Dope Money I
When the House Banking Committee held hearings last September regarding the possible laundering of money in the Bank of New York, questions and comments from Rep. Maxine Waters (D-CA) during the proceedings surprised many. The subject that inspired the hearings –the possibility that International Monetary Fund money had been stolen by Russian government officials and laundered through American Banks—was far from Rep. Waters mind as she questioned Treasury Secretary Lawrence Summers. Rather, she was curious to know what the Secretary was going to do to stop the flow of illegal drug profits through the nation’s banking system. She sharply directed the following at Sec. Summers:
"Let me just say this. Given that we’re not na´ve, and we know that we have to work with countries, even if they’re not doing what we would like them to do, and they have practices that we would frown on—and Russia is very important, for all of the reasons that have been stated—can you separate out drug money laundering for us to put our feet down and say that we will not tolerate the laundering of drug money, period? That’s my pet peeve. Let’s say, let them steal IMF’s money, let them steal our bilateral support, but how tough will you be on the laundering of drug money?"
Sec. Summers responded:
"Let me just say, we will, in every feasible way that we can, seek to combat money laundering of all of the kinds that you described, including drug money. The qualification that I made with respect to our determination to do everything that we could to stop abuses was simply intended to indicate that, as serious as these problems are, it would, I think, be a mistake at this juncture to conclude that all financial transactions, period, that involve certain institutions and offshore centers are transactions of questionable legality. And I think what we…"
Summers was interrupted by Waters and before a hushed audience, the two had the following brief exchange:
No, that’s—I’m not at all concerned about trying to wrap this around everybody. I’m only concerned about the laundering of drug money.
We totally share your concerns, Congresswoman.
What will you do about it, Mr. Secretary?
We will, in the national money laundering strategy and in the ongoing reviews, propose legislation and administrative steps that will take all feasible steps that we can envision to go after this problem. And I might just say that we would be very grateful for any assistance and suggestions that can be provided to us as to how we can more effectively go after this, because…
Well, I would like to…
...I think this is a very clear issue.
I would like to co-author legislation, working with you, Ms. Velazquez, who’s been working so hard, and others. We want some legislation and your cooperation to help us on the question of the laundering of drug money. Thank You.
Let me just, if I could, note that we have acted and have issued an advisory with respect to U.S. banks, specifically with regard to transactions involving Antigua, because of the set of concerns that have arisen, and have been in touch with the authorities in Antigua as well regarding those concerns.
But Mr. Chairman, I have a list of every bank that’s been convicted of the laundering of drug money. Not one has lost its charter. We have –even American Express International, that was fined $25 million. I’m going to tell you, these fines and forfeit- these asset forfeitures are simply the cost of doing business for these banks. You’ve got to put somebody out of business.
Rep. Waters’ time for comment and questioning expired and House Banking Committee Chairman Jim Leach (R-Iowa) informed her of such and moved the hearings along. During the Waters-Summers exchange one could have heard a pin drop as the Waters’ intensity and Summers’ anxiety were evident to all. In the middle of a hearing on Russian corruption and money-laundering, Rep. Waters took the opportunity to remind the United States Secretary of the Treasury and everyone present, that penalties the U.S. government levels on banks involved in money laundering, amounts to little more than a slap on the wrist. On that score, evidence supports Rep. Waters position. Of the 105 prosecutions that have taken place in the last few years for the laundering of money in domestic banks, not a single bank has lost its charter or right to do business. Considering this and the fact that individuals involved in crack sales receive mandatory sentences and small businesses linked to laundering drug money are shut down, it is not hard to understand Rep. Waters’ concern. A quick review of drug prosecutions connected with the Racketeer Influenced and Corrupt Organizations (RICO) Act is enough in order to see that when it comes to prosecutions for money laundering, the federal government operates by two sets of rules. Just think over the implausibility of a small business in the inner city convicted of money laundering receiving only a fine.
In reply to Rep. Waters questioning, Secretary Summers promised that he would partially address her concerns through legislation mandated by the Clinton Administration’s National Money Laundering Strategy. That legislation—the Money Laundering Act of 1999--was presented to Congress last week. In a Nov. 12 news conference, Deputy Treasury Secretary Stuart Eizenstat announced highlights of the Act. Nowhere in those highlights was the possibility of a bank losing its charter mentioned. In fact, a key provision of the Act actually takes the emphasis away from the laundering of drug sales and places it upon other offenses like fraud, official bribery abroad, misappropriation of public funds abroad and arms trafficking. This would allow the government’s horrendous record on stopping the laundering of drug money to be masked by success in preventing the laundering of money in other areas. Unless one asked that a distinction be made, it would be very difficult to separate non-drug-related laundering convictions from drug-related laundering convictions at major banks.
The shift away from drug-related money laundering to non-drug-related money laundering is not an accident and has bi-partisan political motivations. The Republican Congress saw quickly that if U. S. aid—authorized by the Clinton Administration—had been stolen by a wealthy elite in Russia and laundered, such a scenario could be extremely embarrassing for the Clinton administration. Congressional Republicans pursued the allegations in the hopes that a paper trail would be found indicating that IMF money had been stolen from the Russian government and laundered internationally and ultimately through the Bank of New York. No such evidence has been found to satisfy these suspicions. But in tandem with the mainstream media, the hearings shifted attention toward non-drug-related money laundering charges. The Russian money laundering hearings were followed by last week’s hearings before the Senate Governmental Oversight Committee, which further pushed the agenda way from drugs and toward government corruption. The institution at the center of the Senate hearings was Citibank and its possible connection with alleged money-laundering activities involving government officials in Gabon, Pakistan, Nigeria and the brother of the former president of Mexico. True to form, the hearings spent some time on drug trafficking but the majority of the time was devoted to a discussion on the importance of stopping funds illegally obtained by government officials of foreign countries from being laundered through the United States banking system. Intentionally or not, this emphasis serves as a smokescreen for the more severe and intractable problem of the laundering of drug traffic proceeds.
There is a significant profit motive to money laundering for major banks. Estimates say that as much as $ 100,000,000,000 to $300,000,000,000 is laundered each year and $500,000,000,000 internationally. And in banking, the volume of cash, the quality of investments and the frequency of banking transactions are the keys to success. Many a bank executive has been known to turn a blind eye to a suspicious account that means thousands and millions of dollars in profits. In the case of Citibank, this is said to have been the case with Raul Salinas, the brother of the former president of Mexico. Citibank admitted that suspicious activity in Raul Salinas’ account went unreported and was deliberately ignored by bank officials. And it is here where part of the problem lies in the war on drugs. By not making banks partly responsible for money laundering, the banks have little incentive to uproot the practice. If only the traffickers go to jail along with a few bank officials the problem of money laundering will still remain. If the banking institution where the criminal activity took place is free of blame and permitted to operate in spite of being a party to money laundering, the motive to launder is never destroyed. The penalty is too weak and the profit too strong to snuff out the practice.
In fact, many banks offer services that lend themselves to the practice of money laundering. Two of the most laundering prone services that major banks offer are private banking and concentration accounts. Private banking is a service offered to high net-worth individuals with investment assets of at least $1 million. These individual clients are pampered with special treatment, particularly in the area of money management where services such as investment portfolio management, financial planning advice, custodial services, funds transfer, lending services, overdraft privileges, hold mail, letter-of-credit financing and bill-paying services are packaged and offered for the client’s convenience. In addition to providing clients with enormous investment opportunities through exclusive money management services, the accounts are always maintained with a high-level of confidentiality. The banks aim to please and with frequency they succeed. Quite often, as a result of being satisfied with the VIP treatment, clients will refer their wealthy friends and business associates to the bank as potential clients. This word-of-mouth referral network and skillful marketing have caused the private banking industry to expand at a record clip. The size of the private banking industry is now enormous. In 1997, the private banking industry worldwide was estimated at $17 trillion and the competition among banks and even non-banking institutions for private banking business has intensified. With this increased competition has come pressure on the providers of private banking services to increase the profitability of their client’s accounts. This has increased the susceptibility of the industry to laundering activity as many private banking clients are frequently advised to establish offshore accounts and pursue creative and risky investment strategies that often result in huge profits but are enveloped in secrecy. Quite often the confidentiality and investment strategies that allow clients to hide their money often directly and indirectly result in the laundering of money. A 1996 Federal Reserve review of private banking practices found this to be the case.
Concentration accounts are used by banks to temporarily hold money until it can be credited to the proper individual account. But these accounts can be used to confuse or break an audit trail because the concentration account in effect represents a gap between the source of the funds and the destination of the funds. In this sense it can be compared to an airplane that is spotted on a radar screen and then temporarily disappears from the screen only to reappear minutes later. No one at air traffic control would be able to state where the plane was in those minutes it was off of radar. It is the same with concentration accounts. As Richard A. Small, the Assistant Director for the Division of Banking Supervision and Regulation for the Federal Reserve System testified before the Senate Governmental Affairs subcommittee hearing, " This practice effectively prevents the association of the customer’s name and account numbers with specific account activity, and easily masks unusual transactions and flows that would otherwise be identified for further review".
On Sept. 21, the very day that Sec. Summers testified before the House Banking Committee, Rep. Maxine Waters introduced a bill that would have addressed the abuses of private banking and concentration accounts by money launders and drug traffickers. The bill, H.R. 2905, at the time of this writing, has only 4 co-sponsors: Congresswoman Barbara Lee (D-CA.) Congressman Bruce Vento (D-MN), Congresswoman Nydia Velazquez (D-NY) and Congressman Maurice Hinchey(D-NY). Furthermore, the Clinton administration has taken no public steps to support the legislation. The priority of the administration at present is not to stop money laundering but rather to deflect charges coming from the Republican Congress and mainstream media that it has been lax on corrupt foreign governments. Of late, Republican members of the House and Senate have charged the administration of sending money overseas with no strings attached. They now argue that those funds are ultimately stolen. These charges put the Clinton Administration on the defensive and the result is that the administration’s National Money Laundering Strategy is used for its public relations value. At no time in a press conference or in a congressional hearing has a Justice Department or Department of Treasury official clearly delineated the circumstances under which they will strip a bank of its charter when that bank is found guilty of laundering drug profits. With that kind of deliberate ambiguity, it is not hard to see the double standard for the poor and the rich when it comes to drugs. While there are stiff mandatory sentences for crack cocaine there are light sentences for powder cocaine. While there is RICO and fed time for gangs and small businesses for the laundering of drug money, there are only fines for major banks. If the Clinton Administration and Secretary of the Treasury are serious about fighting drugs and money laundering they will heed Rep. Waters advice and "put somebody out of business."
Monday, May 29, 2000