Correspondent banking bursts on scene as major laundering ‘gateway’

One of the most important contributions ever made to an understanding of how dirty money moves around the world was given last month in a report by a U.S. Senate subcommittee that put a spotlight on a gaping hole in global money laundering controls.

One of the most important contributions ever made to an understanding of how dirty money moves around the world was given last month in a report by a U.S. Senate subcommittee that put a spotlight on a gaping hole in global money laundering controls called correspondent banking.

The panel, led by Senator Carl Levin (D. Mich.), says: “U.S. banks, through the correspondent accounts they provide to foreign banks, have become conduits for dirty money flowing into the American financial system and have, as a result, facilitated illicit enterprises, including drug trafficking and financial frauds.”

The report follows a lengthy investigation that began with an in-depth survey sent by the Minority Members of the Permanent Subcommittee on Investigations to 20 large U.S. and foreign banks that serve as correspondent banks in the U.S. for thousands of foreign banks. The subcommittee’s minority, or Democratic, staff, along with the congressional watchdog General Accounting Office, pursued the survey results with visits to several banks. That led to the report released on February 5.

Three days of subcommittee hearings will follow in early March. Representatives of Bank of America, Chase Manhattan and Citibank, an unnamed “former offshore bank owner” believed to be John Mathewson who has given a wealth of information to U.S. authorities, and officials of the Justice and Treasury Departments will testify.

Problem was off radar screens

Exposure of correspondent banking as a conduit for large-scale money laundering affects every bank in the world. None is immune because all have correspondent accounts with other banks. The risk of laundering through correspondent accounts can pose a bigger threat to banks than customers who seek to launder large sums of crime proceeds because astronomical amounts of money come from many directions in a correspondent relationship.

Despite these great vulnerabilities, until the Levin probe came along, virtually no one had paid attention to this problem since the laundering issue was born in 1986. One observer said what the Levin report reveals is like an intersection in a high-speed freeway without stoplights.

The Levin trilogy

Correspondent banking is the second prong of a wide-ranging money laundering inquiry by the subcommittee. The first focused on private banking, highlighted by hearings in November 1999 that exposed the easy way corrupt high-ranking foreign public officials managed their stolen loot at major U.S. banks, particularly Citibank. Next, the panel will examine the money laundering proclivities and controls of the U.S. securities and mutual funds industries, which promises to raise eyebrows even further (See Story, Page 3).

Bank of New York planted seed

The Bank of New York scandal, which erupted in August 1999 and exposed money laundering through Russian correspondent accounts at BONY, planted the first seed of laundering abuses through correspondent banking. Levin took the sapling that grew from that seed and has grown it to a giant oak tree with many long branches.

Report minces no words

The 305-page PSI report, called “Correspondent Banking: A Gateway to Money Laundering,” says some of the great names in U.S. and foreign banking, through carelessness and lax procedures, facilitate the entry and movement in the U.S. of diverse criminal proceeds (See Chart, This Page).

The report minces no words. It says major U.S. banks “provide a significant gateway for rogue foreign banks and their criminal clients to carry on money laundering and other criminal activity in the United States.”

It continues: “Correspondent accounts in U.S. banks give the owners and clients of poorly regulated, poorly managed, sometimes corrupt, foreign banks with weak or no anti-money laundering controls, direct access to the U.S. financial system and the freedom to move money within the U.S. and around the world.”

Foreign offshore banks, it says, prefer to use the cover of U.S. correspondent accounts from which to transact their wire transfers because “they believe wire transfers between U.S. banks receive less money laundering scrutiny than [those] do involving an offshore jurisdiction.”

High-risk banks

The PSI identifies three categories of foreign “high-risk banks”: shell banks, which have no physical presence in any jurisdiction and no affiliation with a bank elsewhere; offshore banks, whose licenses prohibit them from conducting banking business with citizens of their “licensing jurisdiction;” and those in “non-cooperating jurisdictions,” which refer to the 15 nations blacklisted in June 2000 by the Financial Action Task Force, in Paris.

“Nesting” and “payable-through accounts” Correspondent banking is the service by which one bank provides services to another bank to move funds, exchange currencies or carry out a variety of other transactions. In some correspondent relationships, the foreign bank’s local customers are permitted to conduct their own transactions, including wire transfers, through the foreign bank’s U.S. correspondent account. Those accounts are called “payable-through accounts.”

In other situations, a foreign bank’s correspondent account in the U.S. is used by another foreign bank to conduct its own transactions, a practice called “nesting.” “Longstanding, widespread and ongoing” With such direct access to the U.S. financial system, once the funds are received in the U.S. correspondent account, the foreign bank’s customers or other foreign banks can move the money in or out of the U.S. with the correspondent account serving as cover. That money laundering “gateway,” the panel says, “is not a new or isolated problem. It is longstanding, widespread and ongoing.” Banks have failed to confront problem U.S. banks have failed to take adequate steps to detect or prevent laundering through correspondent accounts, the panel says. “The result of these due diligence failures has made the U.S. correspondent banking system a conduit for criminal proceeds for both high-risk foreign banks and their criminal clients,” it says.

These high-risk banks could be merely brass plates on the door of a lawyer’s office in an offshore secrecy haven. Or they may be offshore banks not permitted to do business with persons outside the licensing jurisdiction. Banks licensed by jurisdictions with weak laundering controls invite abuses if they do not know whether their clients are engaged in criminal activity.

“Know Your Correspondent Bank”

The great majority of the 20 banks do not have anti-money laundering and due diligence programs directed at correspondent banking. One exception is Republic Bank of New York, now HSBC USA, which has adapted its Know Your Customer policy to correspondent banks (A detailed report on the Republic program to protect against correspondent banking abuses appeared in the November 1999 issue of Money Laundering Alert).

All the banks said they follow three basic procedures when opening new correspondent relationships, all focused on the credit-worthiness of the foreign bank: Obtain financial statements, evaluate credit-worthiness, and determine the bank’s primary lines of business. None said it had a program to evaluate the money laundering controls of the foreign bank.

Survey caused bank complaints

None of the 20 large banks in the U.S. that received the panel’s survey reacted with glee. Many complained to their advisors and trade associations about the breadth of the questions, but all responded. Several said they had recently adopted stricter correspondent banking controls (See Story, Page 12).

Scope of the problem is huge.

Fifteen of the banks surveyed each have more than 1,000 correspondent relationships; many have even more. One U.S. bank surveyed has more than 3,800 correspondent accounts worldwide. Another U.S. bank handles about one million wire transfers daily.

What aggravates the problem, some bankers say, is that no global settlement system exists that can link together inter-bank transactions that could supplant some dependence on correspondent banking.

Money laundering exposed in the probe

The subcommittee conducted 10 case studies that uncovered numerous money laundering episodes, including:

  • accepting deposits or wire transfers that the foreign bank knew or should have known were linked to drugs, fraud or other crimes
  • conducting high yield investment scams by convincing investors to wire transfer funds to correspondent accounts to earn high returns and then refusing to return the money to the victims
  • conducting advance-fee scams by requiring loan applicants to wire transfer large fees to the correspondent account, retaining the fees and then failing to issue the loan
  • facilitating tax evasion by accepting deposits, commingling them with other funds in the foreign bank’s U.S. correspondent account, and then using the secrecy laws of the foreign jurisdiction to shield them from the U.S. Internal Revenue Service.
  • facilitating Internet gambling, illegal under U.S. law, by using the correspondent account to accept and transfer gambling proceeds.


The report’s recommendations paint a wide swath through the traditional relationships that banks have with each other. At the very least, the panel says, U.S. banks should be barred from opening correspondent accounts with foreign banks that are shell operations with no physical presence anywhere (See Story, Page 6).

It is almost certain that Levin will propose legislation to address the abuses. He filed a bill in the last Congress that would have dealt with some of the problems and others, but it died without passage.

Legislation on horizon

The banking industry says no new laws or regulations are needed. Last year, with help from Senator Phil Gramm (R. Tex.), chair of the Senate Banking Committee, lobbyists derailed legislation proposed by the Clinton administration and some top Republicans, including then House Banking Committee Chair, Congressman Jim Leach (R. Ia.), that would have allowed the Treasury Department to ban certain transactions between U.S. banks and offshore institutions.

The case Levin is making may be too compelling for even the lobbyists to downplay.