on every single customer of its correspondent, it should at least understand its correspondent’s ability to do so, and the environment in which it is operating.213 Given the well-known and well-reported state of mayhem in Liberia, it is not clear how Citibank could have reassured itself that its correspondent bank, LBDI, had good anti-money laundering systems in place.
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At the time of this payment there was no explicit legal requirement to do due diligence on the correspondent client. (This changed in July 2002 when the correspondent banking provisions of the Patriot Act came into force.214) However, under the 1970 Bank Secrecy Act, US banks were already required to do due diligence on their customers, and guidance on how to meet these requirements, published in 1993 by the OCC, Citibank’s regulator, highlighted that banks needed to know their correspondent banks’ business.215 In its response to a survey of US banks’ correspondent relationships by the US Senate Subcommittee on Investigations, published in February 2000, Citibank said that it did determine an applicant bank’s primary lines of business.216
Global Witness wrote to Citibank in July 2008 to ask what due diligence it had done on LBDI and its know your customer procedures, and whether it had ever filed any suspicious activity reports in relation to LBDI. Global Witness also asked if Citibank knew that one of its correspondent’s customers was the president of Liberia, and whether it knew that government timber revenues were being diverted into his account. Citibank replied but declined to answer these questions: ‘In accordance with Citi policy and general principles underlying applicable law, I am unable to confirm or deny whether a person is a Citi customer or to provide the other information requested.’217
The correspondent account held by LBDI at Citibank in New York featured in another of the letters from the Liberian Ministry of Finance to OTC. Global Witness has a copy of the letter which shows that on 10 April 2001, OTC was instructed to pay US $1.5 million in lieu of forestry taxes ‘to Liberia Bank for Development and Investment through: Citibank, 399 Park Avenue, New York, NY 10043, A/C#36006105.’218
Stephen Rapp, Chief Prosecutor of the Special Court for Sierra Leone, where Taylor is currently on trial, has spoken to the press about his search for Taylor’s wealth. Quoted in a Sierra Leonean newspaper, Rapp mentions ‘two accounts in the US in which there were $5 billion of activity… but a lot of it was money moving back and forth between the two accounts in order to maximize daily interest payments. But at least $375 million we’ve identified as moving out of those accounts into other banks in the US and elsewhere around the world…’219 Mr Rapp subsequently confirmed this information to Global Witness.
The accounts were closed, according to Reuters, in December 2003, four months after Taylor stepped down as President.220 According to Global Witness sources, at least one of the accounts Mr Rapp is referring to is this LBDI account at Citibank.221
A third letter from the Ministry of Finance to OTC, dated 29 May 1999, instructs OTC to pay $2.5 million in lieu of forestry taxes to ‘GOL Tax a/c #111-000043 through ABA-021-000089 Citibank NA, 399 Park Ave, New York NY 10043, A/C#36006105 FFC.’222 FFC is likely to mean ‘for further credit,’ and this last account number is the same as the LBDI account above, suggesting that this payment for the Government of Liberia tax account was also destined for the same LBDI account at Citibank.
Global Witness asked Citibank what due diligence it had done to identify the beneficial owners and source of funds of these accounts; whether it had monitored ongoing transactions through the accounts; and whether it had ever filed any suspicious transaction or suspicious activity reports relating to these accounts. Again, Citibank said it could not answer.223
Over in Monrovia, however, LBDI was rather more forthcoming. In response to Global Witness’s enquiries, it confirmed that it did hold account number 36006105 at Citibank, and that it was opened in the 1960s. The authorised signatories were LBDI ‘Executive Managers’. Global Witness asked LBDI what due diligence it had done on the ultimate beneficiaries of the account, that is, its own customers. It responded: ‘LBDI followed its Know Your
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Customer special operating procedure to the extent possible. The account is a correspondent banking relationship and the ultimate beneficiaries are LBDI customers who are diverse.’224
LBDI enclosed a know-your-customer profile checklist used for new customers, dated 2003 (long after the account was opened). While it asks if a customer’s identity and a transparent source of funds have been identified and verified, there is no mention of politically exposed persons. It does, however, require that customers be informed that ‘their account could and will be monitored from time to time in compliance with the CBL provisions, LBDI regulations and the Patriot Act at the request of our correspondent bank, Citibank’ and that ‘Citibank may cease any transfer deem to the suspicious [sic] by Citibank’. LBDI did not make it clear if this policy was in operation before 2003, and did not respond to further requests from Global Witness to clarify this point.
LBDI said it had never filed any suspicious activity reports relating to the account, as ‘there was never any suspicious activity observed.’
LBDI said that this correspondent account at Citibank was closed in November 2003, and provided correspondence between LBDI and Citibank about the closure. It appeared to have nothing to do with the change of government in Liberia: Citibank was withdrawing from 14 countries for strategic reasons. A representative of Citigroup in Johannesburg wrote to LBDI saying: ‘Citigroup is repositioning its NPC Africa operations to focus on customers in specific countries which we can best serve given our product offering and infrastructure located in Johannesburg. As a result of this repositioning, Citigroup will no longer be able to service customers in Liberia in an appropriate manner. It is for this reason that we are advising you that we will no longer be able to continue maintaining your above-noted account(s) and are requesting that you make alternative banking arrangements.’ The accounts referred to are US dollar accounts 36006105 and 36071783.225 Global Witness does not have any other information about this second account.
This means that Citibank kept its correspondent relationship with LBDI open all the way through Liberia’s worst years, at a time when the last thing the country needed was a US bank willing to process dollar payments into Taylor’s account, and during which Liberian banks had very little ability to find out who their customers were and keep appropriate records. It then ended the relationship just as Liberia was entering a potentially more stable post-Taylor transitional period and was most in need of access to international financial markets in order to rebuild itself.
In May 2008, however, Citibank’s Johannesburg office wrote to LBDI to ‘reiterate our desire as an institution to re-establish correspondent banking activities with LBDI.’ The letter continued, ‘The relationship we had in the past over approximately a 12-13 years period was strong and without any major incident. Unfortunately, as explained in our mails…due to a strategic decision linked to our inability to best serve clients [sic] needs in Liberia, we were forced to end our relationship with your bank… We hope that this letter gives you enough comfort and enables us to rekindle what was once a great partnership.’226 Global Witness asked LBDI if it planned to renew its relationship with Citibank; it did not reply.
2. Citibank, another correspondent relationship, and payments for ‘conflict timber’
As well as the letters from the Liberian Ministry of Finance instructing OTC to make various payments in lieu of forestry taxes, Global Witness also has copies of the invoices OTC sent to its timber-purchasing clients in Europe, Asia and America.
Between November 2001 and April 2002, operating under the name Evergreen Trading Corporation, OTC instructed its timber-purchasing clients around the world to make at least
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37 separate payments for timber through a branch of Citibank at 111 Wall Street in New York. OTC was requesting that its clients settle their bills to Evergreen’s dollar account at Ecobank Liberia, account number 1021-0022-81201-7, routed through the Wall Street branch of Citibank in New York, swift code CITIUS33, ‘For credit to Ecobank Liberia Limited, Account Number 36147565.’227 Given the number of separate invoices with the same bank details, it is reasonable to assume that these payments were indeed being made.
This means that Citibank, through its correspondent relationship with Ecobank, was processing timber payments that were fuelling West Africa’s wars. Global Witness wrote to Citibank to ask about these payments, but it said it could not answer.
As with the LBDI relationship, Citibank cannot be expected to know every single one of its Ecobank’s clients. However, by the time these payments began in November 2001, new guidance had been issued to US banks on knowing their correspondent banks. In September 2000, Citibank’s regulator, the OCC, published the Bank Secrecy Act / Anti-Money Laundering Handbook to help them meet their AML obligations under the 1970 Bank Secrecy Act and the 1986 Money Laundering Control Act. Recognising that correspondent banking relationships represented a higher risk, particularly if they were conducting wire transfers, it said: ‘Information should be gathered to understand fully the nature of the correspondent’s business. Factors to consider include the purpose of the account, whether the correspondent bank is located in a bank secrecy or money laundering haven… the level of the correspondent’s money laundering prevention and detection efforts, and the condition of bank regulation and supervision in the correspondent’s country.’228
Even if Citibank was not able to see the beneficiaries of individual wire transfers through Ecobank’s account in New York, basic research into the type of clients that a Liberian bank such as Ecobank was serving might have revealed the importance of timber to Liberia’s economy. By the time of these payments, the following information was in the public domain linking Liberian timber to funding for the war in Sierra Leone and Liberia:
• In September 2001, Global Witness published Taylor-made: The pivotal role of Liberia’s forests and flag of convenience in regional conflict, which showed how the Liberian timber industry, with OTC at the fore, was being used to fund Taylor’s support for the rebels in Sierra Leone, and which called for sanctions on Liberian timber.229
• In October 2001, a UN Panel of Experts report said that Liberian timber production was a source of revenue for sanctions busting, and said that a payment for weapons delivery was made to an arms trafficking company by the Singapore parent company of OTC, Borneo Jaya Pte.230
• In March 2002, Global Witness published The Logs of War: The Timber Trade and Armed Conflict, which elaborated the ways in which timber companies, and specifically OTC, were deeply involved in supporting the violence in Sierra Leone and Liberia. The report said that ‘the industry cannot claim to be unaware that timber is coming from a country gripped by armed conflict. It is our assertion, that in situations of armed conflict these companies should not be permitted to pursue business as usual.’231
Global Witness asked Ecobank what due diligence it did on its client OTC, and whether it could confirm its correspondent relationship with Citibank. Ecobank responded that ‘our records indicate no activity on that account during the period in question.’ However, it continued, ‘the period to which your enquiry refers was an extremely difficult time in Liberia and, as one might expect, Ecobank was not completely insulated from the crisis. Our offices were looted a number of times, and several of our files and computer systems were taken away or destroyed. This has created significant problems with information retrieval, and made transaction cross-referencing virtually impossible… Ecobank maintains KYC procedures that
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are in line with international standards, and is proactive in dealing with anti-money laundering matters.’232
The fact that Ecobank’s record-keeping system was so compromised during the conflict raises questions as to how Citibank could possibly be confident in its correspondent’s ability to monitor its clients.
Global Witness wrote to Citibank to ask what due diligence it did on its client Ecobank in Monrovia and its customers. We asked if it knew what measures its Liberian correspondent banks were using to assess their personal and corporate clients, and how it could be sure that the Liberian banks knew who their clients were given the instability of the situation in Liberia and the almost complete vacuum where effective government should have been, let alone appropriate financial regulation.
Citibank said it could not answer, adding that ‘Citi takes seriously its obligation to combat money laundering and terrorist financing…. Citi has adopted a Global Anti-Money Laundering and Anti-Terrorist Financing Policy that requires all Citi businesses worldwide to develop and implement effective programs to comply with applicable laws.233
When Citigroup, the owners of Citibank, were contacted in July 2003 by Greenpeace, which was working with Global Witness on the environmental impact of OTC’s logging, Citigroup responded that ‘We have conducted an extensive search of our records and were unable to identify any relationships with the Oriental Timber Company or any of the other associated companies.’234
This would appear to indicate a disturbing inability to trace information relating to correspondent banking relationships at Citibank. Global Witness asked Citibank if it had searched its correspondent banking records, as well as its records of direct banking relationships, when it replied to Greenpeace in 2003, and what action it had taken regarding the accounts after receiving the letter. Citibank said it could not respond.235
3. Fortis: receiving direct payments for conflict timber
OTC’s invoices also show that prior to November 2001, the company instructed its timber-purchasing customers to make their payments directly into an account at Fortis in Singapore.
Between December 2000 and September 2001, OTC instructed its timber purchasing clients in Europe, Asia and America to make at least 20 separate payments, worth at least $2.36 million, to a branch of Fortis in Singapore. OTC was requesting that its clients settle their bills to an account of Natura Holdings PTE Ltd at Fortis in Singapore, account number NSO190 and Swift code MEESSGSGTCF.236 Global Witness has previously documented some of the complex corporate history of Natura Holdings and its relationship with OTC. 237
Again, given the number of separate invoices with the same bank details, it is reasonable to assume that these payments were indeed being made. However, there was no indirect correspondent relationship here; these were payments made directly into an account at Fortis.
This means that Fortis was processing timber payments that were fuelling West Africa’s wars. Global Witness wrote to Fortis to ask about these payments, but it said it could not answer.
At the time of these payments to Fortis, banks in Singapore were required by their regulator to do customer due diligence.238
As the UN Panel of Experts was already publicly documenting, money from timber sales was being used to purchase weapons that were being used against civilians, and OTC had been named as being involved. At the time of the payments to OTC’s dollar account at Fortis, the
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following information about the links between timber and the Liberian conflict was publicly available:
• In December 2000, a UN Panel of Experts highlighted the active role of the Liberian timber industry in arms shipments that were fuelling the civil war in Sierra Leone, and named the Oriental Timber Company as being involved in this trade.239
• In March 2001, the UN Security Council placed Liberia under an arms embargo and imposed sanctions on the sale of rough diamonds from Liberia.240
• From June 2001 until December 2008, Gus Kouwenhoven, OTC’s boss, was put on a UN travel ban list.241
Global Witness wrote to Fortis to ask what due diligence it had had done on its client Natura Holdings Pte and its sources of income, and whether it filed any suspicious activity reports relating to the account. Fortis responded to say that ‘following the strict rules for client confidentiality, more specific those rules that we are subject to under Singapore law,’ it could not comment.242
Even if Fortis did identify its client and its source of income, however, there was not then – and still is not now – any requirement to turn down funds that derive from sales of natural resources that are fuelling conflict.
Global Witness asked the OCC, Citibank’s regulator in the US, and the Monetary Authority of Singapore, which regulates Fortis’s Singapore branch, if their attention had been drawn to these accounts or transactions, and if any action had been taken. The OCC responded that it was unable to comment on the scope, knowledge or extent of its confidential supervisory activities, but added that it would review the information concerning the OTC transactions at Citibank and would ‘forward it to the Examiner-in-Charge of Citibank for supervisory consideration.’243
The Monetary Authority of Singapore pointed out that as part of its supervisory responsibilities it had implemented the 2004 Taylor asset freeze, and commented: ‘when the allegations against a Singapore company, Borneo Jaya Pte Ltd,244 with apparent links to a sanctioned Liberian company, Oriental Trading Company, were first made, Singapore’s Ministry of Foreign Affairs had asked both the UNSC’s Panel of Experts of the Liberia Sanctions Committee and the Sanctions Committee itself for more specific information that would allow Singapore to properly investigate the matter. Unfortunately we did not receive specific information that would have enabled us to investigate the matter further.’245
What happened next?
Global Witness’s concerns about Charles Taylor and his use of Liberia’s timber have since been vindicated.
• Charles Taylor is currently on trial for war crimes at the Special Court for Sierra Leone, sitting in the Hague.
• Timber sanctions were finally imposed on Liberia in July 2003 – after several years of opposition from France and China, both significant importers of Liberian logs.246 Sanctions were lifted in June 2006 despite concerns from Global Witness and other experts that there were not yet sufficient safeguards in place to prevent predatory logging practices.247
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• On 7 March 2003, the Special Court for Sierra Leone called on all states to locate and freeze any bank accounts linked to Taylor and others under investigation for war crimes in Sierra Leone.248
• In March 2004, the UN called on all states to freeze the assets of Charles Taylor, his family members and associates, and other individuals associated with his regime including alleged arms dealers. The freeze was implemented in the US through Presidential Executive Order 13348 of 22 July 2004.249 Global Witness asked Citibank if, in addition to checking its own accounts for these individuals, it scrutinised its correspondent accounts with Liberian banks at this point, in order to ensure that the individuals on the asset freeze list were not able to obtain indirect access to the global financial system. Citibank declined to respond.250
• A multi-stakeholder review of Liberia’s forest concessions in 2005 (which concluded that none of the concessions were in compliance with the minimum legal criteria) found that after Taylor took office in the late 1990s, less than 14% of all timber taxes assessed were actually paid into government accounts and used to fund governmental functions or development.251
As a result of some of these revelations, Guus Kouwenhoven, OTC’s president, was prosecuted in the Netherlands for war crimes and breaking a UN arms embargo. He was initially convicted at trial in June 2006 of breaking the UN arms embargo on Liberia,252 however his conviction was subsequently overturned at appeal in March 2008 on grounds of contradictory witness testimony.253
In 2004 Citibank announced an anti-illegal logging initiative, whereby it requires timber firms seeking loans to make representations about their compliance with logging laws, and bankers managing relationships with companies involved in logging to conduct an annual risk assessment.254
As a result of the US Patriot Act, which belatedly recognised the inherent risks of correspondent banking (which are that a bank cannot know who all of its correspondent bank’s individual clients are), Citibank should since July 2002 have been compelled to implement the new regulatory standards on correspondent banking, which focus on ensuring that the foreign correspondent bank wanting access has got sufficient customer due diligence systems in place and is sufficiently regulated itself. These standards require banks to understand the ownership structure of their correspondent bank and whether it provides correspondent services to other foreign banks, and to conduct enhanced scrutiny of the account and report any suspicious transactions.255 These are similar to the standards set out in FATF Recommendation 7. Global Witness wrote to Citibank to ask how it does customer due diligence on correspondent accounts these days; and whether it still maintains correspondent relationships with Liberian banks; it declined to respond.256
Global Witness understands from its sources that some major banks in the US have terminated some of their correspondent relationships as a result of the new rules.257
Global Witness also asked Citibank and Fortis, as well as LBDI and Ecobank, if they have systems in place to recognise the proceeds of conflict resources, even if they have not directly been embargoed, in order to prevent themselves from being embroiled in such a situation in the future. Citibank, Fortis and Ecobank did not answer the question; LBDI said it did not have such systems in place.258
Global Witness then asked the OCC and the Singaporean and Belgian regulators about the due diligence requirements for a financial institution doing business with a company
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operating in a conflict zone, and what guidance is provided to financial institutions doing business in conflict zones. The Monetary Authority of Singapore did not respond to this question. The Belgian regulator – the Banking Finance, and Insurance Commission – which is one of Fortis’s home regulators, replied: ‘there is to our knowledge no requirement or guidance, either at the international or at the national level, specifically applicable to operations or activities of credit institutions in conflict zones. Nevertheless, the specific risks linked to such operations and activities are included, at a more general level, within the scope of the standards concerning customer due diligence and the prevention of the use of the financial sector for the purpose of money laundering.’ The OCC responded in a similar vein.259
Although banks are already required to do customer due diligence and all claim to have put systems in place in order to comply with their regulators, Global Witness fears that this may not be enough to steer banks away from the devastating and largely unregulated trade in conflict resources, particularly where the international community has been slow to impose sanctions. Specific guidance should be given to financial institutions so that they can identify and avoid doing business with those that are trading natural resources that are fuelling conflict. At the moment, there is no regulation in place that would prevent this situation happening again.
Conclusion
PULL OUT QUOTE: The conflict in Liberia is over. But resource-driven conflict has reignited once again in Democratic Republic of Congo (DRC). Which banks are handling the profits of the minerals that are fuelling Congo’s war?
It ought to have been common sense. It was known internationally that Liberia was in a mess of epic proportions, and that the UN was involved. A bank with ethics would not have been doing business with timber traders at a time when concerns were being raised about timber fuelling the war. Once again, however, it was UN investigators and NGOs who brought attention to this situation, rather than the regulators, who were not required to keep a watch for situations like this. Meanwhile, the banks have allowed their reputations to be besmirched.
The conflict in Liberia is over. But resource-driven conflict has reignited once again in Democratic Republic of Congo (DRC). Which banks are handling the profits of the minerals that are fuelling Congo’s war? The provinces of North and South Kivu, in eastern DRC, are rich in cassiterite (tin ore), gold and coltan. The desire to gain or maintain control of these mines and the resulting trade has been a central motivating factor for all the warring parties since 1998. Ten years on, rebel groups as well as units and commanders of the Congolese national army continue to enrich themselves directly from the mineral trade and are able to access international markets. Some groups dig the minerals themselves, others force civilians to work for them, or extort ‘taxes’ in minerals or cash. The profits they make enable them to keep fighting, exerting an unbearable toll on the civilian population, just as the profits from timber supported Taylor’s wars in Sierra Leone and Liberia.260
Global Witness has already called on the companies that are buying Congolese minerals to exercise stringent due diligence on their mineral supplies.261 But the banks that facilitate payments for these minerals and bank the profits that companies make from them should also exercise stringent due diligence to avoid handling the proceeds of minerals that are fuelling this conflict.
When a country is unstable, there should be an extra duty of due diligence on banks doing business in that country – whether directly or through a correspondent relationship – to ensure that they are not dealing in any way with natural resources that are fuelling conflict. When
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setting up, or maintaining, a correspondent relationship in such circumstances, they must take rigorous steps to satisfy themselves that their potential correspondent bank is not fronting for or doing business with warlords or those who are funding conflict.
The anti-money laundering regulations might have been developed since this time, but they still do not explicitly tackle transactions that may be fuelling conflict. Nor do the standards of the Wolfsberg Group, of which Citibank is a member.
The next chapter moves onto another bank in a relationship with one of the worst regimes in the world: Deutsche Bank and Turkmenistan. However, this is hardly a correspondent relationship, but a major relationship worth billions of dollars.
Action needed:
• Banks should be required to develop systems to recognise and avoid the proceeds of conflict resources, regardless of whether official sanctions have yet been applied.
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