1. THE SUBCOMMITTEE RECOMMENDS THAT THE UNITED STATES DEVELOP A MORE AGGRESSIVE AND COORDINATED APPROACH TO COMBAT INTERNATIONAL FINANCIAL CRIME. THE U.S. NEEDS TO TAKE FIRM ACTION AGAINST NATIONS WHO PERMIT THEIR PRIVACY AND CONFIDENTIALITY LAWS TO PROTECT CRIMINALS FROM U.S. REGULATORS AND LAW ENFORCEMENT.
Both BCCI and its customers used foreign bank secrecy and confidentiality laws to commit crimes, to prevent the detection of those crimes, and to obstruct law enforcement efforts to investigate and prosecute crimes once they were discovered.
The traditional approach of smaller nations such as the Cayman Islands and Luxembourg of offering strict bank secrecy as an inducement to attract foreign deposits has is poor international public policy, and threatens vital interests of the United States.
Current practices of major financial centers such as the United Kingdom and Switzerland, while providing for the exchange of information among regulators, and some mechanisms for the exchange of information among federal law enforcement, after criminal activity is uncovered, still impede an adequate flow of financial information concerning such activity in the earlier, investigative phase.
The United States needs to take a more aggressive and coordinated approach to developing an international regime for the sharing of financial information among governmental entities, and a substantial loosening in financial confidentiality and privacy laws to insure that government investigators in the U.S. can gain adequate access to and information about, financial transactions that cross international boundaries, but impact the U.S.
While the U.S. has become more focused in fighting drug money laundering through international cooperation in recent years, it has continued to take the position that the process of sharing on applications between law enforcement agencies is sufficient to protect U.S. interests, and no broad-scale changes in foreign bank secrecy laws are necessary. As Federal Reserve counsel Virgil Mattingly testified, sixteen months after the Federal Reserve began its formal investigation of BCCI, Swiss and French authorities were still denying it critical information as a consequence of their secrecy laws.(1) A much more aggressive approach by the United States to changing attitudes among the G-10 nations on this issue is essential.
Current toleration by the United States of bank secrecy and regulatory havens such as the Grand Caymans, Liechtenstein, the Bahamas, the Channel Islands, Vanuatu, Hong Kong, Aruba, and the Netherlands Antilles needs to be replaced by a policy that threatens to withhold access to the U.S. market for banks doing business in any nation that does not meet minimum standards for regulation and the sharing of information with the United States.
The Treasury, as the lead agency for handling U.S. policies concerning international financial crime, needs to be much more aggressive on these issues, to place substantial limits on the ability of criminals to use confidentiality and privacy laws as a shield against law enforcement.
2. THE SUBCOMMITTEE RECOMMENDS THAT THE INSPECTOR GENERAL OF THE JUSTICE DEPARTMENT INVESTIGATE THE POLICIES AND PRACTICES THAT LED TO THE JUSTICE DEPARTMENT'S INEFFECTIVENESS IN INVESTIGATING AND PROSECUTING BCCI, AND IMPAIRED ITS ABILITY TO COOPERATE WITH OTHER INVESTIGATIONS OF BCCI. THE JUSTICE DEPARTMENT NEEDS FUNDAMENTALLY TO RECONSIDER ITS POLICIES IN DEALING WITH COMPLEX FINANCIAL CASES. FUNDAMENTAL CHANGE IN HOW THE JUSTICE DEPARTMENT HANDLES INQUIRIES FROM OTHER GOVERNMENT AGENCIES AND THE CONGRESS IS ALSO ESSENTIAL.
The problems encountered by the Justice Department in investigating and prosecuting BCCI are familiar ones. As a consequence of a lack of understanding of the significance of the case, requests for additional resources from the Customs Agents and prosecutors involved were ignored, broader investigated leads were abandoned, and ultimately, BCCI was permitted to plead guilty and thereby avoid a trial that could have helped bring down the bank entirely.
Other problems compounded these original problems. Most significant was the Justice Department's unwillingness to share information with other ongoing governmental investigations, including those of the Federal Reserve, the New York District Attorney and the Senate. Instead, the Justice Department appeared on numerous occasions to be more concerned with protecting its ability to control information about BCCI, than with assisting the investigative efforts of others. Related to this problem was the lack of candor demonstrated by individual Justice Department employees in responding to inquiries of the Federal Reserve, New York District Attorney, and Senate. In addition, there were substantial problems of coordination between the Justice Department in Washington and its U.S. Attorneys office, as was especially demonstrated by the breakdown in communication between the U.S. Attorney in Miami and the Criminal Division of the Justice Department in Washington in 1991.
In response to the resource and coordination issues arising in BCCI, consideration needs to be given within the Justice Department to the recreation of the strike force concept, abandoned during the early years of the Reagan Administration, and used to devote substantial resources to major cases.
In response to the cooperation issues pertaining the Federal Reserve, New York District Attorney and Senate, consideration needs to be given by the Attorney General to adopting a new set of procedures and regulations governing such contacts, to direct Justice Department personnel to give a far higher priority to providing assistance in response to the legitimate requests of other governmental entities, limited only by such legal requirements as the withholding of documents placed before a grand jury.
3. THE SUBCOMMITTEE RECOMMENDS THAT THE CENTRAL INTELLIGENCE AGENCY AND STATE DEPARTMENT TARGET FOREIGN FINANCIAL INSTITUTIONS AS SUBJECTS FOR INTELLIGENCE GATHERING AND ANALYSIS.
Prior to BCCI's collapse, the CIA had disseminated only three analytic reports on BCCI itself, one of which was lost and of which no original remains. While the reports demonstrate the Agency's early recognition of BCCI's systematic engagement in money laundering and other criminality, they are also oddly limited in detail and scope, given the serious nature of the allegations discussed, and there was little follow up by the CIA to any of them. Moreover, these reports were not provided to the users, the Federal Reserve and the Justice Department, who most required them. Finally, these reports contained no information concerning several individuals who were affiliated with or owned BCCI, and with whom the CIA had had or was still having substantial contact. These gaps would suggest a remarkable lack of information at the CIA about the basic business dealings of important CIA contacts in the Middle East.
The State Department, by contrast to the CIA, knew almost nothing about BCCI prior to its collapse, and seemed to view the collection of information on foreign financial institutions as largely beyond its scope of responsibilities.
Given the risk to the United States from international financial crime, both agencies need to upgrade their capabilities to understand the strategies being employed by foreign financial institutions that may impact on vital U.S. interests, and to begin to include such entities as targets for collection and analysis.
4. THE SUBCOMMITTEE RECOMMENDS THAT THE CONGRESS CONSIDER ADOPTING ADDITIONAL OVERSIGHT MECHANISMS TO ENSURE THE CIA'S ACCOUNTABILITY ON THE PROVISION OF INFORMATION.
At various times, the Central Intelligence Agency provided information to the Subcommittee during the course of its investigation that was both misleading and untrue. Documents that existed were characterized as not existing. Information that was provided was incomplete. It required repeated efforts by the Subcommittee, extending over a year, to obtain more complete information, which was provided only following a meeting in February, 1992 between the Subcommittee chairman and Director Gates. Even then, as the CIA purported to provide a full account of its knowledge of BCCI, it cautioned the Subcommittee that its system of record-keeping could not guarantee that all information had in fact been provided. Moreover, information regarding certain persons who were shareholders, nominees, officers, or affiliates of BCCI, was provided solely in a summary form, containing relatively limited information and far less than is clearly in the CIA's possession.
Staff of the officer of the Inspector General of the Central Intelligence Agency has recently requested meetings with Subcommittee staff to discuss these issues.
It is recommended that the House and Senate Select Committees on Intelligence consider whether the current procedures and mechanisms are adequate to ensure accountability by the CIA in its responses to Congressional requests. Of particular concern is the lack of any practical mechanism for members who do not serve on the Committees to insure the CIA's responsiveness to their legitimate requests, as well as the difficulties of establishing whether or not the CIA's responses to inquiries are forthright and accurate.
5. THE SUBCOMMITTEE RECOMMENDS THAT FEDERAL AGENCIES IMPOSE NEW REQUIREMENTS ON FOREIGN AUDITORS TO PROTECT U.S. INTERESTS IN ANY CASE IN WHICH ANY SUCH AGENCY IS RELYING ON AN AUDIT CERTIFIED BY A FOREIGN AUDITOR. AT MINIMUM, THIS SHOULD REQUIRE FOREIGN AUDITORS WHOSE CERTIFICATIONS ARE USED BY INSTITUTIONS DOING BUSINESS IN THE U.S. AGREE TO SUBMIT THEMSELVES TO U.S. LAWS.
As the Subcommittee discovered during the course of investigating BCCI, the major accounting firms, such as Price Waterhouse, while operating globally, are structured to be independent partnerships in which no national partnership has financial obligations or ties to any other. As a consequence, when a foreign auditor certifies the audit of an entity doing business in the United States, the domestic auditor views itself to be not legally responsible for any of the actions taken by the foreign auditor, nor for providing any information to U.S. regulators and law enforcement personnel that may be in the possession of the foreign auditor. In the case of BCCI, this meant that Price Waterhouse in the United States was able to take the position that it could not answer any questions or provide the information requested by investigators, while Price Waterhouse in the United Kingdom -- which certified BCCI's books -- was able to take the position that it did not do business the United States, was not subject to service of process in the United States, and was not responsible to provide information to the United States, although BCCI was licensed as a foreign bank in several states.
The inability of U.S. regulators and law enforcement to gain access to foreign auditors who may have certified the accounts of entities doing business in the United States substantially impeded investigations and prosecutions of BCCI. It is recommended that the Congress develop a statutory mechanism to require all U.S. agencies to develop regulations imposing the requirement that any entity certifying the audit of an entity which is provided to any U.S. agency in so doing submit itself to U.S. jurisdiction and agree to the provision of documents and records as required by U.S. law. Additional mechanisms to insure accountability by auditors to government regulators and investigators should also be explored.
6. THE SUBCOMMITTEE RECOMMENDS THAT THE PRESIDENT AND THE SECRETARY OF STATE ADVISE THE GOVERNMENT OF ABU DHABI THAT ITS WITHHOLDING OF DOCUMENTS AND WITNESSES PERTAINING TO BCCI FROM U.S. FEDERAL LAW ENFORCEMENT INVESTIGATORS, THE FEDERAL RESERVE, THE NEW YORK DISTRICT ATTORNEY AND THE CONGRESS THREATENS VITAL U.S. INTERESTS AND WILL NOT BE TOLERATED.
As of the writing of this report, the most important remaining impediment to investigating and prosecuting the BCCI case is the withholding of critical documents and witnesses from U.S. law enforcement and regulators by the Abu Dhabi authorities. Given the ownership of BCCI by Abu Dhabi, and Abu Dhabi's controlling interest, through BCCI and its own shares, in CCAH, holding company for the First American Banks, the Abu Dhabi government has engaged in substantial non-sovereign activities in the United States. Its continued suppression of evidence in the case is so serious that it should raise some questions about the previously friendly relationship between the two nations. To date, neither the White House nor the State Department has made any statement criticizing the Abu Dhabi government for its refusal to cooperate adequately with the United States on this matter. The United States needs to express its deep concern over this matter, and its intention to take further steps if the failure to provide access to the witnesses and documents is not rectified immediately.
7. FURTHER ATTENTION NEEDS TO BE GIVEN TO THE PROBLEM OF THE REVOLVING DOOR IN WASHINGTON, AND THE IMPACT ON THE REGULATORY PROCESS AND ON LAW ENFORCEMENT OF POLITICAL INFLUENCE IN WASHINGTON. THE SUBCOMMITTEE RECOMMENDS THE CONSIDERATION OF LEGISLATING A FEDERAL STATUTORY CODE OF CONDUCT FOR ATTORNEYS WHO PRACTICE BEFORE FEDERAL AGENCIES.
BCCI's political connections in Washington had a material impact on its ability to accomplish its goals in the United States. In hiring lawyers, lobbyists and public relations firms in the United States to help it deal with its problems vis a vis the government, BCCI pursued a strategy that it had practiced successfully around the world: the hiring of former government officials. These former government officials played a major role both in making it possible for BCCI secretly to purchase Financial General Bankshares, and then to evade detection and impede investigative efforts to expose what it had done.
There is something fundamentally wrong with a political system in which former government officials, as in the case of BCCI, too frequently appear to be willing to provide assistance
in circumventing U.S. laws and regulations to anyone who is willing to pay their fee.
In theory, ethical considerations would discourage former high public officials, government prosecutors, and regulators from using the skills and knowledge they obtained in government to assist clients who wish to circumvent, or at least, bend, the obvious import of the laws. However, in the highly competitive day-to-day practice of law and lobbying in Washington, D.C., it appears that such considerations are too often thrown aside to the need of the former officials to generate fees.
The problem of the revolving door and influence-peddling is serious enough when applied to domestic clients looking to influence the legislative, regulatory, or law enforcement process. However, as with BCCI, when former government officials provide put their expertise to use for foreign clients, even deeper problems emerge. First, the foreign clients have little stake in our society beyond their own self-interest, and thus, there is less incentive for them to adhere to U.S. laws apart from the threat of sanctions if they are caught breaking them. Second, some foreign clients may be accustomed to political influence and corruption within their own countries, and therefore pay for and expect such services to circumvent laws in the United States. Third, as in BCCI, foreign clients are less susceptible to being investigated, and prosecuted or held liable in the United States, if something goes wrong. Fourth, it is more difficult to determine the ultimate agenda of an entity which is based outside the United States.
Foreign investment in the United States may in some respects be an essential component of long-term prosperity, and in any case inevitable. Yet the continued willingness of so many attorneys and lobbyists in Washington to represent foreign clients without regard to the special problems they pose, suggests that consideration needs to be given to legislation that would force lawyers and lobbyists who represent foreign interests to adhere to a higher standard of practice, adequate to protect U.S. interests.
At present, essentially no mechanism exists whereby sanctions can be imposed on attorneys who fail to meet basic ethical obligations to regulatory bodies. Serious attention needs to be given to the development of a federal code of professional conduct, that would supplement the industry code adopted by the American Bar Association. Such a code would set forth minimum ethical standards for the practice of law before federal regulatory bodies, including requiring certain disclosures to the government by the attorney in cases in which the attorney has reason to believe the client may have made false statements to the government. The code would allow for any party, including the regulators themselves, to seek revocation of a lawyer's right to practice before that regulatory body for an infraction of the code, or before any federal regulatory body for a serious such infraction.
8. THE SELF-REGULATION OF THE U.S COMMODITIES MARKETS BY THE COMMODITIES FUTURES TRADING COMMISSION, THE CHICAGO BOARD OF TRADE, AND THE CHICAGO MERCANTILE EXCHANGE IS INADEQUATE TO PROTECT THOSE MARKETS AGAINST MONEY LAUNDERING INVOLVING TRADES
FROM ABROAD. THE SUBCOMMITTEE RECOMMENDS THAT THE EXCHANGES MAKE MONEY LAUNDERING ILLEGAL, AND DEMAND THAT THIS REQUIREMENT BE ACCEPTED BY FOREIGN COMMODITIES EXCHANGES WITH WHOM THEY DO BUSINESS, AS A CONDITION OF ACCESS TO US EXCHANGES.
As the Subcommittee investigation found, commodities regulators with the responsibility for investigating Capcom showed little interest in conducting a thorough investigation of its activities, and in 1989 allowed Capcom to avoid such an investigation through agreeing to cease doing business in the United States. While the exchanges have developed sophisticated mechanisms for detecting money laundering that takes place within the U.S. markets, those markets interact with foreign commodities markets in a manner that makes detection of money-laundering that crosses international boundaries very difficult.
At present, the laundering of money, in and of itself, does not violate commodities regulations, and is not grounds for expulsion from the exchanges.
Commodities regulators in the U.S. need to push for the definition and criminalization of money laundering in all commodities exchanges with whom they deal, including those in foreign countries, and develop procedures for "spot" checks of various investment houses to detect money laundering. They also need to develop mechanisms with foreign commodities regulators to insure that mirror imaging and similar techniques for money laundering are not tolerated simply because the mirror images are separated by national borders.
9. THE SUBCOMMITTEE RECOMMENDS THAT FURTHER STEPS BE TAKEN TO INSURE ADEQUATE ACCOUNTABILITY OF FOREIGN FINANCIAL INSTITUTIONS DOING BUSINESS IN THE UNITED STATES, INCLUDING REQUIRING THAT FOREIGN BANKS FORM SEPARATELY CAPITALIZED HOLDING COMPANIES IN THE UNITED STATES AS A CONDITION OF LICENSE AND THE ESTABLISHMENT BY THE FEDERAL RESERVE OF A MINIMUM STANDARD FOR CONSOLIDATED REGULATION THAT EXCLUDES BANK REGULATORY HAVENS.
While foreign bank regulation in the United States has already been substantially strengthened as a result of the BCCI affair, foreign banks doing business in the United States are still treated differently from domestic banks, and to the competitive detriment of domestic banks. Under the changes in law implemented last year through the passage of the Foreign Bank Supervisory Enhancement Act as part of the banking reform bill, foreign banks are now effectively regulated, supervised, and examined at a level equivalent to U.S. banks. However, they are not separately capitalized within the United States, and are merely required to maintain certain levels of reserves here as a means of protecting U.S. creditors.
The result is that U.S. regulators have no means for determining the nature, source, and backing of these reserves, or the real ability to keep such reserves in the U.S. in the event of a crisis involving the foreign bank. The Treasury has already recommended that foreign banks engaging in the sale of securities and other expanded-banking activities be required to establish separately capitalized holding companies in the U.S. This approach should be adopted for all foreign banks as a matter of enhancing overall accountability.
In addition, the Federal Reserve needs to move forward with a certification process which reaches a determination as to whether the home country supervision of a foreign bank meets a base-line standard sufficient to justify granting banks regulated by that country the right to operate in the United States.
Under current law, any foreign bank operating on a consolidated basis regulated by any home country bank regulator is on an equal footing with all other foreign banks similarly regulated in seeking permission to operate in the United States. With the passage of the Foreign Bank Supervisory Enhancement Act last year, the Congress has implemented a number of suggestions made by the Federal Reserve to strengthen U.S. regulatory oversight of such institutions, which includes the ability of the Federal Reserve to differentiate among such institutions based on the quality or extent of regulation by the home state regulator. The Federal Reserve needs to make use of the authority granted in the Foreign Bank Supervisory Enhancement Act to specify what the baseline requirements for consolidated regulation are, and which jurisdictions do and which do not meet these requirements.
As BCCI demonstrated, lax regulation in such jurisdictions as Luxembourg and the Grand Caymans can enable an institution bent on fraud to engage in manipulation of accounts and assets at a significant level as a means of securing legitimate deposits. The U.S. remains a key market for foreign banks, and few nations would be willing to give up the right for their banks to operate in the United States. A certification process under which the Federal Reserve sets criteria under which home country regulation is deemed adequate, and excludes banks regulated by "havens" which fail to meet those standards, would have no impact on banks regulated by countries that met basic standards for such regulation. The adoption of such a process, including the creation of an approve and non-approved list of country regulators, is essential to protect U.S. banking from being infiltrated by criminals.
10. THE SUBCOMMITTEE RECOMMENDS THAT FOREIGN INVESTORS WHO PURCHASE SUBSTANTIAL SHARES OF U.S. BUSINESSES BE REQUIRED TO APPEAR PERSONALLY IN THE UNITED STATES AS INSURANCE THAT THE FOREIGN INVESTOR IS NOT ACTING AS A NOMINEE FOR SOMEONE ELSE.
Currently, U.S. lawyers are allowed to establish a nominee company on behalf of foreign investors. While there are certain disclosure requirements for investors who purchase over 5% of a company, there exists no requirement that the individual appear in the United States. Nominees whose names are used to purchase businesses on behalf of others is a common practice in much of the world, especially Latin America and the Middle East.
A requirement that any foreign investor who purchase more than 5% of a U.S. company, business, bank or financial entity, appear personally before the appropriate regulatory authority, with a waiver for investors who met certain defined criteria, such as showing adequate assets in the United States to meet judgments against them personally, would help to curtail the practice, as illustrated in the BCCI case, of nominee shareholders.
If the investor refuses to be present at a hearing, the legislation could required that the investment be made provided the U.S. attorney is willing to waive the attorney/client privilege and incur liability should the investment subsequently prove to be fraudulent in any way.
11. TURF WARS CONTINUE TO SEVERELY DAMAGE THE ABILITY OF LAW-ENFORCEMENT AGENCIES IN THE UNITED STATES TO DO THEIR JOB. THE SUBCOMMITTEE RECOMMENDS THE ESTABLISHMENT OF A COMMITTEE OF LAW ENFORCEMENT OFFICIALS WHOSE JOB IT IS TO CONDUCT OVERSIGHT OF, PREVENT, AND RESPOND TO FAILURES OF COOPERATION IN LAW ENFORCEMENT.
Turf wars in the BCCI case were evident everywhere, including within the U.S. Customs Service itself, among competing federal law enforcement agencies, within the Justice Department and U.S. Attorneys' Offices, and between federal law enforcement, the Federal Reserve, the New York District Attorney, and the Congress. These bureaucratic battles had a substantial and negative impact on investigating and prosecuting BCCI. They are not unique to the BCCI case, but endemic, and some structural response is essential.
This Subcommittee previously encountered this problem during the course of its investigations in 1987 and 1988. Since that time, the problem has not improved, and the Subcommittee has seen no signs that it is effectively being responded to by federal law enforcement.
It is recommended that the Congress establish, by statute, a law enforcement committee, reporting annually to the Justice Department and the Congress, which focuses on developing solutions to the continuing "turf wars" in the sharing of information and coordination of prosecutions among law enforcement entities in the U.S. The committee would consist of a representative from the Justice Department, a U.S. Attorney, a state Attorney General and a District Attorney, all appointed by the President and each subject to confirmation by the Senate.
12. THE SUBCOMMITTEE RECOMMENDS THAT A STATUTORY MECHANISM FOR THE RECEIPT BY CONGRESS OF FOREIGN FINANCIAL INFORMATION BE ESTABLISHED.
The Justice Department has for a number of years taken the position that U.S. treaties with foreign jurisdictions for the sharing of information in criminal, regulatory and investigative matters does not encompass the Congress, even when Mutual Legal Assistance Treaties (MLATs) have been entered into with those countries which do not by their language exclude the Congress. Accordingly, the Justice Department refused to assist the Subcommittee, and will not in general assist Congressional requests for information, including the enforcement of Congressional subpoenas, to the extent that they seek information that is held abroad. This position has recently been modified so that the Justice Department will cooperate in such assistance in cases in which the Foreign Country has already explicitly agreed to provide it to the Congress.
As the Iran-Contra Committees found in 1987, and as this Subcommittee has found during its work from 1988 through 1992, the inability of the Congress to obtain information from abroad either directly or through the Executive Branch due to the lack of procedures has substantially impeded the Congress' constitutional responsibilities in fact-finding and oversight of U.S. foreign policy and other extra-territorial activities.
Two possible legislative solutions would be a statute explicitly adding the enforcement of legislative branch subpoenas as a matter of U.S. domestic law to the mutual enforcement responsibilities of the Executive Branch under mutual legal assistance treaties with foreign countries; and a statute providing for direct application by the Congress to the foreign government for enforcement of the subpoena, backed by some form of limitation on Executive Branch cooperation with that foreign government in the event of non-compliance.
1. S. Hrg. 102-350 Pt. 5 p. 153.
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