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

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Corruption Profiles: Prosecution of Financial Intermediaries that Facilitate Corruption

Steven Durham, Deputy Chief

Fraud and Public Corruption Section

U.S. Attorney for the District of Columbia

U.S. Department of Justice

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Bank Secrecy Act that Facilitate Corruption

  • Primary anti-money laundering law for financial institutions;

  • Why does it exist?

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

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

  • Criminal penalties for willful violations.

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

  • Have a comprehensive AML program;

  • Engage in reasonable due diligence of customers and transactions;

  • Report certain activity;

  • Not aid and abet the laundering of money.

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Comprehensive AML Program that Facilitate Corruption(What Riggs Didn’t Have)

  • Implement internal policies, procedures and controls;

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

  • Conduct training of bank personnel;

  • Conduct internal or external audits to determine effectiveness;

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

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Engage in reasonable due diligence that Facilitate Corruption

  • Know your customer and likely transactions;

    • Customer identification

    • Understanding specific transactions

  • Level of risk will determine reasonableness of due diligence;

  • Talk is Cheap; Actions speak louder than words

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Special and Enhanced Due Diligence that Facilitate Corruption

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

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

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

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

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Report Specific Activity that Facilitate Corruption

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

  • SAR: suspicious activity reports

    • Knows, suspects or has reason to suspect

    • Illegal source

    • Not consistent with customer’s financial profile

    • Duty to investigate

    • Judgment call

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Criminal Enforcement that Facilitate Corruption

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

  • Systemic Failure/Pervasiveness

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Proving Willfulness that Facilitate Corruption

  • Individual knowledge;

  • Corporate or collective knowledge;

  • Willful blindness -- “flagrant institutional indifference”

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

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Riggs Bank that Facilitate Corruption

  • Founded 1837 in Washington, D.C.;

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

    • Banked 8 U.S. Presidents including Abraham Lincoln

    • 95% of all Embassy business

    • International Private Banking/Embassy Banking Division.

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Augusto Pinochet that Facilitate Corruption

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

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

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

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

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Account Opening Procedures that Facilitate Corruption

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

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

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

  • No attempt to reconcile declared wealth with actual deposits.

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Account Names and Nominees that Facilitate Corruption

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

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

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

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Offshore Accounts that Facilitate Corruption

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

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

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

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

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Moving Money that Facilitate Corruption

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

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

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

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Equatorial Guinea that Facilitate Corruption

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

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

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

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Offshore Corporations that Facilitate Corruption

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

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

  • Again, Bahamas was on FATF blacklist at time.

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Cash Deposits that Facilitate Corruption

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

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

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

  • No SARs filed, although clearly should have been.

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Mysterious Wire Transfers that Facilitate Corruption

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

  • Money likely embezzled from country’s revenues;

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

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Regulatory efforts that Facilitate Corruption

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

  • Bank generally refused or was unable to correct deficiencies;

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

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

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Systemic Deficiencies that Facilitate Corruption

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

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

  • Failing to monitor wire transactions;

  • No effective procedure for filing SARs (Riggs policy);

  • Poor audit function;

  • Poor training of employees.

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The End of the Bank that Facilitate Corruption

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

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

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