oversight

Private Banking: Raul Salinas, Citibank, and Alleged Money Laundering

Published by the Government Accountability Office on 1999-11-09.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                        United States General Accounting Office

GAO                     Testimony
                        Before the Permanent Subcommittee on Investigations,
                        Committee on Governmental Affairs, U.S. Senate




Not to Be Released
Before 10:00 a.m. EST
Tuesday
                        PRIVATE BANKING
November 9, 1999


                        Raul Salinas, Citibank, and
                        Alleged Money Laundering
                        Statement for the Record of Robert H. Hast
                        Acting Assistant Comptroller General for Investigations
                        Office of Special Investigations




GAO/T-OSI-00-3
                   Madam Chairman and Members of the Subcommittee:

                   This statement provides the Subcommittee a synopsis of our
                   1998 investigation1 of alleged illegalities involving Raul Salinas de Gotari,
                   brother of the former President of Mexico, Carlos Salinas de Gotari, and a
                   U.S. bank, Citibank. We conducted the investigation at the request of your
                   Subcommittee’s then Ranking Minority Member, the Honorable John
                   Glenn. Mr. Salinas had allegedly been involved in laundering money out of
                   Mexico, through Citibank, to accounts in Citibank affiliates in Switzerland
                   and the United Kingdom.



Results in Brief   Mr. Salinas was able to transfer $90 million to $100 million between
                   1992 and 1994 by using a private banking relationship formed by Citibank
                   New York in 1992. The funds were transferred through Citibank Mexico and
                   Citibank New York to private banking investment accounts in Citibank
                   London and Citibank Switzerland.

                   Beginning in mid-1992, Citibank actions assisted Mr. Salinas with these
                   transfers and effectively disguised the funds’ source and destination, thus
                   breaking the funds’ paper trail. Citibank

                   • set up an offshore private investment company named Trocca, to hold
                     Mr. Salinas’s assets, through Cititrust (Cayman)2 and investment
                     accounts in Citibank London and Citibank Switzerland;
                   • waived bank references for Mr. Salinas and did not prepare a financial
                     profile on him or request a waiver for the profile, as required by then
                     Citibank know your customer policy;
                   • facilitated Mrs. Salinas’s use of another name to initiate fund transfers in
                     Mexico; and
                   • had funds wired from Citibank Mexico to a Citibank New York
                     concentration account—a business account that commingles funds
                     from various sources—before forwarding them to Trocca’s offshore
                     Citibank investment accounts.



                   1
                    See Private Banking: Raul Salinas, Citibank, and Alleged Money Laundering
                   (GAO/OSI-99-1, Oct. 30, 1998).
                   2
                    Cititrust (Cayman) was an affiliate of Citicorp, located in the Cayman Islands. Citicorp is
                   now known as Citigroup, Inc.




                   Page 1                                                                        GAO/T-OSI-00-3
             No U.S. documentation identified Mr. Salinas as Trocca’s beneficial owner3
             or connected Mr. Salinas to the Trocca funds transferred through Citibank
             Mexico and Citibank New York.

             According to Citibank New York’s Vice President (VP) for Legal Affairs,
             whom Citibank designated as its representative to us, Citibank’s actions
             violated only one aspect of the then Citibank know your customer policy:
             Citibank should have prepared a financial profile (i.e., a financial
             background check detailing the source of Mr. Salinas’s funds) or waived the
             requirement before accepting Mr. Salinas as a customer. By investigating
             his financial background, Citibank could have verified the source of
             Mr. Salinas’s wealth and transferred funds.

             Limited by the ongoing Department of Justice investigation, we could not
             determine whether Citibank’s actions violated law or regulation. (We
             determined that the case is still pending in the Southern District of New
             York.) The Federal Reserve also did not comment on whether Citibank’s
             actions were violations because information available to it at the time we
             inquired was insufficient for it to make a determination. However, on the
             basis of the details we presented, the Office of the Comptroller of Currency
             (OCC) stated that the actions did not violate civil aspects of the Bank
             Secrecy Act.4 Further, private banking’s know your customer policies were
             then voluntary and not governed by law or regulation.

             A comparison of Citibank actions and Citibank testimony in the 1994
             money laundering trial shows that the two were inconsistent concerning
             due diligence and know your customer practices in private banking. For
             example, Citibank’s testimony implied a stricter adherence to due diligence
             than actually occurred during the Salinas transactions.



Background   The provision of financial and related services to wealthy clients is broadly
             described as “private banking.” The Federal Reserve System and OCC are
             two regulators that examine5 banks and private banking activities. With


             3
                 An account’s “beneficial owner” is the individual or group that controls the account.
             4
              The Bank Secrecy Act is codified in 12 U.S.C. sections 1829b and 1951-59 and in 31 U.S.C.
             sections 5311-30.
             5
                 See 12 C.F.R. sections 21.21 (OCC) and 208.14 (Federal Reserve) (1997).




             Page 2                                                                         GAO/T-OSI-00-3
                       regard to possible money laundering, examiners determine whether
                       (1) banks comply with bank secrecy regulations and (2) the banks’
                       compliance programs include appropriate procedural guidelines for
                       recording and reporting large currency transactions and for detecting,
                       preventing,6 and reporting suspicious transactions related to possible
                       money laundering activities.

                       Regulators and most banks contacted during a previous GAO review 7 cited
                       “know your customer” policies as one of an institution’s most important
                       guidelines for detecting suspicious activity. Such policies enable the
                       institution to understand the kinds of transactions that a particular
                       customer is likely to engage in and to identify unusual or suspicious
                       transactions. In an effort to protect itself from risks associated with money
                       laundering and other unlawful activity, Citibank, as have other financial
                       institutions, has implemented a know your customer policy to ensure that
                       the bank will have a reasonable level of information about a client at the
                       time of acceptance.



Citibank Facilitated   Citibank New York accepted Mr. Salinas as a private banking customer and
                       created the shell company Trocca through Cititrust (Cayman) to hold
Salinas Funds          Mr. Salinas’s assets. As part of Trocca, Citibank created other shell
Transfers              companies and opened two investment accounts in Citibank London and
                       Citibank Switzerland. However, no official U.S. documentation clearly
                       connected Mr. Salinas to Trocca or the investment accounts. Disguising the
                       origin and destination of the funds, which broke the funds’ paper trail, was
                       accomplished by, among other actions, the depositing of the Mexican funds
                       in a Citibank New York concentration account and Mrs. Salinas’s use of
                       another name to initiate funds transfers in Mexico. (At the time of her
                       introduction to Citibank Mexico officials to begin the transfers,
                       Mrs. Salinas had not yet married Mr. Salinas. Although they were not
                       married until the year after the transfers had begun, we refer to her
                       throughout this testimony as Mrs. Salinas.) After Mr. Salinas’s March 1995
                       arrest in Mexico, Citibank placed a watch on the Salinas accounts in
                       Citibank New York and Trocca’s offshore investment accounts and
                       prepared a financial profile that did not mention Trocca. After


                       6
                           Under 18 U.S.C. 1956, banks have a legal obligation to prevent money laundering.
                       7
                        Private Banking: Information on Private Banking and Its Vulnerability to Money
                       Laundering (GAO/GGD-98-19R, Oct. 30, 1997).




                       Page 3                                                                       GAO/T-OSI-00-3
                      Mrs. Salinas’s November 1995 arrest in Switzerland, Citibank filed a
                      criminal referral form8 with the U.S. Department of Justice but again
                      divulged no information about Trocca or the offshore accounts.


Citibank and Trocca   In or about May 1992, Mr. Salinas met with the Vice President, Mexican
                      Division, International Private Bank section of Citibank New York, to
                      arrange a Citibank private banking relationship. At that time, Citibank
                      waived bank references for Mr. Salinas. It relied instead on the referral of
                      an existing client. In addition, Citibank did not follow its policy in that it did
                      not prepare a financial profile, or financial background check, on
                      Mr. Salinas before accepting him.

                      Citibank, according to its representative, first opened a checking account
                      at Citibank New York in Mr. Salinas’s name and then, through Cititrust
                      (Cayman), activated a private investment company named Trocca—a shell
                      company—to hold Mr. Salinas’s assets.9 The company was set up in the
                      Cayman Islands, where all documentation connecting Mr. Salinas to Trocca
                      was held and whose laws protect the documentation’s confidentiality.

                      To further insulate Mr. Salinas’s connection to Trocca, Cititrust (Cayman)
                      used three additional shell companies to function as Trocca’s board of
                      directors—Madeline Investment SA, Donat Investment SA, and Hitchcock
                      Investment SA. Trocca’s officer and principal shareholder was another
                      company formed by Cititrust (Cayman) named Tyler Ltd. Further, Confidas,
                      a Cititrust affiliate located in Switzerland, acted as Trocca’s manager and
                      handled all administrative requirements.

                      As part of Mr. Salinas’s private banking relationship, Citibank New York
                      opened two investment bank accounts for Trocca, one in Citibank London
                      and one in Citibank Switzerland. According to Citibank officials, Citibank
                      London had no documentation or knowledge that Mr. Salinas was Trocca’s
                      beneficial owner. We were informed that Citibank Switzerland had


                      8
                          The form has since been changed and is now known as the suspicious activity report.
                      9
                       As we noted in a previous report, Money Laundering: Regulatory Oversight of Offshore
                      Private Banking Activities (GAO/GGD-98-154, June 29, 1998), banking regulators have
                      expressed some concern that such private investment companies, among other offshore
                      entities, may serve to camouflage money laundering and other illegal acts. This may occur
                      because these accounts are formed, among other reasons, to maintain clients’
                      confidentiality and anonymity.




                      Page 4                                                                      GAO/T-OSI-00-3
                     documentation of a connection between Mr. Salinas and Trocca, which is
                     required by and confidential under Swiss bank secrecy law.


The Funds Transfer   To facilitate the periodic wire transfer of Salinas funds from Mexico to
                     Citibank New York, Citibank New York’s Mexican Division VP introduced
                     Mrs. Salinas, Patricia Paulina Rios Castañon de Salinas, to officials of
                     Citibank Mexico under the name Patricia Rios. The Citibank representative
                     initially told us that Mrs. Salinas’s true identity and connection to
                     Mr. Salinas was disguised from Citibank Mexico officials reportedly
                     because Mr. Salinas did not want to reveal that he was moving large sums
                     of money out of Mexico. The Citibank representative stated that
                     introducing Mrs. Salinas as Ms. Rios had not violated Citibank policy. Later,
                     the representative and another Citibank official recanted the position
                     concerning Citibank Mexico’s lack of knowledge. The officials told us they
                     had no documentation to support their new position.

                     Throughout the transactions, according to Citibank’s representative,
                     Mrs. Salinas withdrew funds from what is believed to be at least five
                     Mexican banks10 and had the bank checks made payable to Citibank. After
                     obtaining the bank checks and hand carrying them to Citibank Mexico,
                     she—using the name Ms. Rios and although she had no account there—had
                     Citibank Mexico convert the value of the bank checks from Mexican pesos
                     to American dollars before it wired the funds to Citibank New York.
                     Documents supporting the transactions further convoluted the paper trail,
                     disguising the origin and destination of the funds and preventing them from
                     being traced to Mr. Salinas.

                     Citibank Mexico then wired the converted funds, at the direction of
                     Citibank New York’s Mexican Division VP, to Citibank New York. The funds
                     went into a concentration account—a Citibank New York business deposit
                     account that commingles funds of a number of bank branches/affiliates and
                     bank customers.

                     Citibank next wired the funds from the concentration account to the
                     Trocca accounts in Citibank London and Citibank Switzerland. The two
                     offshore banks then invested the wired funds as directed by Citibank New


                     10
                       Documentation listed the Mexican banks as Bancomer, Somex, Banca Cremi, Banorte,
                     and Banco Mexicano. According to knowledgeable sources, Mr. Salinas’s accounts at these
                     banks were under fictitious names.




                     Page 5                                                                   GAO/T-OSI-00-3
                           York and agreed to by Mr. Salinas. On occasion, however, Mr. Salinas had
                           direct contact, concerning his investments, with a private banker at
                           Citibank Switzerland where his confidentiality was ensured under Swiss
                           bank secrecy laws.

                           According to the Citibank representative, the funds wired through Citibank
                           Mexico and Citibank New York to Citibank London and Citibank
                           Switzerland totaled between $90 million and $100 million. This Citibank
                           official and others acknowledged that the fund transfers could have been
                           wired to the Salinas checking account in Citibank New York or directly to
                           Citibank London or Citibank Switzerland, thus retaining a paper trail.


The 1995 Salinas Arrests   In late February 1995, according to Citibank’s representative, Mr. Salinas
and Subsequent Account     was arrested and jailed in Mexico for murder. 11 At that time, rather than
                           before accepting Mr. Salinas as a customer as was Citibank policy, Citibank
Actions
                           prepared a very brief financial profile on Mr. Salinas. The profile cited no
                           Citibank/Trocca accounts and no source of wealth other than a reference to
                           an unidentified construction business.

                           Upon reportedly learning in early March 1995 that the arrested Mr. Salinas
                           was a Citibank private banking customer, the Citibank representative, as
                           Vice President for Legal Affairs, put a watch on the Salinas Citibank New
                           York accounts and Trocca’s Citibank London and Citibank Switzerland
                           accounts. However, according to the Citibank representative, the Mexican
                           Division VP personally contacted Mrs. Salinas in Mexico in the summer of
                           1995, without the representative’s knowledge or consent, and advised her
                           to move all funds associated with Trocca out of Citibank. Mrs. Salinas was
                           arrested in Switzerland in November 1995 for money laundering and drug
                           trafficking while attempting to withdraw funds from a Swiss bank.

                           After Mrs. Salinas’s November 1995 arrest, according to the Citibank
                           representative, Citibank New York filed a criminal referral form with the
                           U.S. Attorney’s Office, Southern District of New York, sending copies to the
                           Federal Bureau of Investigation and the Drug Enforcement Administration.


                           11
                             Subsequently, Mexican law enforcement officials also charged Mr. Salinas with money
                           laundering and "illegal enrichment." It has been reported that he was acquitted of one money
                           laundering charge in May 1998 and that the illegal enrichment charge was dropped.
                           However, as of October 1998 when our report was published, he remained in jail pending
                           resolution of the murder charge. It was then unclear whether additional money laundering
                           charges were still pending.




                           Page 6                                                                      GAO/T-OSI-00-3
                            However, the only Salinas accounts listed on the form were those in
                            Citibank New York. The form did not cite the existence of Trocca or the
                            Trocca accounts in Citibank London or Citibank Switzerland, purportedly
                            because no official U.S. documentation existed although Citibank New
                            York had facilitated the accounts’ formation.

                            According to Citibank’s representative, Citibank earned about $1.1 million
                            in fees associated with the Salinas/Trocca accounts.



Citibank Violation of       Most of the actions of Citibank New York’s Mexican Division did not violate
                            Citibank policy. However, the one aspect of Citibank’s know your customer
One Aspect of Know          policy that was violated—preparation of a financial profile—could have
Your Customer Policy        assisted in verifying the source of Mr. Salinas’s wealth and transferred
                            funds. Citibank policy was revised in 1997.


A Violation of Citibank     According to the Citibank representative, Citibank New York’s Mexican
Know Your Customer Policy   Division believed that all of Mr. Salinas’s funds had been obtained legally,
                            with a large portion resulting from the sale of a construction company that
                            he owned. However, Citibank reportedly knew no details about the
                            construction company including its name, who had purchased it, or the
                            amount of money generated by the sale.12

                            In addition, when opening Mr. Salinas’s accounts, Citibank waived the
                            requirement for two references for him, including its most common
                            reference source, i.e., bank references, which could have contained such
                            information as length of association with the account holder and size of the
                            Mexican accounts. When asked if bank references were an important part
                            of Citibank New York’s know your customer policy, the Citibank
                            representative stated that Citibank private bankers had told him that bank
                            references provided little value or information. We pointed out that if bank
                            references had been obtained and checked, Citibank could have
                            established the value of assets Mr. Salinas possessed in those banks and a



                            12
                              According to the Citibank representative, Citibank New York’s Mexican Division,
                            International Private Bank section failed Citibank’s internal audits from 1996 to 1997. These
                            failures occurred because of problems and deficiencies in the Private Banking section’s due
                            diligence and know your customer practices. The Citibank representative was unable to
                            provide the results of internal audits conducted prior to 1996.




                            Page 7                                                                       GAO/T-OSI-00-3
                          banking history of those assets, both significant points for determining
                          future suspicious account activity including money laundering.


Current Citibank Policy   Citibank’s know your customer policy has been revised since the Salinas
                          accounts were opened. As of September 1997, the policy contained more
                          specific minimum standards of information for accepting a new customer.
                          However, at the time of our October 1998 report, any element of the policy
                          could still be waived for a new or existing customer.



Citibank’s General        We could not determine whether Citibank’s actions regarding Mr. Salinas’s
                          private banking relationship had violated then applicable laws and
Compliance With Laws      regulations. We were denied access to Department of Justice officials
and Regulations Was       involved in the then ongoing investigation of the Salinas/Citibank
                          relationship. We were also denied access to the principal Citibank officials
Undetermined              involved with that relationship, although Citibank designated bank officials
                          to provide us with detailed information.



Comparison of             The requested comparison of Citibank actions regarding Mr. Salinas and a
                          Citibank official’s testimony in a 1994 money laundering case13 illustrated
Citibank’s Actions With   that the two were inconsistent. Citibank New York’s actions did not reflect
a Citibank Official’s     the importance that its Mexican Division VP placed on the bank’s due
                          diligence/know your customer practices when testifying.
1994 Testimony
                          The head of Citibank New York’s Mexican Division, International Private
                          Bank section, who was also involved in the Salinas matter, appeared as an
                          expert witness for the government in the 1994 money laundering trial. In
                          sworn testimony, the division VP explained the importance of due diligence
                          principles and Citibank’s know your customer policy in accepting and
                          working with private banking customers.

                          However, Citibank actions regarding Mr. Salinas contrasted sharply with
                          the VP’s sworn testimony with concern to the importance of knowing the
                          customer. For example, the Citibank VP affirmed in sworn testimony that
                          Citibank New York’s international relationship managers were to make an
                          extensive effort to know their potential customers, as a way of protecting

                          13
                               United States v. Giraldi, No. 93-CR-28-6 & 7 (S.D. Tx. 1994).




                          Page 8                                                               GAO/T-OSI-00-3
                      the bank, before accepting them. It was “too risky not to … do the due
                      diligence, not to know who you’re dealing with” before accepting a
                      prospective customer’s funds in a private banking relationship. In contrast,
                      Citibank made no attempt to investigate Mr. Salinas’s background before
                      accepting him. Citibank was unable to confirm if the division VP had met
                      Mr. Salinas before accepting him as a Citibank private banking customer.
                      Further, Citibank did not file a financial profile, or a financial background
                      check, as part of due diligence.



Conclusions           At the time of our investigation, the Congress and the Federal Reserve
                      recognized that financial institutions could abuse voluntary policies with
                      regard to potential money laundering. Further, we determined in the
                      Salinas scenario that Citibank’s voluntary controls did not work. Citibank,
                      while violating only one aspect of its then policies, facilitated a
                      money-managing system that disguised the origin, destination, and
                      beneficial owner of the funds involved. We determined that the Department
                      of Justice investigation of the Salinas/Citibank relationship is still pending
                      in the Southern District of New York.



Contacts and          For further information regarding this testimony, please contact Robert H.
                      Hast or Ron Malfi at (202) 512-6722. John Ryan made a key contribution to
Acknowledgement       this testimony.




(600601)      Leter   Page 9                                                           GAO/T-OSI-00-3
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