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Congressional Report Cites 2 Banks

November 29, 2000

WASHINGTON (AP) _ Financial services giant Citigroup Inc. and Commercial Bank of San Francisco violated control rules and allowed some $1 billion in possibly illicit Eastern European money to move through their accounts, congressional investigators say.

``These transfers raise concerns that the U.S. banking system may have been used to launder money,″ the General Accounting Office, Congress’ investigative arm, said in a report dated Oct. 31 on its nine-month inquiry. It was made public on Wednesday.

The report is just the latest allegation of large-scale international money laundering, which has received increased notice after it was revealed last year that the Bank of New York, one of the nation’s largest, had served as a conduit for $7 billion in Russian money, some of it believed to be from criminal activities.

New York-based Citibank, one of the world’s largest banks with operations around the globe, came under congressional scrutiny a year ago for alleged abuses by some executives in handling millions of dollars deposited by foreign officials later accused of corruption and money laundering.

John Reed, then the co-chairman of parent Citigroup, was closely questioned about the bank’s activities at a Senate investigative hearing that opened a window on the sheltered world of private banking that caters to the very wealthy.

Citibank on Tuesday sent a letter to the GAO saying it had closed the accounts in question after being contacted by the congressional investigators earlier this year.

``It is clear in hindsight that our systems and tracking procedures were not sufficient to detect the nature and extent″ of a client’s relationship with the bank, wrote Michael Ross, general counsel of the bank’s Global Consumer Business division.

``Given enhancements to our systems and procedures, we are confident that we would detect questionable activity and take action more promptly should a similar situation arise today,″ Ross’ letter said. It said bank officials have detected no illegal activity in the accounts.

The words had a familiar ring. At the hearing in November 1999, Reed decried past lapses by some Citibank executives in overseeing deposits by government leaders from Mexico, Nigeria and other countries, but told skeptical senators that the problem had been corrected and eliminated.

The client referred to in Ross’ letter is a Russian immigrant who set up more than 2,000 corporations registered in Delaware for Russian brokers and then opened the Citibank accounts for them between 1991 and January 2000, according to the GAO report.

The client was identified as Irakly Kaveladze by a congressional source, who spoke on condition of anonymity. Of the $1.4 billion or so that he deposited in the two banks, some $800 million went into Citibank accounts and about $600 million into Commercial Bank of San Francisco, the report said. It said much of the money later was transferred by wire to accounts in foreign countries.

Citigroup spokesman Michael Schlein said Wednesday the company would have no further comment. ``The letter speaks for itself,″ he said.

Far less well-known is Commercial Bank of San Francisco. According to the GAO report, its president told the investigators that two Russians bought about 9 percent of its stock for $1 million in March 1995.

An employee at Commercial Bank said that its chief executive officer, Robert Fuller, was not in his office Wednesday and not immediately available for comment.

``It is relatively easy for foreign individuals or entities to hide their identities while forming shell corporations that can be used for the purpose of laundering money,″ the GAO report said.

It said Citibank and Commercial Bank of San Francisco ``violated the principles″ of banking industry policies requiring financial institutions to monitor account activities for suspicious transactions or customers.

Money laundering, in which profits from drug trafficking, prostitution and other criminal activities are moved through a series of bank or brokerage accounts to make them appear to be proceeds of legitimate business activity, is estimated to absorb close to $600 billion a year. That equates to 5 percent of the world’s gross domestic product.

Shares of Citigroup rose $1.69 to $49.44 in trading Wednesday on the New York Stock Exchange.

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On the Net:

The report is available on the General Accounting Office’s Web site at http://www.gao.gov, under GAO Reports (Report GAO-01-120).