Dirty money is losing its allure

A tale of laundering, drug running and murder has caught out some of the biggest names in banking. By Steven Solomon

ON at least half-a-dozen occasions over a three-week period in the spring of 1993, Raul Salinas, the older brother and close advisor of Mexico's then president, Carlos Salinas de Gortari, asked his wife Paulina to hand carry about $50m (pounds 30m) in anonymous bearer bank checks drawn on Mexican banks to the offices of Citibank in Mexico City. Although neither she nor her husband had an account at the bank, the checks were promptly accepted and sent to New York to support a playboy lifestyle. There, on instructions from Raul Salinas's private banker, they were wired into either the London or Geneva accounts of a bank secrecy-protected Cayman Island investment company, Trocca.

Citibank officers in London accepted the account, even though they had no documentation and no, or only vague, awareness that Mr Salinas was Trocca's ultimate beneficial owner. The funds were then invested under instructions from a Citi-owned Swiss company called Confidas.

This Confidas system was the heart of the scheme Citibank used to secrete some $90m to $100m of Raul Salinas's funds outside Mexico for two years, until 1995. Mr Salinas liked the system so much, he later told Swiss prosecutors that - had he known of it earlier - he wouldn't have resorted to the false passports and aliases he had previously used to clandestinely transfer money to Switzerland. But as suspicions have grown that Raul Salinas's fortune - he is known in Mexico as "Mr Ten Per Cent" because of the commissions he took on business he facilitated - came from drug traffickers, the system has made Citibank the target of a money laundering inquiry by the US Justice Department. On Friday, the Congress's audit arm published a study of the Salinas-Citi affair, which concluded that Citibank "facilitated a money- managing system that disguised the origin, destination, and beneficial owner of the funds involved".

Ronald Noble, a former US Treasury Under Secretary for Enforcement, says that such disguises "facilitate money laundering and make it more difficult for law enforcement to combat it".

British police have been investigating the Citicorp London link to the affair since December 1995, when they froze $22.3m of Raul Salinas's funds. In October, Swiss authorities asked the Home Office to seize the money frozen as drug-related. If this money is impounded, it is likely to be forfeited by Raul Salinas, and divided between the Swiss and British Treasuries.

The US Congressional report on the Citibank-Salinas affair also highlights rising worldwide concern about money laundering. Motivated initially by the desire to combat drugs and more recently by corruption, bribery and transnational financial crimes, governments led by the UK and US are seeking more effective measures to crack down on the $300bn to $500bn laundered yearly by banks and financial institutions. In 1996, the 26 members of the Financial Action Task Force (FATF) - the G7's anti-money laundering agency based in Paris - set out "to make bank reporting of suspicious activity mandatory", says Stanley Morris, a former head of the US Financial Crimes Enforcement Network.

Many countries around the world are now moving to implement legislatively 40 recommendations put forward by the task force. At a meeting starting tomorrow in Strasbourg, the Council of Europe will begin discussions on forming an FATF sub-agency for the nations of the former Soviet bloc, plus Cyprus, Malta, Lichtenstein and a few other places.

In a move that's cheered US financial crime fighters, the Blair government is playing a leading role in increasing pressure on offshore centres, traditionally the black holes of the world financial system. BCCI hid much of its $5bn losses in the Caymans and Dutch Antilles; Credit Lyonnais parked losses of some $35bn in Luxembourg. Since so many of the offshore centres have British roots, the new UK policy may add considerable momentum to global standardisation on money laundering. But creating a seamless web of regulation in today's porous global economy is all but impossible without self-policing by reputable financial institutions. The first principle of a good anti-money laundering bank programme is to "know your customer" (KYC). Citibank had one of the most vaunted KYC programmes in banking, but it is precisely here it seems to have slipped up in the Salinas case. The new US Congress report, says Citi waived its usual reference demands in opening Salinas' account. It accepted his explanation that his initial proceeds had come from selling a construction company, but never asked for its name, its price or to whom it was sold. Nor did the bank seem to do any other research into Salinas's reputation, which, by 1992 and 1993, was being talked about in police and intelligence circles. Even when the size of Salinas's deposits jumped to $50m in three weeks, the bank made no inquiries as to the source of the funds. It also never filed the forerunner of a "suspicious activity report" until after the Swiss moved in November 1995 to freeze Salinas's funds as probably stemming from drugs.

At this point, the Swiss arrested Raul Salinas's wife, Paulina, when she tried to retrieve documents and money from a Swiss bank. By this time, Raul Salinas was in jail in Mexico on charges of murdering his brother- in-law and of illicit enrichment. In all, Citibank earned $1.1m in fees in managing Salinas's accounts. The lack of adequate due diligence, suggested by the US Congress report, could subject the bank to further scrutiny - in London as well as the US.

For other City-based bankers, meanwhile, the Citibank-Salinas affair is a harsh lesson in what can go wrong - especially now that the global anti-money laundering movement is gathering force.