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Example: Bank of Ireland (BOI)

These events at the Bank of Ireland in the UK occurred between 1998 and 2002, by which time there was already a heavy emphasis on AML standards in OECD countries. The regulatory requirements enforced in the UK at the time required that banks should operate ‘such procedures of internal control and communication as may be appropriate for the purposes of forestalling and preventing money laundering’, and that they should adopt ‘reasonable care in countering financial crime’. They also stressed that special care was necessary for high-risk products and cash, and that a complete audit trail of beneficial ownership was essential. During the period in question the BOI operated a ‘drafts outstanding account’ in which a customer was allowed to deposit cash in exchange for BOI bank drafts (instruments drawn on the bank itself without reference to any underlining customer account), made payable to the BOI itself, which could then be deposited at other BOI branches in exchange for cash.

In fining BOI £375,000, the regulator, the Financial Services Authority (FSA) noted that by issuing drafts to itself, BOI broke its own internal controls in relation to the issuing of drafts and that the use of drafts was outside the customers’ normal business activity. The FSA also noted that cash did not actually pass through the customers’ accounts and was not, therefore, auditable. It found that staff understanding was incomplete and untested and extended only as far as the account opening process and the need for identification. For four years neither line management, peer review, nor audit identified the suspicious transactions despite ‘cash for drafts’ being identified as a potentially suspicious transaction type since 1994, in the bank’s own policy manual.

Example: Royal Bank of Scotland (RBS); Bank of Scotland (BOS)

These events occurred one after the other in 2002 and 2004 and both related to failings by the institutions concerned to retain proper records, particularly identification records.

In both cases the key regulatory requirement was that banks ‘must take reasonable steps to find out who their clients are by obtaining sufficient evidence of the identity of any client’ and ‘to retain copies of identity evidence and records of where that evidence is kept’. Record-keeping standards also required maintaining account opening records for five years following the closure of the account and transaction records for five years following the transaction. In the case of RBS, the regulator’s (FSA) inspection revealed that in 89 of 181 accounts sampled, there were insufficient identity documents, including a failure to retain copies of any details at all on some files. In the case of BOS, the FSA found a failure rate of 55 per cent across sampled accounts, with a particular concern being on the bank’s apparent inability to identify at which point of the document process the deficiencies had occurred.

It is notable that both banks reported the deficiencies to the regulator having discovered them themselves, yet this was not sufficient to escape censure and punishment. It is also worth noting that the costs of remediation in both banks, amounting to millions of pounds, have vastly outweighed the predicted costs of implementing and enforcing proper procedures in the first place.

Example: Raiffeisen Bank

Raiffeisen Bank’s (RZB) London branch operated in a regulatory environment which required that banks ‘must set up and operate arrangements including the appointment of a Compliance Officer, to ensure that it is able to comply and does comply with the rules’. Those rules were wide ranging, covering the areas described already, and others. The regulator (FSA) visited RZB’s London branch in September 2002 and discovered that the bank’s anti-money laundering procedures had not been updated since June 1999. This was despite the fact that there had been major regulatory changes in the interim period, particularly dealing with recommended identification procedures. The regulator warned the bank that an inspection would take place later in that year, and that particular areas of concern were higher-risk areas such as agents, overseas corporations and trusts, non-European Union financial institutions and customers from Non-cooperative Countries and Territories (NCCT), third-party payments and non-face-to-face customers. In terms of identification records there was a failure rate of more than 50 per cent on sampled accounts. The inspections revealed the problems which RZB had had in retaining an effective Compliance Officer. A Compliance Officer had resigned in October 2001; a new one had resigned in July of 2002 and a third one, appointed in August 2002, had then not revised the bank’s procedures in time for the inspection.

Example: Abbey National

Now part of the Banco Santander Group, Abbey National was one of Britain’s largest mortgage lenders. The regulations in force required banks to take reasonable steps ‘to ensure that any internal report of potentially suspicious activity was considered by the Compliance Officer’ and, further, that if the Compliance Officer suspected money laundering, then they should report that promptly to the Financial Intelligence Unit (FIU). The regulations also require ‘reasonable care in countering financial crime’. Abbey National had introduced a ‘self-certification’ process for Know Your Customer (KYC) measures in November of 2000. This included a capability for branches to self-certify their retention of identification records. In March 2003 an internal audit revealed failure rates on samples of 32 per cent in the identification documentation of new customers. The regulator (FSA) found that Abbey’s failings were indicative of ‘wider systems and controls failings across the group over a prolonged period of time’. Furthermore, there were serious shortcomings in the effectiveness of suspicious activity reporting. Some 58 per cent of reports were sent to the FIU more than 30 days after the internal reports had been filed with the compliance department. Of those, 37.6 per cent were sent up to 90 days after the initial report, and 8.4 per cent were actually sent up to 120 days after the internal report, with a further 12 per cent being sent more than 120 days after the initial internal report had been filed. This example proves the clear importance of having systems and procedures in place which facilitated the speedy processing and reporting of suspicious activity.

Example: ABN AMRO

ABN AMRO fell foul of the US AML regulatory system, which required that banks must have a programme ‘reasonably designed to assure and monitor compliance’. ABN’s North American clearing centre in New York dealt with 30,000 fund transfers a day and had clients that were deemed to be high risk including hundreds of shell banks (a shell bank, it may be recalled, is a ‘virtual’ bank with no physical presence in its country of incorporation and which is not part of a larger banking group). Upon inspection, FINCEN (the US’s Financial Intelligence Unit) found that violations of the Bank Secrecy Act ‘were serious, long standing and systemic’. Only one person was in charge of monitoring this activity. There had been sporadic manual monitoring to start with and when suspicious activity reporting was automated, many reports were produced which, however, were never acted upon. There was inadequate due diligence on bank customers from higher-risk jurisdictions or in connection with higher-risk transactions, despite the fact that there had been numerous regulatory warnings about such customers and transactions. A poor record of suspicious transaction reporting, a non-existent training programme and no proper system of internal controls compounded the problems. ABN was fined $30 million along with other fines.

Example: Lloyds TSB

In 2009 the UK-based bank, Lloyds TSB, was fined in the US after admitting to falsifying information on hundreds of millions of dollars’ worth of international wire transfers – the electronic messages through which payments are made between counterparties in different countries. The wire transfers in question involved companies in countries that were the subject of sanctions by the US government. US investigators were probing links between the Iranian government and two Manhattan-based companies when they stumbled on a trail of Iranian money entering the city via Lloyds. The UK branch of an Iranian bank would send an electronic payment message to Lloyds via the SWIFT system. However, knowing that the suspicion of the US authorities would be alerted if the payment message made reference to Iran or to an Iranian company as the source of the funds, Lloyds staff would then re-key the data in the SWIFT message, leaving out any reference to Iran, before sending it on to the US. This process was known as ‘stripping’. It didn’t come about through the misdemeanours of a few rogue staff. Rather, it happened under standing operating instructions.

The US authorities have electronic filters to detect wire transfers from sanctioned countries, but the lack of identification details meant that the Lloyds transfers could get through, especially since they came from a reputable UK bank. Taken with other transactions involving another sanctioned country, Sudan, when confronted by the US authorities Lloyds admitted to over $350 million of illegal transactions between 2001 and 2004. The transfers in question were made to buy goods and services from US companies and from companies in other countries that wanted payment in dollars. The Manhattan District Attorney’s Office said that they feared that some of the funds ‘may have been used to purchase raw materials for long range missiles’. Lloyds was hit with a fine of $350 million – at the time the biggest penalty ever against a single financial institution for breaches of sanctions legislation. The bank also had to conduct an audit of a wide range of other transactions over the period in question to determine their legitimacy.

Example: Citibank

With increased scrutiny and with seemingly ever greater due diligence expectations being placed on the world’s banks and investment institutions, now seems like an appropriate time to revisit one of the classic archive cases – Citi-Salinas – and ask yourself some searching questions; namely, ‘What has my institution learned from this?’;‘How can I be sure that our policies are being followed?’; and, always the most sombre, ‘Could it happen to us?’

It is more than 15 years since Raul met Amy and started opening the various Salinas accounts with Citibank in New York, Switzerland and elsewhere.

Below, we recount the facts of the case as revealed by the 1999 US Senate hearings, before turning to the lessons learned.

A PEP comes calling

Raul Salinas was the brother of the former President of Mexico, Carlos Salinas. For five years during the late 1980s he was Director of Planning for Conasupo, a Mexican state run agency regulating certain agricultural markets, with an annual salary of up to $190,000. From 1990 until mid-1992, he was a consultant at a government anti-poverty agency called Sedesol.

In January 1992, Carlos Hank Rohn, a prominent Mexican businessman and long-time client of Citibank’s private bank, telephoned his private banker, Amy Elliott, and asked her to meet with him and Raul Salinas that same day. Elliott was Citi’s most senior private banker in New York handling Mexican clients. At the meeting in New York, which was also attended by an even more senior private banker, Reynaldo Figueiredo, Carlos Hank provided the bankers with a strong personal reference for allowing Salinas to open an account. In May 1992, Elliott flew to Mexico and duly obtained Salinas’ signature on account opening documentation. She proposed accepting him as a client without investigating his employment background, financial background or assets, and waiving all references other than the one provided by Mr Hank. The head of the Western hemisphere division of the private bank, Edward Montero, approved the opening of the account. Such was the secrecy involved that the private bank’s country head in Mexico, Albert Misan, was not consulted and apparently did not even learn of the existence of the account until 1993. In June 1992 Elliott wrote in a monthly business report that the Salinas accounts had ‘potential in the $15 to 20 million range’.

Account set-up

After accepting him as a client the private bank opened multiple accounts for Mr Salinas and his family. The New York office opened five accounts and the private bank’s trust company in Switzerland talked to him about opening additional accounts in the name of a shell corporation (a nameplate company existing as a purely legal entity, not as an operational one). A Confidas employee wrote in June 1992:

‘The client requires a high level of confidentiality in view of his family’s political background ... This relationship will be operated along the lines of Amy’s “other” relationship; i.e., she will only be aware of the “confidential accounts” and will not even be aware of the names of the underlying companies ... Please note for the record that the client is extremely sensitive about the use of his name and does not want it circulated within the bank. In view of this client’s background, I think we will need a detailed reference from Amy, with Rukavina’s [Hubertus Rukavina – the head of the private bank and a Confidas board director] sign-off for our files ...’

The ‘detailed reference’ was never obtained and neither was Rukavina’s sign-off, yet Citibank in the Cayman Islands activated a Cayman Islands shell corporation called Trocca Ltd to serve as the owner of record for private bank accounts benefiting Mr Salinas and his family. Cititrust used three additional shell or ‘nominee’ companies to function as Trocca’s board of directors, Madeline Investments SA, Donat Investments SA and Hitchcock Investments SA, and a further three nominee companies to serve as Trocca’s officers and principal shareholders, Brennan Ltd, Buchanan Ltd and Tyler Ltd. Cititrust controlled all six companies which were routinely used to serve as directors and officers of shell companies owned by private bank clients. Approximately one year later Cititrust also established a trust, identified only by a number (PT-5242), to serve as the owner of Trocca. The result of this elaborate structure was that Mr Salinas’ name did not appear anywhere on Trocca’s incorporation papers. Separate documentation establishing his ownership of Trocca was maintained by Cititrust in the Cayman Islands, under secrecy laws restricting its disclosure. Even Amy Elliott was not aware of the name of the shell corporation and Mr Salinas was not referred to by name, but by the acronym ‘CC-2’, or ‘Confidential Client No. 2 (CC-1 being Carlos Hank Rohn).

After Trocca was established the private bank opened investment accounts in London and Switzerland in the name of Trocca and later, in 1994, a special name account was opened for Mr Salinas and his wife in Switzerland under the name of ‘Bonaparte’.

Movement of funds

After his accounts were first opened, Mr Salinas made an initial deposit of $2 million via the account of Carlos Hank, who told the bank that these were monies provided by Salinas in respect of a business transaction which never proceeded. The funds were divided between the Salinas accounts in New York and the Trocca accounts in London and Switzerland. But it was in May 1993 that the arrangements under which the bulk of the Salinas funds were to be moved were set up. Elliott met with Salinas and his mistress (later to become his fiancée), Paulina Castaňon, at his home in Mexico, where he explained that he wished to move funds out of Mexico to avoid the volatility which traditionally accompanied Mexican elections. In order to provide maximum confidentiality on this undertaking, it was also agreed that Ms Castaňon, using an alias ‘Patricia Rios’ (Rios being her middle name) would deposit cashiers’ cheques with Citibank’s Mexico City branch, from where the funds would be wired through to a Citibank account in New York, for onward transmission to the London and Switzerland accounts. Although senior management in Mexico denied knowledge of the arrangements, Elliott herself cooperated fully, even setting up a meeting between herself, Castaňon/Rios and a service officer at the Mexico City branch to explain the arrangements and ensure that the cheques would be accepted.

Cashiers’ cheques were a form of instrument, similar to a bank draft, which were drawn on the banks themselves and which did not, therefore, reveal the beneficial owner of the funds in question, and the New York account to which the funds were then to be wired (marked for Amy Elliott’s attention) was a ‘concentration account’ – an account which commingled the funds of various clients with other funds belonging to Citibank itself, without revealing who owned what. Given that neither Salinas nor Castaňon/Rios held any accounts with Citibank in Mexico City (which must therefore have received the funds into its own nostro accounts), and given that the Salinas accounts in London and Switzerland were trust company or code name accounts, these arrangements had the effect of disguising completely the beneficial ownership of whatever volume of funds would eventually pass through them (see p. 173).

These funds turned out to be substantial, and in any event way above the initial ‘$15–20 million range’, referred to by Elliott in her June 1992 business report. The sums involved were very large and were deposited within very short periods. For example, in May and June 1993, in a period of less than three weeks, seven cashiers’ cheques were presented to the Mexico City branch totalling $40 million, and over a two-week period in January 1994 four cashiers’ cheques totalling $19 million were deposited. By the end of June 1994 the total funds in the Salinas accounts originating from Mexican cashiers’ cheques amounted to $67 million. A further $20 million was transferred using other methods, leading to a grand total in excess of $87 million. In June 1993, Elliott emailed a colleague in Switzerland:

Source: http://www.gao.gov/archive/1999/os99001.pdf

‘This account is turning into an exciting and profitable one for us all. Many thanks for making me look good!’

The Salinas arrests and the private bank’s reaction to them

In early February 1995, the Mexican press started to report that Salinas was under suspicion of murdering his former brother-in-law, Luis Massieu, a leading Mexican politician. Questioned by a presumably concerned Elliott, Salinas claimed that the charges were politically motivated and untrue. Then, on 28 February 1995, he was arrested and imprisoned in Mexico on suspicion of murder. (After a lengthy trial, a conviction followed, which was upheld on appeal in 1999.) Nine months later, on 15 November 1995, Salinas’ wife was arrested in Switzerland and the following day the Swiss authorities froze more than $130 million sitting in Salinas controlled accounts with various banks – including Citibank. The rumours were that the Swiss authorities were investigating allegations that Salinas had been involved in laundering the proceeds of illegal narcotics and, sure enough, three years later in October 1998, proceedings in Switzerland were commenced on that basis.

The private bank’s reactions to this reputational disaster unfolding before it have since become well documented, as has Amy Elliott’s role as the classic relationship manager ‘caught in the middle’ of a corporate environment that claimed that anti-money laundering (AML) and client due diligence (CDD) policies were important, but which also, at that time, apparently did not enforce them consistently enough. They are revealed in detail within the pages of the report on the hearings of the Senate Committee on Investigations on private banking and money laundering in November 1999, and show the following.

• Initial reactions: in March 1995, soon after Salinas had been arrested for murder, tape transcripts of conversations between the bank’s New York, London and Swiss offices reveal that the initial instincts of the bankers, far from making life more easy for the law enforcement investigations which were bound to follow, were rather to make it in practice more difficult for them. For example, the then head of the private bank, Hubertas Rukavina, mooted sending the funds held in the London accounts over to Switzerland so as to make their discovery more difficult – an option which was considered but rejected, apparently, however, primarily on the grounds that the transfer would be obvious in London’s books. The same transcripts also reveal that the bankers discussed calling in loans which had been made to Trocca against its deposits, so as to ensure that the bank was not out of pocket in the event that the Trocca funds were frozen.
• Absence of due diligence records: it became clear during the hearings that despite the existence of clear policies requiring that information on clients’ backgrounds and sources of wealth be collected within the bank’s CAMS (Client Account Management System), in fact no entries had been made at all regarding Salinas. There had been a complete blank throughout the three-year period of the relationship.
• Backdating of due diligence records: it then became clear that what records there were had only been completed ex post facto by Elliott in early March 1995 following Salinas’ arrest, apparently at the behest of private bank senior management in London who wanted to feel ‘more comfortable’ about the source of wealth on the account, upon which in fact there was very little knowledge. Furthermore, faced in November 1995 with a request for information from the Swiss authorities following the arrest of Salinas’ wife in Switzerland, the bank’s legal department (who by now had operational control of the accounts) had effected further, after-the-event changes to the CAMS entries. They incorporated reference to a belief that Salinas had sold a construction company – something which Elliott had not included in her own initial attempts at completing the CAMS profile back in March 1995. None of the information had been verified to the extent required by bank policy.
• Absence of effective enforcement of due diligence policies: the senate hearings record how: ‘during this same period, 1992 until 1995, top leadership in the Western Hemisphere division had sent numerous strongly worded memoranda urging, and ultimately ordering, its private bankers to complete and update information on their client account profiles’ and how ‘Several internal audits had specifically identified incomplete client profiles as a problem.’
• Yet apparently nothing effective had been done to ensure that these instructions were followed. None of the senior managers who waived additional personal references for Salinas beyond the Hank reference, enquired as to what other background checks were being made on Salinas and Elliott herself clearly believed that senior management – right up to the very top of the organisation – was both aware of and approved of the Salinas accounts, regardless of whether or not due diligence information was available. The account had earned $2 million in fees and interest for the bank and tapes of conversations made on the day after Salinas’ arrest recorded Elliott saying: ‘Everybody was on board on this ... I mean this goes in the very, very top of the corporation, this was known, okay? ... We are little pawns in this whole thing, okay?’
• Restricted reporting to the authorities: the exact reporting obligations of any bank in the situation in which Citibank found itself, in terms of timing and content, will always be a matter of a legal interpretation dependent on a number of factors. But the senate documents make the point that when the bank filed a criminal referral form with US law enforcement officials on 17 November 1995 – the day after the freezing of the Swiss accounts – the report only referred to the New York accounts, which held only $200,000, and not to the London or Swiss accounts which held over $50 million.
• Failure to identify discrepancies between actual and expected account activity: Elliott had stated in her earliest business report that the account had potential in the ‘$15–20 million range’, yet when the funds actually passing through the Salinas accounts topped $87 million – more than four times what was apparently expected – this did not trigger alarm bells or generate any action to validate the source of this apparently unanticipated stream of wealth.

The case concludes

Having started with a bang, the Salinas case concluded more quietly. The US District Attorney’s Office initiated an investigation into whether money laundering charges should be filed against Citibank or any of its employees, but decided against it – presumably because there was no evidence that anyone in Citibank had suspected wrongdoing and therefore participated willingly in any scheme. It is always difficult being judged by new standards and it is possible to argue that, as the banking industry emerged from the world of ‘anything goes’ into the new era of regulation and public scrutiny, that this was the position which Citibank effectively found itself in. Its Chief Executive, John Reed, who apart from his appearance before the Senate Committee was also forced to endure the indignity of a day in the company of the Justice Department being interviewed about the affair, wrote to the Citibank board:

‘Much of our practice that used to make good sense is now a liability. We live in a world where we have to worry about “how someone made his/her money”, which did not used to be an issue. Much that we had done to keep private banking private becomes “wrong” in the current environment ...’

Amy Elliott, too, in some ways found herself betwixt two worlds, and paid a very public price for it. After describing the positive perceptions of the Salinas family which she had built up over the years, and the habits of Latin American elites in moving sometimes vast sums overseas in order to escape market volatility caused by political turmoil, she stated in her written testimony before the Committee:

‘It is easy to ignore the context I have described and instead to focus on isolated details in this matter and make them seem questionable. The world in which I operated as a relationship manager in the early 1990s was different from the private banking environment today. Procedures, technologies and safeguards are very different today at Citibank ... I only ask you, with all due respect, to keep in mind the broader picture I have described as you frame your enquiry to me.’

Source: http://www.gao.gov/archive/1999/os9900/.pdf

Lessons learned

The world was surely different back then, and if you’re a financial crime professional, re-reading the case makes you realise just how far things have come since the early to mid-nineties; Wolfsberg, the Patriot Act, EU III, the risk-based approach have all come into being. And yet despite the passage of time, some of the issues this case raises are timeless.

• If you have a state-of-the-art compliance policy, what good is it if it isn’t followed at the ‘coal face’?
• If mixed messages are being sent out with firm AML policies on the one hand but a failure to deal with non-compliance on the other, where does that leave the relationship managers – the ‘poor bloody infantry’ who have to deliver both compliance and revenue?
• If the corporate culture is perceived by staff as prizing revenue above all else, then where does that leave the organisation as a whole in terms of its reputational exposure when things go wrong?

Shortfalls identified included:

• no proper identification of the customer
• no effective KYC on the customer relationship
• adequate documentary links between client identity and ownership of assets were not maintained
• information on sources of wealth were not obtained
• the substantial discrepancy between expected versus actual funds volume was not spotted ...
• and as a result, suspicious activity was not reported
• there was a delay in making a suspicious activity report for six months
• account documentation was doctored after the event to make it look as if proper KYC had been done
• staff were not supervised properly to ensure the KYC policy was being implemented
• senior management ignored multiple audit warnings.

Example: Riggs Bank

Riggs Bank was a Washington DC-based prestige bank which had built up its reputation over 150 years. It had served 20 US presidents including Abraham Lincoln and had supplied gold for the Alaska purchase in 1867. A major line of business for Riggs was the operation of accounts for foreign embassies in the US capital. Often this extended into private banking for diplomats, their family members and sometimes other officials from the country in question.

Under the US Bank Secrecy Act, banks at that time, and indeed now, were required to maintain an extensive compliance programme which included requirements that they perform due diligence against their customers, that they identified suspicious transactions involving funds of potentially illegal origin and that they report suspicious transactions to the authorities. Riggs’ own Bank Secrecy Act compliance programme policies and procedures stated that:

‘Riggs Bank will conduct business only with individuals, companies, trusts (beneficial owners) and grantors/power holders of such trusts that we know to be of good reputation and, through proper and thorough due diligence, we know to have accumulated their wealth through legitimate and honorable means.’

Augusto Pinochet Ugarte was a boy from a middle-class Chilean background who rose to become a general in the Chilean army and who seized power from the elected president Salvadore Allende in a bloody coup in 1972. Several years of violent repression followed with some reports putting the number of deaths under Pinochet’s regime as high as 3,200, with tens of thousands imprisoned and tortured. During his rule, until his resignation in 1989, he was also accused of having connections with drug trafficking and illegal arms sales, and of corruptly accruing $28 million. But Pinochet still wasn’t a ‘bad guy’ that everyone could agree on. Millions of Chileans and many in the West supported him because they believed he had saved the country from Communism and directed it firmly and safely to the path of economic growth and prosperity.

It was against this background that in 1994 a senior delegation of Riggs Bank executives visited Chile to solicit General Pinochet’s business. His first personal account with Riggs was opened shortly thereafter, an account which saw balances ranging up to $1.2 million over the next few years. The Riggs Bank approach came despite the fact that General Pinochet was already known internationally as a controversial figure and despite this, in all that followed, no evidence was ever found of any KYC documentation on his account created or maintained by Riggs Bank. Some 18 months after the account was opened, Pinochet was indicted in Spain for crimes against humanity.

Between 1994 and 2002 Riggs opened three more personal accounts for Pinochet, these being a money market account which held balances up to $550,000, a checking account and a ‘NOW’ account, which contained balances of up to $1.1 million. Riggs also established corporate accounts with complex structures for the Chilean ex-president. These included offshore shell corporations (i.e. corporations with no real physical presence, employees or staff) for the receipt of certificates of deposit which benefited General Pinochet and his family. The companies, Ashburton Limited and Althorp Investment Co Limited, all had nominee shareholders (a function which was performed by Riggs Bank (Bahamas) and directors and officers from the accounting firm which was managing the affairs of Riggs Bank in the Bahamas). So Pinochet’s name didn’t appear anywhere on the incorporation papers. At times, these corporate accounts held balances up to $4.5 million.

Much of this activity was occurring despite the fact that in 1998 the Spanish courts had issued international warrants for General Pinochet’s arrest and had issued attachment orders against his accounts throughout the world. In the UK, the Pinochet had been arrested pursuant to the Spanish warrant and was subject to an extradition hearing. Yet no suspicious activity reports were filed by Riggs, which continued to operate the Pinochet accounts without the knowledge of the US authorities. In May 2001, a senior executive at Riggs, Stephen Pfeiffer, forwarded a memo to two senior Riggs Bank officials, containing extensive information on Pinochet’s alleged crimes and the litigation surrounding him.

In the spring of 2002, during a routine examination, the Office of the Comptroller of the Currency (OCC) discovered evidence of the Pinochet accounts at Riggs. Initially the Bank resisted cooperating with the investigation, but in the end it did cooperate and finally, in the summer of 2002, the Pinochet accounts were closed. Federal regulators fined and required various contributions from Riggs Bank to a total sum of $53 million and World-Check has estimated that $130 million was wiped from Riggs’ share value as a result of this and other money laundering scandals. In July 2004 Riggs Bank was sold to the PNC Financial Services Group Inc. and the famous 150 year-old name became extinct.

In its reports on the Pinochet accounts and other accounts where Riggs Bank fell short, the US Senate Permanent Sub-Committee on Investigations stated that ‘Riggs has disregarded its Anti-Money Laundering (AML) obligations, maintained a dysfunctional AML program despite frequent warnings from OCC regulators, and allowed or, at times, actively facilitated suspicious financial activity.’

Lessons learned

How should we assess the significance of the Riggs Bank/Pinochet case and what lessons can be learned from it? Clearly it was very significant because it was one of a number of cases which pointed out the very real reputational risks that exist in doing business with controversial political figures. A key lesson learned from the case is the importance of undertaking a comprehensive risk assessment before a relationship has commenced, which covers not just the sources of wealth and the origin of the funds expected to come into the account, but also the wider reputational issues surrounding allegations against the potential client – both current and historic. If Riggs Bank did do this, then clearly they got it badly wrong. Secondly, it is important that with such individuals, such assessments – and the due diligence which goes with them – should not be a ‘one-off’ event, but should take place on a constant and regular basis, such that new evidence concerning the client is taken into account and processed and so that there can be an ongoing assessment about the suitability of a particular client for a continued business relationship. In this regard, the Riggs Bank/Pinochet case also demonstrates the importance of not allowing relationship managers who may have developed a very close personal relationship with a client, or who may be influenced by their own political views, to override the organisation’s wider sensors regarding the continued suitability of a particular account. Finally, failures in suspicion reporting and in the level of KYC and due diligence on an account will always be punished heavily by regulators, and this case was no exception.