Corruption Profiles: Prosecution of Financial Intermediaries that Facilitate Corruption - PowerPoint PPT Presentation

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Corruption Profiles: Prosecution of Financial Intermediaries that Facilitate Corruption

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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 Primary anti ... – PowerPoint PPT presentation

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Title: Corruption Profiles: Prosecution of Financial Intermediaries that Facilitate Corruption


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

2
Bank Secrecy Act
  • Primary anti-money laundering law for financial
    institutions
  • Why does it exist?
  • Requires financial institutions to engage in
    certain activity to prevent the laundering of
    money
  • Civil and administrative enforcement by bank
    regulators and FinCEN, the US FIU
  • Criminal penalties for willful violations.

3
What Must a Financial Institution Do?(What Did
Riggs Fail to Do?)
  • Have a comprehensive AML program
  • Engage in reasonable due diligence of customers
    and transactions
  • Report certain activity
  • Not aid and abet the laundering of money.

4
Comprehensive AML Program(What Riggs Didnt Have)
  • Implement internal policies, procedures and
    controls
  • Appoint a compliance officer who is responsible
    USSG Sec 8B2.1(b)(2)(B) (C)
  • Conduct training of bank personnel
  • Conduct internal or external audits to determine
    effectiveness
  • USSG Sec. 8B2.1(b) (Promotion of an
    organizational culture)

5
Engage in reasonable due diligence
  • Know your customer and likely transactions
  • Customer identification
  • Understanding specific transactions
  • Level of risk will determine reasonableness of
    due diligence
  • Talk is Cheap Actions speak louder than words

6
Special and Enhanced Due Diligence
  • Calls for special due diligence for correspondent
    and private banking accounts involving foreign
    persons.
  • Enhanced due diligence for correspondent accounts
    maintained for offshore banks or those in high
    risk ML locations.
  • Enhanced scrutiny of private banking accounts
    maintained by senior foreign political leaders.
  • Learning from past mistakes USSG Sec. 8B2.1,
    Application Note 2(D).

7
Report Specific Activity
  • CTR in excess of 10,000 cash transactions
  • SAR suspicious activity reports
  • Knows, suspects or has reason to suspect
  • Illegal source
  • Not consistent with customers financial profile
  • Duty to investigate
  • Judgment call

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

9
Proving Willfulness
  • Individual knowledge
  • Corporate or collective knowledge
  • Willful blindness -- flagrant institutional
    indifference
  • Evaluated against the institutions duty to know
    as a result of the BSA

10
Riggs Bank
  • Founded 1837 in Washington, D.C.
  • The most important bank in the most important
    city
  • Banked 8 U.S. Presidents including Abraham
    Lincoln
  • 95 of all Embassy business
  • International Private Banking/Embassy Banking
    Division.

11
Augusto Pinochet
  • Leader or president of Chile 1973-90
    Commander-in-Chief of armed forces 1990-98
  • Allegations of significant human rights abuses,
    including murder, torture and kidnapping
  • By 1998, was in significant legal trouble
    October 1998 Spanish arrest warrant and
    worldwide freeze of all assets
  • Arrested in UK in 98 released and re-arrested in
    Chile in January 2001.

12
Account Opening Procedures
  • Federal banking regulators require banks to
    understand and document source of money
  • Pinochet deposited US 8 million into Riggs
    accounts, despite declaring less than US 1/2
    million on Chilean tax returns
  • No investigation or documentation of source of
    money by Riggs
  • No attempt to reconcile declared wealth with
    actual deposits.

13
Account Names and Nominees
  • After Pinochets legal troubles became apparent,
    Riggs allowed Pinochet accounts to be changed to
    wifes maiden name to prevent their discovery
  • Riggs maintained accounts for military attaches,
    knowing that they were actually for Pinochet
  • Internal Riggs documents consciously avoided
    referring to Pinochet by name.

14
Offshore Accounts
  • Riggs created two offshore shell corporations in
    the Bahamas for Pinochet in 1996 and 1998
  • Riggs accounts were in the name of the shell
    corporations rather than Pinochet
  • At the time, the Bahamas had been designated as a
    FATF blacklist country
  • Bank regulators advised caution in dealing with
    both FATF blacklist countries and with shell
    corporations.

15
Moving Money
  • Riggs allowed the early termination of a CD held
    in London, and then transferred it to the US at a
    time where the money could have been seized by
    the UK
  • Riggs vice president broke apart US 1 million
    into 40 cashiers checks, then physically
    transported them to Chile
  • Money had been transferred into Riggs clearing
    account before converting it to cashiers checks
    no legitimate reason to do so other than to
    disguise origin of money.

16
Equatorial Guinea
  • Significant issues of corruption and
    mismanagement by current government numerous
    public documents put Riggs on notice that
    corruption was an issue
  • Billions of dollars of oil reserves found in EG
    territorial waters
  • Riggs held accounts worth US700 million for EG
    in 64 different accounts.

17
Offshore Corporations
  • Riggs opened offshore corporation, named Otong in
    Bahamas for Teodoro Obiang Nguema, the EG
    President
  • Otong was a Private Investment Company (PIC)
    bank regulators cautioned banks that such PICs
    were often used as money laundering vehicles
  • Again, Bahamas was on FATF blacklist at time.

18
Cash Deposits
  • EG first family deposited US 11 million in
    currency, often wrapped in plastic bundles, into
    Otong offshore account
  • No due diligence as to the source of the cash or
    purpose of the transactions
  • CTRs filed, falsely stating that Otong was a
    timber exporter, rather than a PIC
  • No SARs filed, although clearly should have been.

19
Mysterious Wire Transfers
  • Approximately US 26 million, in 16 wire
    transfers, moved from oil revenue account to
    Spanish account of EG corporation
  • Money likely embezzled from countrys revenues
  • No due diligence conducted as to nature of EG
    corporation or purpose of the transaction no
    letters of credit or bills of lading on file to
    justify it.

20
Regulatory efforts
  • Bank regulators issued 30 different written
    findings between 1997-2004
  • Bank generally refused or was unable to correct
    deficiencies
  • Regulators did not monitor deficiencies from year
    to year and insist on correction always gave
    bank a passing mark
  • Clean bill of health from regulators does not
    necessarily end the inquiry

21
Systemic Deficiencies
  • Poor information systems could not link multiple
    accounts, could not identify risky accounts
  • Poor know your customer procedures,
    particularly with high-risk accounts
  • Failing to monitor wire transactions
  • No effective procedure for filing SARs (Riggs
    policy)
  • Poor audit function
  • Poor training of employees.

22
The End of the Bank
  • Riggs pled guilty to BSA violation and paid a
    total combined civil and criminal penalty of US
    41 million
  • Fine was greater than last 5 years profits,
    combined
  • Riggs was immediately sold to larger bank, who
    stripped the Riggs names off the buildings Riggs
    no longer exists as an institution.
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