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RUSSIAN MONEY LAUNDERING
WEDNESDAY, SEPTEMBER 22, 1999
U.S. House of Representatives,
Committee on Banking and Financial Services,
Washington, DC.
The committee met, pursuant to call, at 10:05 a.m., in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.
Present: Chairman Leach; Representatives McCollum, Roukema, Bereuter, Lazio, King, Royce, Metcalf, Barr, Kelly, Cook, P. Ryan of Wisconsin, Biggert, Terry, Green, LaFalce, Vento, Waters, C. Maloney of New York, Bentsen, J. Maloney of Connecticut, Sherman, Lee, Goode, Inslee, Moore, Gonzalez, S. Jones of Ohio, Capuano and Forbes.
Chairman LEACH. The hearing will come to order for a second day of hearings on this precise subject, but fourth or fifth day of hearings in the last year-and-a-half on Russia. And I would like to just address a couple of philosophical issues that may seem a little out of sorts in the context of specific actions of specific individuals or companies. When you think about it, for most of this century the world has been engaged in a battle between communism and capitalism. That battle has been put aside, if not the West having largely prevailed, although there is some question now, the Cold War being over, whether the peace has been won.
But it strikes me the new great antagonism in the world today is between capital systems that operate under the rule of law and those that operate outside the rule of law, and what you have here as we look at Russia is a society in which free markets are developing, but they are developing in such a way that there is a lawlessness. In fact, as one of our witnesses yesterday indicated, law applies to the poor and contacts apply for the rich.
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Interestingly, philosophically in communism there are two great flaws in Marxist philosophy. One was the view that history was based on a march in which individuals weren't necessarily accountable, because historical forces were the dominant forces, and you have a class struggle, both of which I always thought had virtually no basis in reality of either history or philosophy. Although ironically in the circumstances developing in Russia today, we have un-Marxist elements that are tied to these theories; that is, you have a new class that has been put in power that is a class that has never existed in world society in a like manner before, and this new political power class has now come to control instruments of economics. I don't believe personally that any society can long stand in which very few control all the wealth and the very many have virtually no opportunity.
And so by a virtual accountability sense, there is real question of whether democracy can hold in this kind of circumstance, and I believe that we in the West have an obligation to cease standing up for governments in power and start standing for people and their plights, and that what we should be doing in the West, led by the United States, is identifying with the Russian people, not with their leaders.
In this regard, when it comes to international finance, I don't think you can walk away in Russia. On the other hand, when you look at any institution like the IMF, which give large macro-economic adjustment programs to central banks that are not perfectly accountable, and which, it appears, have been leading in social theft, one of the questions is, ''Is it justified for the United States to support IMF lending to Russia at this time?'' I think this is very dubious.
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On the other hand, there is a second great institution of international finance called the World Bank, which is what might be described at the micro level instead of the macro level of economics, and I personally think we ought to be giving emphasis to World Bank assistance to Russian people, perhaps having World Bank contract out with Western banks or community-oriented financial institutions instead of state-controlled, monopolistic enterprises so that money can flow for economic development for the sake of the Russian people.
In any regard, today we have a series of witnesses who will talk about the issue of crime in Russia and the issue of money laundering, and one example of significance from an American banking perspective of the possibility that will reveal, shed light on how funds from Russia come into the Western banking system, whether they be perfectly legally from a Russian or American perspective or with some questions as to their propriety.
At this point, let me turn to Mr. LaFalce for any opening comments he might have.
Mr. LAFALCE. Thank you very much, Mr. Chairman. I think these hearings are extremely important. About a decade or so ago, it became obvious to the world that we were witnessing a great moment in history, a moment when a transition would take place, a transition from Communist states, with centrally planned economies, to something else. Some people, they thought they knew what that something else would be, but nobody really knew for sure. Many people say, ''Well, we are going to go from communism to capitalism.'' That is much too simplistic; but, of course, there are difficulties with both.
I am often fond of reading encyclicals of Pope John Paul II, and he will condemn the evils of communism and give solace to us of the United States saying, ''Aha, we are right.'' But he will also condemn the potential evils of the capitalistic system, too, which ought to make us stand up and say, ''Well, now, wait a minute, you know, you have to be careful. If you are going to have a capitalist economy, you have to have certain rules and regulations that are fair, that are enforceable,'' and so forth.
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And whatever your political system, whatever your economic system, there is something that must always be central, and that is not something in the abstract. It is not a bunch of figures, budget deficits, budget surpluses, GNP growth, GDP, whatever it might be. The most important concern of all individuals should be the condition of the human being, the condition of the human being within the United States, the condition of the human being in Russia, condition of the human being in Mexico, and so forth.
And so whatever policies we adopt as a Nation, our first question should be how will this affect people in our own country, and because things, what we do, have ramifications elsewhere, how will it affect people elsewhere. We are especially obligated to ask that question, how does it affect people elsewhere, when we take action within multilateral institutions, whether that is the IMF, the World Bank, European Bank for Reconstruction and Development, InterAmerican Development Bank, you name it.
I don't think that we have had before us on all occasions the centrality of human beings and their condition in the actions we have taken. I think also that we have so glorified capitalism that we have not been mindful enough of its problems, and we clearly have not been mindful enough of the problems that can so easily come about in making a transition from one type of system to another, the transition from communism to a basically capitalist economy. That is why I was so concerned going way back to the early 1990's, introduced legislation that was passed that created the Central European Small Business Commission, so that we could help develop a small business sector in these formerly Communist states. It did excellent work, in my judgment, but then we couldn't get it reauthorized and reappropriated. That is why I was so concerned.
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I thought the most important phenomenon taking place circa 1993, 1994, 1995 to 1996 was the phenomena of privatization. We were witnessing privatization on a scale and in a manner that had been unknown to the world, and we would either do it right, or we would let this golden opportunity slip through our hands. In large part we let a tremendous amount of opportunity slip through our hands, we being a lot of people, World Bank, the private consultants, United States, European Bank for Reconstruction and Development, and so forth, and so much of the privatization went then to the benefit of a relatively small handful of individuals, either legally or illegally. That is one of the difficulties is so much of this was done under the color of law.
So what do we do? Well, we do what we can right now, learn from what we did or didn't do right and wrong; examine our laws, most especially our money laundering laws, to see if the laws are good, if the laws are being enforced, and if they are not being enforced, why not, and if they are good, but could be better, how so. Then, of course, we have individuals such as the Justice Department which look at criminal issues, and we have to be careful to what extent Congress works compatibly with criminal investigators so that nothing we do serves to be or proves to be counterproductive, and I am always mindful of that. Anything we do I want or the Chairman wants to be productive rather than counterproductive.
So some of those are my initial thoughts. This is an important hearing. I look forward to hearing from you, Mr. Robinson, and all of the witnesses scheduled today and those witnesses that will be brought in the future.
Chairman LEACH. Mrs. Roukema.
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Mrs. ROUKEMA. Thank you, Mr. Chairman. I will limit my introductory remarks here and just express my regrets to everyone that I couldn't be here for most of the hearing yesterday. I heard the third panel, but as you know, we were experiencing Hurricane Floyd disaster in two of my counties in northern New Jersey and I had to meet with the Director of FEMA, James Witt, who had flown in early yesterday morning, and the Governor of the State in order to assess the damage and set up lines of communication and organization to deal with the flooding problems. I am happy to say that things seem to be under control.
I will however be reviewing the testimony of yesterday. I want to express my extreme appreciation, Mr. Chairman, for the fact that you are taking up these subjects; not only the foreign policy components, but also and most central to our committee are the questions of money laundering. As you know, I have held some money laundering hearings, way back in April, and have proposed legislation, the Bulk Cash Smuggling Act. I believe these hearing expose what is being done in terms of money laundering, and what should be done in the United States as well as what should be criminalized and how we should have the law enforcement community react.
But more importantly than that is the fact, Mr. Chairman, that you introduced just this week, yesterday, and I am very happy to be a co-sponsor of that legislation, the Foreign Money Laundering Deterrence and Anticorruption Act. Mr. Chairman, there is great need for this legislation. I think the need for stricter money laundering laws is is being demonstrated clearly by these hearings. Certainly my questioning today will focus on whether or not we have learned enough from this particular tragic experience with Russia and the Bank of New York to determine whether the legislation, based on this experience, will be sufficient and comprehensive enough.
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I think we are going to learn some excellent things today. I pledge, Mr. Chairman, that with the full knowledge of these committee hearings that we can, and should, all move together, hopefully in a bipartisan basis, to expedite the movement toward enacting money laundering legislation this year. I certainly look forward to what we can learn from our panelists today to help us achieve that purpose. Thank you, Mr. Chairman.
Chairman LEACH. Well, thank you, Mrs. Roukema.
Mr. Vento.
Mr. VENTO. Thanks, Mr. Chairman. I don't have a prepared statement. I want to again recognize the importance of this series of hearings with this new focus on the transactions of cash flow from the Soviet Union and from other countries I suppose it could be expanded to. We are obviously looking at this and I think in sort of a myopic way when we look only at the financial institutions here and perhaps not looking at what happens in bond markets or what happens in other equity markets that are taking place if we really want to follow the entire flow of the capital.
Mr. Chairman, I heard in some of the comments of yourself and some of my colleagues there was debate over the IMF, whether we are going to look at simply the market-oriented forces of the conditions and requirements that the IMF attempts to personify in providing some of the key loans that are made upon which many other loans and financial arrangements depend, looking upon that and whether or not we are going to look at what the human condition is, and of course we hear this from our friends.
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Of course, I have been advocating or attempting to look at the human rights questions broadly insofar as they affect countries with regard to Asia and certainly with the World Bank and its sister institution. That sister institution, that is what its primary focus is, but invariably the other 180 nations that are members of the International Monetary Fund don't always take kindly to the U.S. view of culture and various rights of individuals.
And so I think we have to be aware of that phenomenon and what the limits are, but I think it could come to and should come to an agreement. I don't think that a sustainable free-market economy is sustainable based on an undemocratic or grave social injustices that are embedded in some of the member countries that we are attempting to deal with that have severe financial problems and need sort of the financial architecture and the keystone position that the IMF puts in place in those instances.
Mr. Chairman, furthermore, of course, as we look at our own institutions and how they can indirectly help a nation such as Russia that is emerging and has an evolving market system, one that obviously has come without the institutional memory from a centrally controlled economy, with all the other adjectives that are added to its demerits, in looking at how we can assist, there has to obviously be the will and the recognition within the country of the necessity of the actions that we may take. And doing these, as I said, in a myopic way just within the United States simply transfers, as has often been pointed out, these activities to other banks, to other financial entities globally.
So I don't know the answer. I appreciate that some are risking putting forth solutions very quickly, including yourself, Mr. Chairman, and I think that it is a positive effort that is being made. We obviously need to learn many of the aspects of this and whether or not we can achieve agreement with the other financial entities and policymakers on an international basis, including, I think—and Curt Weldon's comments were, I think, well placed—in not relying simply on the one personality or one leader in Russia, but relying on and trying to establish better relations with other government and state institutions, including the Duma, in Russia.
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Mr. Chairman, I am pleased to see our former colleague Senator DeConcini is present. I wanted to put you in New Mexico for a minute, Dennis, but I know that he has maintained in this and obviously is working and representing some of the witness/clients that are present today.
Mr. Chairman, thank you.
Chairman LEACH. Thank you, Bruce.
Does anyone else seek recognition?
Mr. Lazio.
Mr. LAZIO. Thank you, Mr. Chairman. Just briefly I just want to make two remarks. First of all is again to emphasize the fact that it is important for us to make some assessment about American complicity in the crisis in Russia. Everything ranging from the dramatic increase in poverty from about two million people to sixty million Russians living in poverty, a tremendous health crisis that is occurring now that is unseen in even some Third World countries, a dramatic increase in alcoholism among Russian males, the diplomacy between America and Russia that can at best be characterized as chilling, an economy that is now roughly the size of Denmark, and how this all happened and whether Russia will look back upon this and say America could have done better and needs to do better.
I want to make a personal remark about Tom Renyi, who is testifying today, the CEO. They are obviously in a difficult position, but I think it is extraordinarily graceful of him, frankly, as a CEO to be here and to answer these questions, and I think it shows great leadership at the CEO level for an important institution in New York.
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Chairman LEACH. Thank you very much.
Mrs. Kelly.
Mrs. KELLY. Mr. Chairman, I have a statement, but in the interest of time I would like to have unanimous consent to insert it in the record.
Chairman LEACH. Without objection, so ordered.
Mrs. KELLY. Thank you.
Chairman LEACH. Mr. King.
Mr. KING. Thank you, Mr. Chairman. I don't have any formal opening statement. I just want to commend you for initiating these hearings. They certainly go to the heart of the issues that could have both criminal and foreign policy implications. So I look forward to listening to the testimony here today.
I regret I could not be at the hearing yesterday. I was at the U.N. for the opening of the session, but certainly from what I have read and from what I have seen in going over the testimony, it seems to have been a very productive hearing, and along those lines, I want to commend you also for the legislation you have introduced. I intended going on as a co-sponsor yesterday, but I was not here.
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I look forward to the testimony today, and again, these do go to the heart of very, very significant issues which have criminal and foreign policy implications, and I commend you for having the initiative to bring this forward.
Chairman LEACH. Thank you, Mr. King.
Mr. Ryan.
Mr. RYAN. Thank you, Mr. Chairman. This issue is something that I think we are going to learn quite a bit about. We have a lot to learn, but as we look at these things, as we look at the newspaper accounts and the testimony from the witnesses, it seems to me that the problem with our policy toward Russia is not so much a coddling and coping with organized crime units at the highest level in Russia with respect to our U.S. Administration's policy as much as it is a high-stakes crap shoot policy of picking the only route we think that is safe for Russian policy in supporting the Yeltsin administration and going to the point of denying and not wanting to know any other information.
I think we are finding, and we are going to find, that our Russian policy is basically that as we heard from the testimony of others.
The concern that I have—and the pleasure that it is to see that we have several members of the Duma here with us today, which I would like to welcome on behalf of Curt Weldon, who I know is not here, is this. It is my concern that the people in Russia think that Western capitalism is cronyism. The people in Russia think that Western capitalism is those who have the assets and the power are the ones who survive, but I would like to send a message to the people of Russia, and I think Congress should send a message to the people of Russia that that is not what we see as democratic capitalism.
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What we see as democratic capitalism is this: You are bound only by your God-given talents and your own effort. That is what capitalism is. Capitalism is an asset. It is not cronyism. Capitalism is liberalization of the market and everybody having a stake in society and moving forward based on the core premise of the rule of law. That is what capitalism is. That is what we believe capitalism is, so that when you go to your bank, you know that your money is safe. That is something that people don't enjoy in Russia today. It is very foreign to us here in America. We know our money is safe in the bank, but they don't realize that their money is safe in the bank in Russia.
So it is a message that I think is very important for Congress to send to the people of Russia is that we want to see real capitalism flourish in Russia. That is what these hearings hopefully will come about. Hopefully we will have a shift in American policy on behalf of the people in Russia, on behalf of real capitalism and the rule of law, and hopefully that is the good that will come out from all of the bad things we are going to be hearing over the next couple of months.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Ryan.
If there are no further opening statements, let me welcome—excuse me, the gentleman from Washington.
Mr. METCALF. Thank you very much, Mr. Chairman.
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Money was allocated for relief of people in these vast transactions. I am deeply concerned about the apparent problems of money laundering. Eight months ago I was in Russia, and we met with people that were in need, and I now thank the Chairman very much for holding these hearings and saying if wrongdoing or corruption or personal gain has been involved in this scenario, then dramatic action is absolutely essential.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Metcalf.
If there are no further opening statements, let me welcome to our committee, I think for the first time, James Robinson. Mr. Robinson is a Michigander. He is a former United States Attorney, and he is currently the Assistant Attorney General in the Criminal Division of the Department of Justice.
Mr. Robinson, please proceed.
STATEMENT OF HON. JAMES K. ROBINSON, ASSISTANT ATTORNEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE
Mr. ROBINSON. Chairman Leach, Ranking Minority Member LaFalce and Members of the committee, I want to thank you for this opportunity to discuss the nature and scope of the threat posed by Russian organized crime groups and the steps the Department of Justice is taking to combat that threat.
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In preparing for my testimony today, I have prepared a written overview of the problem of organized crime in the United States emanating from the former Soviet Union. I have also discussed some of the measures law enforcement has been engaged in to combat international organized crime in general and Russian organized crime in particular. I have given a copy of these written remarks to the committee, and to expedite the proceedings.
Chairman LEACH. Without objection, your full statement will be placed in the record.
Mr. ROBINSON. I will summarize some of the key points and then answer the questions the committee Members may have to the best of my ability.
Before I do so, I would like to take this opportunity, however, to express the appreciation of law enforcement for the assistance provided to it by this committee over the years and as recently as this week in assisting law enforcement in providing it with the tools we need to combat money laundering. Making efforts to assure that crime does not pay and being able to identify and prosecute illegal activities through the money laundering statutes is among the most effective ways of combatting criminal activities and deterring criminal conduct.
As stated in the Chairman's letter inviting me to be here today, I know that much of what you are interested in involves recent allegations that appeared in the press involving possible Russian money laundering at the Bank of New York. However, it would potentially prejudice the criminal inquiry currently under way to discuss that investigation in great detail or what has been uncovered so far, and I obviously have limited ability to do that. I can, however, give you a general idea about the investigation, how it has been structured, and I will be happy to do that.
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The inquiry into suspicious transactions at the Bank of New York is being conducted by agents of the Federal Bureau of Investigation's New York field office, and with prosecutors from the United States Attorney's Office for the Southern District of New York. Analysts from the Federal Reserve Bank of New York and the Internal Revenue Service are also working with this investigative group.
This has been and will continue to be an exceedingly complex investigation. The volume of transactions passing through a major United States bank on any single day is simply staggering, and money laundering investigations necessarily involve painstaking research of these many transactions. Significant investigative resources have been and will continue to be expended in an effort to ensure that we uncover the entire story and bring any merited criminal charges for violations of United States law.
Last week as part of this inquiry, I and other prosecutors and agents met with a team of Russian law enforcement officials in Washington. We discussed ways we could cooperate consistent with applicable law and our respective law enforcement policies and practices, and we agreed on improved procedures to secure necessary assistance in conducting this investigation.
I should also note that except possibly in terms of volume and number of transactions, this matter has many of the same characteristics as numerous other cases we encounter with some regularity. I regret that I will be unable to discuss those matters in greater detail at this time because of the severe limitations and restrictions that prevent us from commenting in public on pending criminal investigations. We are also sensitive to a number of policy considerations, a sensitivity which I know is shared by Members of this committee, which make us extremely reluctant to make public comments on a case even in situations where we might arguably be able to do so should we choose.
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Among those policies is the need to protect the identity and safety of witnesses. Premature disclosure of an investigation can cause subjects of that investigation to destroy or alter or manufacture evidence and could deter witnesses from coming forward. Also of very serious concern to those of us in this country is the need to prevent unfair damage to reputations that would result if we were to prematurely accuse people of committing crimes that may never be charged.
I have a few other remarks that I would be happy to finish.
Chairman LEACH. The red light doesn't apply to you. You are free to proceed at some length, Mr. Robinson.
Mr. ROBINSON. Thank you.
I would also like to make the point that in complex, fast-moving matters such as this one, there is a very real danger that any comment that I might make on day one of a matter could be rendered inaccurate by new evidence discovered on day two, and that is another reason for great circumspection with regard to comments on an ongoing investigation.
With respect to the general problem of Russian organized crime, I note by way of background, that since the fall of the Soviet Union, Russian criminal groups have become more open, more organized and more powerful, and have a more powerful influence on Russian society. Of particular interest to today's discussion is the role that Russian organized crime groups may be playing in the massive outflow of capital from the former Soviet Union. Clearly billions of dollars are flowing out of Russia to foreign bank accounts. These outflows resist comprehensive analysis. Some of the activities may result from Russian individuals and businesses sending their legitimate assets abroad for safekeeping. Some could involve Russians conducting business with Western companies and paying for Western goods. Neither of these activities are per se illegal under United States law; however, the activities could involve violations of Russian currency, tax or other laws.
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We believe that Russian organized crime groups are using Western financial institutions to launder the proceeds of their own illegal activities in Russia. We further believe that Russian organized crime groups assist Russian businesses and individuals in moving assets out of Russia in a manner that attempts to evade the scrutiny of Russian law enforcement and tax officials. Because the United States does not want to become the world's repository of foreign criminal proceeds, we must continue to combat Russian money laundering and Russian organized crime activities generally.
Our strategy in attacking Russian organized crime is embedded in the President's comprehensive International Crime Control Strategy issued in May of 1998, a copy of which I am sure many of you have seen. It has designated international organized crime as a national security threat and directed United States law enforcement, diplomatic and intelligence agencies to intensify their international organized crime efforts.
Additionally, the Department and other law enforcement agencies are significantly expanding our presence in other countries and building new relationships with foreign governments. At the same time, we are continuing aggressively to investigate and prosecute Russian organized crime activity that we discover in the United States.
As of December 1998, the FBI alone had approximately 260 pending investigations targeting Russian and Eastern European criminal enterprises. Our work in this area has already scored notable successes, including indictments and convictions of significant Russian organized crime figures. Our prosecutions of Russian organized crime cases are handled by United States attorneys around the country, in particular through the twenty-four organized crime strike forces. These cases are coordinated through the Criminal Division, which also coordinates contacts with foreign authorities to obtain evidence and to extradite fugitives from abroad. The strike force model has worked extraordinarily well in combatting LCN activities in this country, and the close network of strike forces is well-suited to combat emerging forms of international crime such as Russian organized crime.
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I can say just as a footnote that a great deal has changed since twenty years ago when I was the United States Attorney for the Eastern District of Michigan. In those days it would have been, frankly, quite unusual for United States attorneys in this country and even members of the Criminal Division at Main Justice to have had the involvement to the extent that we have in international criminal activities of all kinds in the narcotics area and many other areas.
We feel we are making significant progress in dealing with Russian organized crime and other international organized crime groups; however, some of the law and some of the resources we use to wage this effort, particularly in the area of money laundering, I think need to keep up with the developments and the techniques of international crimes being used by criminals. With the addition of some new legislative provisions of the type that the Chairman has introduced and some proposals that we have as well, we think that the fight against organized crime can be significantly enhanced.
For example, under current U.S. law, in order to prove a charge of money laundering, we must allege and prove that one of the specified unlawful activities listed in the money laundering statute gave rise to the illegal proceeds, but only a very limited number of foreign offenses now qualify as specified unlawful activities, and I am delighted that the legislation that has been introduced—and we are in the process of looking at that—introduced by the Chairman, addresses those issues.
Thus, the legislative provisions contained in these various proposals and some that will be shortly submitted to Congress by the Administration as the Money Laundering Act of 1999 would add additional foreign crimes such as fraud to the list of permissible specified unlawful activities for U.S. money laundering charges. Other provisions in the Money Laundering Act of 1999 would make it easier for Federal prosecutors to gain access to foreign business records and enhance our ability to prosecute money transmitters who knowingly accept criminal proceeds.
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We look forward to working with this committee on these important improvements to our money laundering statutes, and again, we appreciate the fine work of this committee in assisting law enforcement as we move into the 21st Century where we will increasingly need to address issues of international organized crime. Thank you very much, and I will be happy to try to answer any questions.
Chairman LEACH. Thank you, Mr. Robinson, and I would also point out to members of the panel that Mr. Robinson has a very impressive opening statement that he has submitted for the record that is of a more general nature rather than a specific case nature, but I think is very, very helpful.
Let me in terms of opening comments say that, as you know, we are looking at a particular case, and when you have cases, there are sometimes back-biting that occurs, and the British Government, for example, the Financial Times has reported, actually went to the White House with concerns that our law enforcement authorities were moving too slowly after information that it had provided to precipitate the case. We have an article in a major publication yesterday indicating that the British National Crimes Squad, as well as the Department of State, believe in the New York bank case that movement has been slow.
And so the question I have is not so much a criticism, but can you assure this committee that all requisite efforts of the United States Government will be marshalled on serious money laundering cases of this nature?
Mr. ROBINSON. I can assure the committee that that is the case. The Federal Bureau of Investigation has very close working relationships, as do members of the Department of Justice, with our foreign counterparts. As you know, in an investigation of an international money laundering case, that is very important to have close relationships with and to secure information from a whole host of other countries, and I can assure you that we are working closely with our international partners in addressing these matters. It is being done rigorously and effectively, and I think, as you point out, from time to time there are tensions between different agencies of government, and we need to continue to work hard to see to it that those don't get in the way of doing an effective, expeditious job.
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Chairman LEACH. Fair enough.
Now, yesterday another major reporting agency from the press indicated that Swiss authorities have expressed a desire to help the United States in the case under review today, but that to help the United States, a formal request has to be made to Swiss authorities, and such a request has not been made. Is that something the Department is prepared to address?
Mr. ROBINSON. I can address it in this way, and that is to assure you that there has been contact and will continue to be contact with foreign countries, including the Swiss and the Russians and other countries with whom we need to work. As the Chairman knows all too well, in order to successfully investigate a money laundering case, one needs to identify the source of the money and where it went, and to the extent these are international transactions, we need the assistance of our international partners. We have outlined in the submitted testimony the procedures that are available. One of the reasons for the meeting with the group from Russia was to make sure that the lines of communication were open there, and we are continuing to do that with other countries as well.
Chairman LEACH. That was my final question. You met last week with Russian counterparts to discuss issues of this nature and others, but how would you characterize the level of cooperation with U.S. law enforcement, and in particular, was this case raised, and did the Russians have any information that they wanted to share with you?
Mr. ROBINSON. We had a general discussion. It was very productive in terms of trying to clearly understand the different legal systems we have in our two countries, the money laundering statutes here, the statutes that are available, the investigative techniques that are available, and the agents and the prosecutors did meet together and tried to identify the kinds of information that needed to be shared. And this is obviously the kind of thing we try to do in any one of these investigations, and I know that we developed a point of contact that we hope will facilitate the exchange of the kind of information that is necessary to conduct a thorough and successful investigation.
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Chairman LEACH. I appreciate that. I just want to conclude with this observation: Historically we have always thought the United States was the leading country in concerns for issues like money laundering and international financial institution issues related to bank regulatory enforcement. In this case, it appears that British authorities have been ahead of us, and I want to thank and compliment the British in this regard. In this case, based on one newspaper article, for the first time, to my knowledge, instead of us going to the Swiss and asking for them to be more forthcoming, they have been more forthcoming than we have.
And second, the Swiss authorities, from a law enforcement perspective, appear to have done a more politically-sensitive and more comprehensive law enforcement effort with regard to high officials in Russia than the United States. And I would just simply express to you, first, that it is good news where Britain is today. It is good news how far Switzerland has come, and in a very competitive sense I hope American standards are not going to be second best. And so I would argue as strongly as I can that this is a very significant area of endeavor, and I would hope the Department of Justice would indicate to its subsidiary organizations, the Federal Bureau of Investigation and U.S. Attorneys, that this is an issue of true national significance in a national interest way as well as in a law enforcement way, and this issue be prioritized, and I would just want to make it clear from a congressional perspective that I think that is the way we all feel.
Mr. ROBINSON. I couldn't agree more, and I would only indicate on the subject of news accounts with regard to activities back and forth, with no disrespect to any members of the press who are here, we can't believe everything we read in the newspapers.
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Chairman LEACH. Fair enough.
Mr. LaFalce.
Mr. LAFALCE. Thank you very much.
Mr. Robinson, I would like to get a better understanding of the enforcement mechanism that exists within the United States and internationally to deal with what we consider to be money laundering and with what other countries might consider to be money laundering, because obviously we are dealing with an international phenomenon, an international phenomenon that on the one hand crosses national boundaries, on the other hand, in the era of the Internet, knows no national boundaries, because you have transfers virtually at the speed of light or the press of a button.
So I would like to look at the bodies of law, but mainly the structure that exists within the United States and internationally. Tell me about FinCEN. Tell me about the role of the Justice Department and the FBI. Tell me about the interrelationship or coordinating mechanisms you have with them and with the Federal Reserve and the OCC and with the State bank superintendents, most especially the superintendent of banks for the State of New York, although there are others, and because of the international nature of it, what coordinating enforcement mechanisms exist internationally.
Mr. ROBINSON. I think it is clear that it is more important than ever before that there be the kind of coordination that you are identifying. There are many actors. Obviously the regulatory regime that exists to try to identify suspicious activities brings those to the attention of law enforcement, to coordinate all of the actors in the law enforcement agencies of the Treasury Department, as well as the Justice Department and other components that are critical.
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Because I don't want to take anything away from what I know will be an announcement tomorrow by the Attorney General and the Secretary of the Treasury with regard to the new money laundering strategy, I hope you won't mind if I don't go into the kind of detail that I expect will come out tomorrow in connection with this, but I can tell you that the Justice Department, the Criminal Division, has been working very closely with law enforcement in the Treasury Department, the Federal Bureau of Investigation, the United States Attorneys' offices in developing this money laundering strategy that will be unveiled in some detail and comes as a result of the work of this committee encouraging this activity to occur. And I think that it will be an effective means of coordinating the various components, and I think the assistance provided by this committee and the statutes that you have been shepherding through will continue to assist us in that regard.
Mr. LAFALCE. That is it?
Mr. ROBINSON. Well, as I say, I don't want to get ahead of my interference with regard to the strategy which I think is comprehensive and discusses many of these areas, and I don't want to be getting ahead of my boss, the Attorney General of the United States, and the Secretary of the Treasury with regard to these matters. I know there was some discussion by Secretary Summers yesterday with regard to this, and this will be discussed in detail tomorrow.
Mr. LAFALCE. This is a preview of coming attractions.
Mr. ROBINSON. Yes, indeed.
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Mr. LAFALCE. All right. We will be there tomorrow.
Let me go on. Does your office or does any United States office have a handle on the extent to which organized crime or criminality was involved in the various privatization efforts within Russia?
Mr. ROBINSON. I would think that that kind of information as to internal activities within Russia itself would be less likely, except in an indirect way, to come to the attention of U.S. law enforcement, whose primary responsibility, obviously, is the investigation and prosecution of violation of United States laws. We, as well as many others, are privy to a wide variety of intelligence information concerning much of this activity, but with regard to the internal relations of privatization in Russia, I wouldn't be the best person, I suppose, to give you that detailed analysis.
We certainly see money flows, and as I indicated in my opening remarks and in the testimony that we filed, the extent to which these flows violate Russian laws is a subject that will require us to go and try to deal with our counterparts within Russia and to address some of the issues that are contemplated by the Chairman's legislation with regard to expanding the number of specified unlawful activities that are contained within the money laundering statutes.
Mr. LAFALCE. Thank you.
Chairman LEACH. Mr. McCollum.
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Mr. MCCOLLUM. Thank you, Mr. Chairman.
Mr. Robinson, it has been reported to us that yesterday was the first time the FBI contacted the Swiss Attorney General regarding the case that involves the IMF and the possibility of money laundering via the Bank of New York, and so forth. Is that true?
Mr. ROBINSON. I think the answer is no. There are contacts throughout—we have constant contacts, frankly, with our partners in other countries, including the Swiss, and while I don't want to get involved in the specifics.
Mr. MCCOLLUM. I don't want you to either, but are you prepared to assure us that that assertion to us is not true, that there were earlier contacts and have been earlier contacts? You don't have to go into details. I just want to know was yesterday the first time or not that the FBI or the Department of Justice has been in contact by the Swiss on this matter. Have there been any earlier contacts?
Mr. ROBINSON. My understanding is there have been earlier contacts, but just to make absolutely sure that did occur, I will double-check.
Mr. MCCOLLUM. Please do.
Mr. ROBINSON. I will correct the record if I am mistaken.
Mr. MCCOLLUM. Thank you.
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To your knowledge, does Russia have a truly independent judiciary?
Mr. ROBINSON. I would say that the issue of the challenge for Russia with regard to the rule of law and the independence of its judiciary is a serious challenge. One of the things we do within the Criminal Division is to have a program of providing assistance for training prosecutors and police agencies. There have been discussions and I think needs to be continuing work with Russia with regard to their achievement of a rule of law. That would, I think, make an enormous difference to many of the issues that we are talking about here today.
So my short answer, I guess, to your question would be I think there is a serious question as to the independence of the judiciary and the strength of the rule of the law. They are emerging and the Russians are working hard, I know, on these issues and on their constitution.
Mr. MCCOLLUM. Do the Russian law enforcement agencies have an effective program to combat internal corruption such as we have in our law enforcement agencies?
Mr. ROBINSON. I certainly wouldn't indicate, based upon my knowledge, that it would be anything comparable to the kinds of thorough programs that we have here, and it is important that those be developed, I think.
Mr. MCCOLLUM. We have a very effective program with the Colombian National Police in Colombia where we have all the drug problems to theft. Their police officers, they have been very cooperative with us on this level, and that ability has been demonstrated that we, the United States, can, with the cooperation of a foreign government, do that sort of work, help them do that work.
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Is the level of relationship between United States Department of Justice and our program that you just mentioned in working with the Russians, is it up to the same par with that we have with regard to the Colombian National Police? Are we working with them to—have we established relationships to help them vet their police, or are they less cooperative them than the Colombians?
Mr. ROBINSON. To the best of my knowledge, we have not been involved in this vetted unit concept. I will double-check. But I think we need to make the extraordinary expertise we have in this country available, and I think that there have been discussions on this subject and that there needs to continue to be discussions. Before I took this job, I was the dean of a law school for five years and had a number of members I know of my faculty there, some who speak Russian who were involved in training programs for Russian prosecutors and judges. And I think that that kind of cooperative effort is one of the very important things that we can do in this country.
Mr. MCCOLLUM. It strikes me, Mr. Robinson, not only do we need cooperation, we need to have some force here when it deals with the International Monetary Fund, the loans we have made, however our future relationships are with Russia, to make sure that they are willing to do this kind of detailed vetting that we have with relationship to Colombia, in that example I gave you, because that is the only way I think they are going to come around to issues like the money laundering and the corruption in this country.
At the same time I am asking this series of questions, I am curious to know what your assessment is, what the Justice Department's assessment is of the extent of the Russian mob penetration of the Russian banking system? Do you have an assessment? Is there one at the Justice Department? How widespread, in other words, is the mob in control of Russia's banking system?
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Mr. ROBINSON. I think there are concerns. There have been some assessments done, but obviously our investigations are largely domestic, and I think much of the information that exists on this subject is in the intelligence community and other places. And our investigations, we don't have jurisdiction to investigate crimes within Russia itself. We have major concerns about it, some of which I identified in my written testimony.
Mr. MCCOLLUM. If I can, Mr. Robinson, I happen to sit on the House Intelligence Committee, and I know that there is a sharing of information that goes on, if there is an ascii, and we need cooperation between the FBI and the CIA and intelligence units. So I certainly hope and pray that you do have, you may not be able to reveal to us those details today, but you do have that information, and that in the process of assessing that, that you get to the bottom to the degree to which we can of where that corruption is, and that we as an Administration with the Attorney General taking a lead on this, along with the Secretary of the Treasury, make some commitment to really get tough in our negotiations when we deal with our friends, and they are, I think, our friends. At least some of the leadership over there wants to be. But we have got to change the way they operate, they have got to change the way they operate, we can't do it alone. Obviously we need their cooperation.
But we also can't do it, and they can't do it if we don't show them somewhat of the way and tell them that we aren't going to be able to have the kind of economic relations that are desirous that we have had up to this point in the future, if they are not going to shape up their system and get rid of this corruption.
So I am very concerned that Justice is not carrying on as strong a policy role in this as it should. Even though I know the hand is out, it seems to me the carrot stick needs to be there, Mr. Robinson.
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Mr. ROBINSON. I think that one of the things that PDD-42 and the International Crime Control Strategy makes clear is that we need to have this kind of close working relationship between the intelligence community, the State Department, and the Justice Department. We need to gather the kind of information you are talking about and make our assessments.
And I would certainly agree that we do have a serious concern on the issue of the extent to which Russian organized crime groups are involved in the Russian banking system. I think it does present serious problems and things that we need to take a careful look at.
Mr. MCCOLLUM. Thank you. Thank you, Mr. Chairman.
Chairman LEACH. Thank you. Mr. Vento.
Mr. VENTO. Thanks, Mr. Chairman. Mr. Robinson, thanks for your testimony. I have looked over the summary of the legislation that you have proposed. It didn't quite ask what the Chairman has done, so I think we might want to try and reconcile some of that.
You noticed in my opening comments that I alluded to the fact that we are dealing sometimes with bonds or with other types of instruments. Do you feel that, in fact, those disposal of assets in those particular circumstances, whether it goes to bonds, annunities, real estate, do we actually track those as closely as we do in terms of bank activities?
Mr. ROBINSON. I am not sure we have the regulatory mechanisms to do in the same way, and that is why I think it is important to address those mechanisms, and I share the concerns that you have mentioned about the need to do that.
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Mr. VENTO. I expect a lot of it gets back to some sort of a wire transfer to a bank, at least in terms of our nation, I don't know globally if that is true. But the concern is that in the work that you do, do you find that on occasions that if you are trying to trace money that it actually goes in those directions?
Mr. ROBINSON. Absolutely. And I think the better capacity law enforcement has to try to identify those things the better able we will be able to do an effective job.
Mr. VENTO. One of the issues, of course, is that we are concerned that the specter of the IMF and World Bank that has been brought up and what happens to the assets or resources that go into them. There have been the discussion of tax evasion if various countries—obviously, the focus of the tension today is Russia—capital flight.
Of course what you are talking about very often are assets and resources through banks that result in criminal activity. I notice in the convictions that you have had here, some is under the Hobbs Act, which is sort of a shakedown of immigrants and of transporting prostitutes from abroad, and going through some of these, some of these are just not identified as just money laundering and this Armenia issue that you raised.
But in tracking what you are working here on is pretty much the illegally attained, you don't really make, there is no tracking of IMF dollars? Is that a specific role that you have?
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Mr. ROBINSON. A specific role of tracking IMF dollars?
Mr. VENTO. Yes.
Mr. ROBINSON. Once they get to the Russia, you mean.
Mr. VENTO. However you do it. I understand that, you know, that dollars never get over there. According to the Secretary of Treasury, they are just sitting in Washington, and I understand that, so you have to—so I know you cannot do that, but I think that—is there any specific role that you have in terms of indirectly trying to determine—IMF dollars basically leverage a lot of other things that go on in these nations in terms of credit. Is there any role or monitoring role that we have, either as a nation or internationally in terms of monitoring these dollars?
Mr. ROBINSON. Well, obviously from a law enforcement perspective, before we begin to open a criminal investigation, we need a predicate, and so we are not out there searching around. But I do think that the regulatory agencies and others, through the suspicious activity reports and other mechanisms, do provide early warnings for those activities that ought to be looked at by law enforcement. And I think that is the kind of thing that we ought to do and then investigate those thoroughly.
Mr. VENTO. You know, you have some other issues that are going on here. The capital flight is one, where assets are being taken out of the country and deposited. I mean, these are concerns, because if we, through our national policy are trying to support the IMF to put dollars into Russia or other countries, we would like that those resources to stay there insofar as possible to better the economic and market goals that we have, to market oriented goals and some social goals that some of us might have.
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So we are concerned about issues of tax evasion, whether individuals are not paying taxes in Russia or doing things which bar it—which touch on evasion, but really with the laws you are looking at pretty illegal activities within the United States, not necessarily in Russia; is that correct?
Mr. ROBINSON. I think to a large extent. There are a few specified unlawful activities that involve foreign offenses as well, but I think that the kind of work that is being done by the committee to address the issue of expanding the number of specified unlawful activities that would be included in the money laundering statute would give tools to law enforcement that would enable us to really go after these things in a significant way and help us, and that is why our proposals address that.
I know the Chairman's proposals address it as well. And we are looking forward to working with the committee to try to improve these to the point where we can address these kinds of issues. We are working in a very different world these days with regard to the amount of activity that the Justice Department is engaged in that has international implications. And this is one of a number of examples, and I think these statutes, which are intended to accommodate these changing dynamics, will be of great assistance to law enforcement.
Mr. VENTO. I mean it does involve monitoring, as we pointed out yesterday in testimony, that Russia exports both as an example as a country $80 billion worth of exports, so there is a lot of transactions that take place, and short of having financial entities across the board helping us with that and feeding us back the information there isn't much hope—I mean we can't begin to be the police force and law enforcement for Russia, can we?
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Mr. ROBINSON. No, I think we have enough to handle here, but we certainly need to interact with the consequences that occur there that affect the United States both directly and indirectly.
Mr. VENTO. It is sort of frustrating, I think it is like playing catch with a kid that can't catch the ball, and he doesn't throw it back to you, you know, it is kind of hard to do. And so I mean we really need cooperation in order to accomplish this end. And I think while we are concerned with illegal assets and illegal activities here that there has to be an integrated policy with other nations and banks.
I mean if we are willing to superimpose these requirements on us and others are not—for instance, picking on someone like the French, they tend to pick on us, so I shall pick on them—if they don't cooperate, then it obviously dissipates in a different direction. And even in the money laundering activity—or the capital flight, we are probably only talking about 20 percent of the export dollars, so it is not—there is still some good that comes out of what happens here. It is a question of whether we are moving in the right direction, I think, here, not whether or not the system is perfect.
Mr. ROBINSON. True.
Mr. VENTO. Thank you, Mr. Chairman.
Chairman LEACH. Thank you.
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Mrs. Roukema.
Mrs. ROUKEMA. Thank you, Mr. Chairman.
In many ways, our questions have overlapped here. Certainly the questions I have heard from my colleagues are central to the questions I have. But let me—hopefully without prejudicing or compromising your investigation, let me ask the questions the way they have come to my mind. You heard me indicate in my opening statement that the Chairman has introduced legislation and, of course, the Treasury is going to have recommendations for legislation tomorrow.
But I am wondering, based on your experience and knowledge of the international problem here, and unfortunately I don't think we are going to find in the end that it is limited to Russia, there may be a more worldwide problem than we currently understand.
The legislation that you know of, based on your experience thus far, what do you think is most central to the need for criminal reforms? Are we closing the loopholes effectively in the legislation as you know it?
Mr. ROBINSON. Well, I haven't had an opportunity to study the Chairman's proposals that were offered up I think yesterday. But I think that those are the kinds of things that we need to——
Mrs. ROUKEMA. Aside from that, excuse me, aside from the Chairman's legislation, then what do you think we should focus on as the top priorities for closing the loopholes based on your own experience?
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Mr. ROBINSON. We have a variety of proposals. I think one of those would be the extent to which in the money laundering area the specified unlawful activities are broadened. It seems to me that would be a significant assistance to us in law enforcement.
I have tried in my written testimony to discuss a variety of those questions. But among the proposals would be to expand the list of money laundering, predicate crimes, to include a variety of things, including public corruption against foreign governments. And I think these would increase the availability of money laundering enforcement tools to law enforcement; also broadening the definition of a financial institution to include foreign banks, closing a loophole that might exist there involving criminally derived funds, laundered through foreign banks doing business in other countries.
Mrs. ROUKEMA. You mean new definitions on that?
Mr. ROBINSON. Yes.
Mrs. ROUKEMA. And also what are those, the banks that are able to get funds only from private payments and not include deposits from their own local citizens; is that right?
Mr. ROBINSON. I think those kinds of issues are things that we certainly need to address. Also toughening penalties for violations of the International Emergency Economic Powers Act, the IEEPA. There are a variety of specific things that we have discussed and I think we will be continuing to discuss in terms of making these kinds of improvements.
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Mrs. ROUKEMA. Well, I would appreciate anything else that you could submit to us for the record with specificity, not only about our legislation, but based on your experience in various investigations as to how we close those loopholes, if you have anything beyond your testimony.
Mr. ROBINSON. We would be delighted to do that.
Mrs. ROUKEMA. But it is also brought to my attention by staff that in an Administration briefing recently for staff, there was an indication that the most significant feature in the new strategy regarding money laundering is an agreement between the AG and the Secretary of the Treasury to have their agencies work together to combat money laundering.
That seems to be so elementary. Is there something more specific that you are talking about as to how you work together and cooperate with specificity that is not permissive or required under the law now?
Mr. ROBINSON. I don't want to get ahead of the interference again. But the answer is, yes, I think those details will be discussed tomorrow when this strategy is discussed by the Attorney General and the Secretary of the Treasury.
Mrs. ROUKEMA. Evidently it was not clear to some staff persons, and just on the basis of the way they presented it to me, that raised a question in my mind as well. So we will be looking at that.
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Mr. ROBINSON. Good.
Mrs. ROUKEMA. All right. Thank you, Mr. Chairman.
Mr. ROBINSON. Thank you.
Chairman LEACH. Thank you very much.
Ms. Waters.
Ms. WATERS. Thank you very much.
Mr. Robinson, I have been reviewing your statement, and I am particularly concerned about the laundering of drug money.
Mr. ROBINSON. Yes.
Ms. WATERS. Coming from the Justice Department, you are aware of our mandatory minimum laws and the fact that the prisons are filling up with young people from inner cities, mostly minorities, who for 5 grams of crack cocaine can get a mandatory—a minimum of five years in prison, and the judge does not have any discretion.
When I look at the laundering of drug money by our own domestic banks, and I have reviewed the 105 or so prosecutions over the past few years, I see that the fines have been given for some of these banks, one fine as high as $25 million for American Express International. I saw that Confia bank was on the list. That was one of the banks that was identified in the Casablanca operation. That was a known drug money laundering bank that was under purchase at the time by Citibank.
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We have ''know your customer laws'' that are basically ignored by our own domestic banks. There are some reference to private banking, nothing about concentration accounts, and no one has ever lost a bank charter for laundering drug money. At the same time we give long sentences to low-level street dealers. Without the ability to realize the profits there would be no drug trafficking. They couldn't spend the money. It just wouldn't happen.
What are you prepared to recommend? What get tough laws are you recommending for banks, and do you include in that the loss of a charter for banks that are convicted for the laundering of drug money?
Mr. ROBINSON. I share the concerns that you have about the need for effective prosecution, not only of individuals who commit crimes, but financial institutions that commit crimes. I know that this has been a subject of discussion. And I had the opportunity to review and saw your testimony actually yesterday on this topic. I think that you raise very legitimate points, and I think law enforcement needs continuous improvement in this area.
As you know, in the submissions that we have given to you by one of my deputies and others concerning the work of the Department over the past ten years in this area, there has been a good deal of work, but that doesn't suggest that simply because there have been 105 foreign and domestic banks and financial institutions that have either been convicted of money laundering or penalized——
Ms. WATERS. Excuse me, I don't want you to go any further.
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Mr. ROBINSON. Yes.
Ms. WATERS. That is the cost of doing business these days.
Mr. ROBINSON. I understand.
Ms. WATERS. If you can keep doing business and you get fined and you are making money, you will pay the fine. Are you prepared for us to take away the charters of banks who launder drug money?
Mr. ROBINSON. I think in appropriate circumstances that if people are engaged in criminal activity at that level, the forfeiture laws and others ought to be considered. I guess the short answer is getting tough in this area is appropriate.
Ms. WATERS. Are you prepared to recommend the loss of a charter under any circumstances where the laundering of drug money is involved?
Mr. ROBINSON. I think yes under appropriate circumstances. The answer ought to be yes.
Ms. WATERS. Can you describe what kind of circumstance you think would be appropriate to snatch a charter?
Mr. ROBINSON. I think if you had a financial institution engaged in knowledgeable money laundering at the highest levels of the corporation, that that was their business to engage in, that you didn't have a situation in which there were mechanisms in place to prevent this, where you have corporate compliance programs to see to it—we do encounter situations in which people, because of the tremendous economic advantages, get involved in this activity and hide their activity from other people and the institutions. That doesn't mean that the institution shouldn't pay, but I think we have to look at these cases on a case-by-case basis.
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And in an appropriate case, it seems to me, it would be appropriate to have the ultimate capital punishment for a financial institution with regard to that. I think it depends on the specific case.
Ms. WATERS. Are you involved at all with the ongoing investigation of Citibank?
Mr. ROBINSON. I am familiar with it, yes.
Ms. WATERS. But it is still ongoing? It has not been concluded yet?
Mr. ROBINSON. I obviously can't comment on the specifics of the investigation, however.
Ms. WATERS. I just ask. Is it still ongoing?
Mr. ROBINSON. I think it wouldn't be appropriate to say anything other than there has been no conclusion as I understand it and the specific answer to the question, let me double-check and get back to you.
Ms. WATERS. Thank you.
Chairman LEACH. Mr. Lazio.
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Mr. LAZIO. Thank you, Mr. Chairman.
I just want to get, if I can, some understanding of the structure that is being used from a law enforcement point of view. Is it a task force that has been assembled, an interagency task force on the money laundering issue?
Mr. ROBINSON. Are you talking about a particular case or——
Mr. LAZIO. I will refer particularly to the Russian case.
Mr. ROBINSON. The Bank of New York case, or whatever you want to call it? As I indicated——
Mr. LAZIO. I presume it is broader than just Bank of New York.
Mr. ROBINSON. Yes. As I indicated in my opening remarks and in the testimony that was submitted, the matter is being handled by the United States Attorney's Office for the Southern District of New York working with agents with the FBI field office in New York in conjunction with agents from the IRS and other regulatory agencies in coordination with the Organized Crime Racketeering Section of the Criminal Division at the Justice Department.
To the extent that additional resources are deemed to be necessary, those resources, I think, will be assigned if that answers your question.
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Mr. LAZIO. Not completely. In other words, is it a collaboration right now in sort of an institutionalized way with Treasury? Is there a collaboration in some type of institutionalized way with our intelligence services?
Mr. ROBINSON. Yes.
Mr. LAZIO. In this task force?
Mr. ROBINSON. Yes, the answer is yes.
Mr. LAZIO. And Treasury has FinCEN organization. Is that directly involved as a representative of——
Mr. ROBINSON. What I wouldn't want to do is describe in great detail, in any more specifics than I have in the testimony, the specific configuration of the investigation.
Mr. LAZIO. I am interested in whether FinCEN has been proactive and has been effective from a law enforcement standpoint and whether it is frankly worthy of additional scrutiny, and so I will ask you this directly. How would you characterize up until today, because I understand there will be an announcement tomorrow, how would you characterize FinCEN's role in money laundering in general and in this particular case in particular?
Mr. ROBINSON. Well, let me add, sir, that FinCEN is a very important tool and I think it does a very effective job and works cooperatively with the rest of Federal law enforcement. And I think it has a very important role in money laundering investigations, and the continued cooperation between all of these resources in the Federal Government will be essential to do an effective job.
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And I think they have been effectively engaged. Their resources are well-known to the rest of the law enforcement, and I think that obviously under the topic of continuous improvement, there always needs to be continuous improvement. But I think there has been good cooperation between Treasury and Justice with regard to these matters.
Mr. LAZIO. Yesterday we heard testimony from Fritz Ermarth, who is a former CIA official who headed the Russian—I guess chief Russian analyst. And he testified as to almost a culture, and that is my word, I don't think it was his, but a reference to the pressure not to pass on bad news to superiors, that intelligence would be gathered, but there would be a sense that people at the upper ends just did not want to hear it, because they were pursuing a strategy that was an announcement to some of this bad news.
Have you had any experience with that? Had you heard of other people in American law enforcement who have expressed a concern about that?
Mr. ROBINSON. I have not, although I did see some of the hearings last night. The Justice Department thrives on bad news. We are supposed to investigate it and so the extent to which we can get information indicative of the possibility of criminal activity, that is part of our job to look for that information, make a determination as to whether the predicates are there for the possible violation of United States law and conduct a thorough investigation.
Mr. LAZIO. OK. You also know, and I say this as a former prosecutor myself, not everything that is uncovered ends up being criminal. There is essential information that sometimes needs to be passed on so that policymakers can make informed decisions.
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Mr. ROBINSON. True.
Mr. LAZIO. So my question is to you, did you ever experience or hear of anybody who ever experienced a disinclination to pass on information to higher-ups, because it didn't fit in with the strategy that was being pursued from a political standpoint?
Mr. ROBINSON. I haven't, but obviously my period of most recent involvement in this topic is about fourteen months since my appointment to this position last June.
Mr. LAZIO. Thank you very much, Mr. Chairman.
Chairman LEACH. Thank you.
Mr. Bentsen.
Mr. BENTSEN. Thank you, Mr. Chairman.
Mr. Robinson, in your testimony, you talk about, on page 7, you talk about the increasing frequency of suspicious financial transactions. And you talk about prosecutions under Sections 1956 and 57 of Title XVIII, and 5324 Title XXXI, and on the following page, you list the charges that have been brought. It shows an increase in fiscal years 1996 through 1998.
How does this compare to the previous three years? Has there been a pretty substantial step-up in the number of charges brought, and is this both domestic and international related?
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Mr. ROBINSON. These would include all prosecutions under these sections. And I will be glad to get the information on the years preceding. But I would anticipate that we will see this number increase as we go forward.
Mr. BENTSEN. So the various U.S. Attorneys out in the field have been stepping up their activity based on the data that you showed here at least in the last three years.
Mr. ROBINSON. I think that is true. And my understanding is that these numbers have been relatively consistent over the last five or six years. But we will double-check the specific figures.
Mr. BENTSEN. That would be helpful. Later on in your testimony, you reference the International Crime Control Act of 1998, a package of more than 50 new legislative measures to help us fight international crime and implement the objectives of the international crime control strategy.
Now, apparently that passed the Senate, but was never taken up by the House in the last Congress, according to your testimony.
Mr. ROBINSON. My understanding is that is correct.
Mr. BENTSEN. Was it ever taken up by the Judiciary Committee in the House, do you know?
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Mr. ROBINSON. Pieces of it have, as I understand, but not the entire package.
Mr. BENTSEN. Otherwise the Senate acted, but the House did not act. Would this be a helpful measure for U.S. Attorneys in the field and for the Justice Department and the international efforts to combat money laundering and organized crime infiltration of the Nation's financial system?
Mr. ROBINSON. We believe it would be.
Mr. BENTSEN. There have been questions raised, and certainly raised to me primarily from the media, and there have been a number of reports in the media that the Bank of New York is endemic of a situation where high levels in the Clinton Administration have turned a blind eye toward organized crime and corruption in Russia for furtherance of other goals, and some have said in the case of the Bank of New York, the blame lays at the doorstep of the Vice President, because of being the point person on U.S. relations with Russia.
My question to you would be, what is the standard operating procedure involving an ongoing criminal investigation within the Justice Department and notification? From testimony given yesterday by Secretary Summers, the Treasury policy officials were notified in April of this year, although, if I recall correctly, FinCEN officials at Treasury were engaged with the FBI and with Justice and the U.S. Attorney's Office in the Southern District of New York on this, as you would expect.
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But, would it be appropriate or inappropriate, in your opinion, for this to be an issue to be taken up to the high levels of the Administration so it could be used in negotiations, say, with a Russian prime minister, of concern within the Administration with respect to corruption, or would an ongoing criminal investigation be something that we would prefer to keep under wraps until a decision can be made whether or not to bring charges or pursue a prosecution?
Mr. ROBINSON. Well, we start with the proposition that we prefer to keep criminal investigations confidential for some of the reasons I identified in my opening remarks and I articulated in the written statement that I made. In addition, there are specific legal constraints with regard to sharing information, particularly grand jury information under rule 6(e) of the Federal Rules of Criminal Procedure. There are specific prohibitions on the sharing of grand jury information.
Having said that, increasingly these days and at the point that probably didn't exist, certainly didn't exist when I was a United States Attorney twenty years ago, because of the internationalization of criminal activities and the extent to which the Justice Department comes across information in the course of our efforts, there are situations in which we could come across information that is so important to the national security or foreign relations of the United States that it would be deemed appropriate to provide limited information, and so we have a process within the Department to try to flag that kind of information.
Each United States Attorney's office was advised and has been reminded that, if during the course of investigations information comes to their attention of this type, we have to have a careful process of determining under what circumstances it rises to a level where it is appropriate, that it affects national security, that there ought to be notification to policymakers.
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So we would raise the matter up to the Attorney General, and a determination would be made as to the extent to which it would be necessary to share that information. So that is the process that is utilized, and it is a careful, I think, process that is designed to protect the integrity of the investigation while still not sitting on something that could affect the vital national security interests of the United States.
Mr. BENTSEN. With the Chairman's indulgence, based upon that, as a former U.S. Attorney and a high-level Justice Department official now, would it be in your opinion productive or counterproductive for information regarding an ongoing investigation to be divulged in international contacts; that is, for our negotiators with the Russians to bring up that, oh, by the way, we are investigating potential money laundering activities through a certain U.S. bank, we think this is a problem that you should be aware of and you should be addressing, or would that be counterproductive or productive to your ongoing criminal investigation?
Mr. ROBINSON. Well, obviously, I wouldn't want to comment on the specifics or even a hypothetical basis. Let me say the answer this way, obviously—to the extent, we conclude through this process that there is information vital to the national security interests that needs to be shared with people that are engaged in carrying out that policy on behalf of the United States, the point at which those policymakers, based upon a much larger role and responsibility for foreign relations and other things, determine how to use it is something that I think that they would have to determine. Obviously, we would prefer that any disclosures be only as necessary so that we can continue to protect the equities that I outlined in my written testimony and stated here.
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Mr. BENTSEN. Thank you.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you.
Mr. Royce.
Mr. ROYCE. Thank you, Mr. Chairman.
Part of our responsibility——
Chairman LEACH. Could you hold just a second, Ed. Do you want a parliamentary inquiry?
Ms. WATERS. I would like to submit my statement for the record.
Chairman LEACH. Mrs. Waters has a unanimous consent to submit her statement. Without objection, so ordered.
Mr. Royce.
Mr. ROYCE. Thank you, Mr. Chairman.
One of our responsibilities here is to get at the facts. And one of the witnesses that we heard yesterday passed on the following observation: he says officials of one of our closest allies told him last spring that they are now monitoring their local Russian organized crime problem very closely. And they say, further, 80 percent of the funds through Russian organized crime entering their country first come into the United States; that they are laundered through the U.S.; and of those funds from the U.S., they say 60 percent arrive from the City of Boston. However, when they ask U.S. police to provide information on the ownership of those accounts, it takes six to eight months to receive sketchy data.
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Further, the Russians close and change those accounts every six months. However, our allies are being assured that Boston has no Russian organized crime problem.
Now, he says he will give us the names of policemen there that are willing to indicate differently. This is the question that we have been bringing up now. The Chairman held a hearing in June of 1996 where we brought up this same set of issues, and I guess part of the concern that we have is not what Justice is going to do tomorrow, when you lay out a new program; the question is, what has been done over the last couple of years over a problem which is very serious?
We have Duma members that come to us and in our offices and tell us, it is time for the legislature and the Duma to begin to work together on this information, because there is not enough being done in their administration or in our Administration in terms of investigating money laundering.
The Russian delegation that was just here last week that met with you, they met with the Justice Department, returned to Moscow and said that they had not been shown any evidence that there was a legal problem with the Bank of New York.
Now, is this what we call cooperation? I mean I would just like your response on that.
Mr. ROBINSON. Well, we do require their cooperation, and there were meetings and there will continue to be meetings, not only with this group, but with other countries. We have mutual legal assistance treaties that have been outlined in my written testimony. In the Office of International Affairs in the Criminal Division, we have people who work on a daily basis with our partners throughout the world. The FBI, DEA, and other law enforcement agencies have legal attaches. One of the things we are obviously expanding, because of the growth of international crime is the need to have people in place dealing with these different laws and different systems in creating the kind of relationships where the shared information can occur to have mutual assistance between our two countries.
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We obviously have to do it with some care with regard to what you share under what circumstances, what guarantees do you have that by sharing the information it is not going to be inappropriately used, and that means building the kinds of partnerships. And I think that the meeting that we had last week was helpful, the relationships the FBI legatts have throughout the world. There are, as I indicated in the testimony, I think, 32 or 33 countries in which we have FBI legatts. And that needs to continue to improve.
Mr. ROYCE. Be mindful of the fact it is the Duma that has passed a series of laws to make money laundering a crime in Russia, all right? Those have been vetoed by their administration. They are trying to get a signature on a law to make it a crime in Russia. They come here and meet with you to investigate this issue of money laundering with respect to these funds that went through the Bank of New York.
They then return and have to say, ''Well, we have been given no evidence, no information.'' I am just reporting to you, because we are hearing from delegations, from the Russian Duma, that indicate they are very upset with the amount of money laundering that has occurred in their country that has gone out of their country. They suspect a lot of it is going through banks here in the United States and then into the Caribbean, and so forth.
And they are trying to get to the bottom of this. We are trying to get a signature, I assume, from President Boris Yeltsin of Russia on a bill to in fact make this a crime, and it would just be helpful if there was some cooperation with the Duma members. And they are telling us they are not getting that cooperation from more than one member of the Duma by the way.
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Mr. ROBINSON. I think that the cooperative relationship between U.S. law enforcement and Russian law enforcement is there. I think that there is a good relationship. I think the meetings we had were productive, and I think there will be further meetings between law enforcement, to law enforcement with regard to sensitive information, and that exchange needs to occur.
We also made the point during the meetings that we thought it was very important for the money laundering statute in Russia to come into place. And we had a discussion about that, had a copy and translated it, the veto message. And we are taking a careful look at that and urged them and made the point that we felt that money laundering statutes are critical here and would be very, very helpful and important in Russia as well.
Mr. ROYCE. It would be nice with all the aid we have given Russia if we would have at least leveraged that signature on that bill instead of the continued vetoes that we have gotten out of the Russian administration. But I thank you for your testimony.
Mr. ROBINSON. I agree with you.
Mr. ROYCE. Thank you, Mr. Chairman.
Chairman LEACH. Thank you.
The gentlelady, please.
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Ms. LEE. Thank you, Mr. Chairman.
Mr. Robinson, you indicate this in your testimony, that there are very limited foreign offenses under the money laundering statute, you mentioned on page 4 trafficking in narcotics, murder, kidnapping, robbery, extortion, destruction of property by means of explosives and fraud against a foreign bank, OK. Because they are very limited offenses, is it safe for us to assume that there are or have been other instances of money laundering from other countries, other than Russia, that for whatever reason has not been exposed nor investigated, because of the lack of statutory requirements, is this really just the tip of the iceberg?
Mr. ROBINSON. This problem is not a problem that is limited to the situation that we are talking about here today with Russia. We see it with other countries. We see it in a whole host of situations in our narcotics investigations and the like. So the topic of international money laundering is a topic that spans the globe and will continue to be a subject that we have very serious concern for law enforcement.
Ms. LEE. But how do you decide when to prosecute and when not to prosecute, given the very minimal statutory authority that you do have?
Mr. ROBINSON. Well, obviously, we are bound by the statutes that exist, and so to the extent that we have specific credible evidence that we can find a violation of United States law as it currently is configured, and understanding that our standard in the United States is to convict people beyond a reasonable doubt, we conduct those investigations and where we have the evidence, we bring the charges.
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Ms. LEE. Can you, just for my own information, indicate where there have been other instances of money laundering that would—I won't say rise to the level of this investigation, but would be a serious investigation that you have conducted or——
Mr. ROBINSON. Why don't I do this, rather than try to talk off the top of my head on this, is try to get back with specific information for you to supplement my testimony.
Ms. LEE. OK, thank you very much.
Thank you, Mr. Chairman. Thank you. I yield back the balance of my time.
Chairman LEACH. Mrs. Jones.
Mrs. JONES. Thank you, Mr. Chairman.
Mr. Robinson, I did not arrive at the time you began your testimony. Would you repeat for me what your current position is, please?
Mr. ROBINSON. I am the Assistant Attorney General for the Criminal Division of the Justice Department. I was appointed last year and took office June 22nd of 1998.
Mrs. JONES. To whom do you report, sir?
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Mr. ROBINSON. I report to——
Mrs. JONES. Directly report?
Mr. ROBINSON. I report to the Attorney General of the United States through the Deputy Attorney General of the United States.
Mrs. JONES. Who is your deputy?
Mr. ROBINSON. Eric Holder.
Mrs. JONES. I just wanted to understand the relationship. And prior to serving in this position, what did you do?
Mr. ROBINSON. I have been a lawyer for 30-some years. I was a partner in a major law firm in Detroit where I headed the litigation department for many years. I was the United States Attorney for the Eastern District of Michigan in the Carter Administration. And for five years immediately before assuming my current position, I was the dean and a professor of law at Wayne State University Law School in Detroit, Michigan.
Mrs. JONES. Close to Ohio?
Mr. ROBINSON. Yes.
Mrs. JONES. OK. My background and experience is a former DA and a former judge. I sat here listening to the testimony yesterday, and I am sure you heard it over the television. It is very easy to sit here and speculate about what testimony is admissible or what isn't in a courtroom or to speculate and say hearsay, but you can't use that in a trial in a courtroom. Is that a fair statement, sir?
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Mr. ROBINSON. As it turns out, my principal area of scholarly attention is evidence and so I taught evidence for many years, and I have written a couple of books about it. And there is no doubt that there is a difference between hearsay, rumor, speculation, innuendo and what you can get into court.
Mrs. JONES. For representatives of the Duma to go back to Russia and publicly say that they have not had cooperation from law enforcement in the United States when they come over to complain makes for great television stories, doesn't it?
Mr. ROBINSON. I am not sure how the press plays it.
Mrs. JONES. Or the press.
Mr. ROBINSON. I don't know.
Mrs. JONES. Now, yesterday we also heard testimony that privatization of Russian banks cause the flow of funds from Russia to other countries, therefore, the United States should be responsible for the money laundering dilemmas in Russia as a result of pushing for privatization.
Have you found any evidence of that particular fact that would cause us to proceed with money laundering claims in this country?
Mr. ROBINSON. Well, let me separate out a couple of things. I have seen the information that these privatization issues have resulted in a fair amount of capital flight out of Russia, some of which, as I indicated in my testimony, may be perfectly legitimate, and not a violation of any United States laws, some of which may constitute money laundering within the meaning of our statutes and each, of course, would require a very careful analysis of the transaction, identifying the source, determining whether the source was based upon a specified unlawful activity. This is a careful process that has to be built together before obviously anyone can be charged with violating Federal criminal law.
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Mrs. JONES. Just for the fact that money flows from Russia out to other countries does not necessarily mean it is as a result of any criminal activity?
Mr. ROBINSON. Certainly not necessarily a violation of United States criminal laws; whether it might or might not violate Russian laws is another matter. If it was to be sent out, for example, to evade Russian taxes or otherwise, but that is speculation.
Mrs. JONES. Would it be fair to say that a good analyst or investigator, even if he had the feeling that the higher-ups thought that some information should be one way or the other, but if he or she was doing their job, they are obligated to provide good news and bad news?
Mr. ROBINSON. I would assume that every manager wants all the information whether it is good or bad. I certainly do in my job, and I would assume others want all the information as well.
Mrs. JONES. And the bad news is the news that could sting you in the behind in a courtroom if you didn't have it once you got to a courtroom on a particular case or analysis; is that a fair statement?
Mr. ROBINSON. In a courtroom or before a congressional hearing or wherever.
Mrs. JONES. Finally, Mr. Robinson, is it a fair statement to say that in the course of being a criminal—excuse me, an Assistant U.S. Attorney or an assistant U.S. Attorney General, you provide not only civil, but also criminal advice to agencies in the United States; is that correct?
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Mr. ROBINSON. Certainly the Justice Department.
Mrs. JONES. The Justice Department does. And there comes a time at some point wherein you may be providing civil advice to an agency and someone in the Criminal Division would be providing criminal advice, and at some point it may be required that in order to be giving good advice civilly, some information may have to be provided criminally that would not necessarily impair an investigation?
Mr. ROBINSON. It sounds possible in the abstract, yes.
Mrs. JONES. In fact, in reality, it could well happen as well?
Mr. ROBINSON. Sure.
Mrs. JONES. Thank you very much, Mr. Chairman.
Chairman LEACH. Thank you, Judge Jones.
Mr. Capuano?
Mr. FORBES. Mr. Forbes.
Chairman LEACH. Mr. Forbes. Excuse me, I am looking the wrong way, I apologize.
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Mr. FORBES. Thank you, Mr. Chairman.
Thank you, Mr. Robinson, for your patience and for being here today. I think your information has been extremely informative, and as the newest Member of the Banking Committee and a Member from New York, I can tell you that I have great interest in this issue. And thank you again.
Is it correct for me to assume, based on what I have heard here this morning in your statements and your responses, that the efforts by organized crime in various foreign nations, Russia and other nations, that the laundering of money in the United States is pervasive?
Mr. ROBINSON. I think that is fair to say. We may not be the most pervasive, but certainly it is a serious problem that requires law enforcement attention and regulatory attention, I think.
Mr. FORBES. May I also assume that given your testimony, that the limited number of offenses that would qualify under the money laundering statute somewhat tie the hands of the Department of Justice to get at this problem?
Mr. ROBINSON. I think there is no question, but that we could use some expansion of the statute specifically with regard to the specified unlawful activity predicates within the money laundering statute, yes.
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Mr. FORBES. The revelation, the recent revelations on one financial institution, its unfortunate involvement with money laundering, only really suggested—you can correct me if I am wrong, but I got the sense and I don't think you have had a chance to complete your statement—but, when my colleague Ms. Waters mentioned ways of getting financial institutions to perhaps be more aggressive in their oversight of money laundering, were you about to mention that there were 105 financial institutions that in one manner or another had been involved, albeit not of their own knowledge, but it came to light that they were involved or their personnel were involved unwittingly in money laundering?
Mr. ROBINSON. Yes, we have submitted some information with regard to that. Some may be mentioned in the attachments to my testimony, yes.
Mr. FORBES. So it is about 105 institutions though?
Mr. ROBINSON. We are talking about investigations and prosecutions over the last ten years, I think is what the matter related to. There were earlier hearings on this subject and one of my deputies, Mary Lee Warren, who supervises, among others, the Asset Forfeiture and Money Laundering Section within the Criminal Division and also the Narcotics Section, testified here, and then following that there was a submission of some additional information. We would be happy to make it available to you as well.
Mr. FORBES. Thank you. Is it your sense that the financial institutions take a more passive role toward the money laundering problem, or are they taking a more aggressive role?
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Mr. ROBINSON. I think hearings like this are causing everybody to devote a greater degree of attention to these matters. And I think that that will ultimately inure to the benefit of law enforcement as we can identify situations that warrant a careful scrutiny.
Mr. FORBES. I guess more to the point, and perhaps some of this will come to light tomorrow when there is an announcement by the Attorney General and by the Treasury Secretary, but generally, as I understand it, beyond the statutory requirements that banks have in looking for suspicious transactions, has there been an effort in the last month or so, or a couple of months, particularly with the latest revelations, to get more aggressive and get the banks to be more aggressive in their approach to this problem?
Mr. ROBINSON. I would like to think that everyday we get a little more aggressive, but I wouldn't limit it to the last month or so, but the efforts in this area have been increasing over a period of time and I expect will continue to increase as we have a greater appreciation for this problem.
Mr. FORBES. And finally, if I may, has the Department approached the Hill in trying to get these money laundering statutes adjusted so that your hands are no longer tied in the manner I think that you suggested?
Mr. ROBINSON. There have been proposals and this committee, I might say, has been very helpful to law enforcement in assisting us to make improvements in the statutory tools that are available to law enforcement.
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Mr. FORBES. The Department itself has made those recommendations?
Mr. ROBINSON. We have.
Mr. FORBES. Thank you.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Michael, and let me extend a formal welcome to you on the committee, and we are grateful for your contribution.
Mr. FORBES. Thank you. Thank you very much.
Chairman LEACH. Mr. Goode.
Mr. GOODE. Thank you, Mr. Chairman.
In your statement, you said organized crime in Russia covered a wide array of activities. Just ballpark percentagewise, how much is protection rackets protecting people would you say?
Mr. ROBINSON. I would be reluctant to put a percentage. It has been identified as a very serious issue, I think, in Russia. There has been a lot written about this. There has been a fair amount of the classified information, which you can't talk about, but there has been a fair amount of discussion about this problem in Russia, and I think it is a serious problem.
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Mr. GOODE. Would it be fair to say that it is far greater now than it was when the Communists ruled Russia in the 1960's?
Mr. ROBINSON. That is my impression. I don't offer myself up as an expert on those particular matters, but it is obviously something we are spending a lot of time on. But that is certainly my impression.
Mr. GOODE. To jump to a tangent area, the tax. What kind of taxes does a business person pay in Russia now?
Mr. ROBINSON. I would have to double-check.
Mr. GOODE. Do you have any income factor?
Mr. ROBINSON. I do know there is a very substantial amount of evasion of taxes. My understanding is that the rate of taxation is reasonably high, and there are substantial incentives as a result for people to either engage in transactions that avoid the scrutiny of the taxing authorities in Russia or simply to try to avoid taxes altogether. I know it is a serious problem that has been recognized in Russia itself that needs to be addressed.
Mr. GOODE. Do they usually now focus more on sales tax type taxes or income type taxes?
Mr. ROBINSON. I would be reluctant to offer an assessment without getting back, because I don't think I have gone into the detail of what their tax system is at this juncture. But we would be glad to try to do that for you.
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Mr. GOODE. Well, do the criminal elements help those businesses that pay protection to avoid taxes? Is it a twofold thing? In other words, I am going to protect you from some bad guys, but I am also going to help you in avoiding paying your share to the government?
Mr. ROBINSON. I would not at all be surprised by that, but as I say, our concentration here, and there are others who would probably be in a better position to offer the right answers to your questions, is domestic law enforcement violations here. Many of those things that are happening there, we are seeing the consequences on our shores and in the Justice Department, our primary attention is the violation of U.S. laws.
Mr. GOODE. Well, with regard to the United States and the influence here, are the organized criminal elements trying to work with established criminal elements in this country or are they trying to set up something apart from?
Mr. ROBINSON. We see a little of both, actually. We have seen some cooperation between some of these groups and traditional organized crime groups in this country and some independent activities as well.
Mr. GOODE. All right. And I yield back, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Goode.
Mr. Barr.
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Mr. BARR. Thank you, Mr. Chairman.
Mr. Robinson, I was reviewing your testimony here, including your references to the current money laundering statutes and what you see as their limited applicability to international cases such as the ones that we are talking about here today involving Russian organized crime and money laundering. Are there any offenses, any provisions of the U.S. criminal Code that would, other than the money laundering statutes, that might be able to be used by our prosecutors for offences involving money that is diverted or fraudulently used; that is, that goes through the IMF, other than simply the money laundering statutes?
Mr. ROBINSON. Well, there is certainly the fraud statutes—bank fraud statues, and variety that could be looked at in the context of specific facts. So money laundering is one of the tools, but there may be other fraud statutes that could be utilized, conspiracy and fraud statutes that could be utilized depending on the facts developed.
Mr. BARR. Because I know if we look at problems with misuse of Federal funds domestically, I know there are ways to directly attack funds that are misused or not used in accordance with statutory provisions on grants and so forth that go through domestic agencies and are used domestically, certainly.
Mr. ROBINSON. And also, as I am sure you know from your prior work in the criminal justice area, that the interstate transportation stolen property statute and others might also provide a vehicle for being used in appropriate circumstances.
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Mr. BARR. Are attorneys at the Department, or in particularly U.S. Attorneys' offices that might have jurisdiction over these particular type of offenses, are they looking at those statutes and the possibility of bringing cases? In other words, being imaginative, using current Federal statues while we are waiting, and hopefully we can adjust some of these statutes to put more teeth in them as you have recommended, as others have recommended—rather than just wait for that to happen, are your prosecutors right now, as we speak, looking at different ways that they might be able to get at this if there are, as we certainly suspect, millions and millions of taxpayer dollars that have been diverted from legitimate uses provided by Congress and intended by the President, or are we just sitting back and sort of waiting for new statutes?
Mr. ROBINSON. I think you are exactly right, imaginative examination of all of those statutes is going on. We would expect that to go on. I am sure you would expect that from your experience, and we expect it here as well.
Mr. BARR. We certainly hope so. One area that is of concern to a number of us is you have indicated these cases are very, very complex. Even among money laundering cases, these are more complex, because of the international institutions involved and the international nature of them generally. Does the Department have training programs in place now for equipping prosecutors and agents with the tools they need to level the playing field with regard to these criminal enterprises or do you need to develop some additional or new training programs in light of the complexities of these cases?
Mr. ROBINSON. I think we need to continue to do that. We have those programs in place. We have international coordinators now in the U.S. Attorneys' offices. As I said earlier before you were here, there has been a sea change since I was the United States Attorney in Detroit twenty years ago to the kinds of issues that are being confronted in these days by our prosecutors throughout the Federal system, and I think we need to do continuous work in getting our Assistant United States Attorneys and Federal prosecutors, as well as the investigators, fully trained with regard to the new technology that is being used and new activities that are occurring really internationally these days.
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Mr. BARR. Thank you. I would urge you to move forward on that as quickly as possible and also to really push these prosecutions, because there is an awful lot of money at stake here for the American people.
Mr. ROBINSON. Thank you.
Chairman LEACH. Thank you, Mr. Barr.
Well, let me just conclude with two questions. One I am not sure you will be able to answer and the second may be rhetorical. First, is the Justice Department looking into the possible diversion of IMF funds in any of the cases it has under review?
Mr. ROBINSON. The entire matter of the investigation, there aren't any limitations on it. The investigation is going to be done thoroughly and carefully and carried to wherever it may go without any limitations at all.
Chairman LEACH. Second, and this may be rhetorical, have you been in close consultation with Justice authorities and legal authorities and banking authorities in the Cayman Islands and received good cooperation from them in your investigation?
Mr. ROBINSON. I think the answer is yes, that there has been. This is going to be increasingly important for us to engage in, particularly in places where we have concerns about offshore financial institutions that are putting money beyond our reach. That is a challenge for us, and we need to continue to follow up on it.
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Chairman LEACH. I raise this for the following reason, just so that you understand. A few months back, the Federal Reserve of the United States intervened and helped assist an American incorporated institution called Long-Term Capital Management, involving funds, however, that were chartered in the Cayman Islands. And I asked the Chairman of the Federal Reserve Board if he had of course consulted with the Cayman monetary authorities before making this decision to save Cayman funds, and this was a rhetorical question, which of course he had not.
But the point I would raise is that we have developed a system in the world where some countries establish laws that are designed to defend the lawless. And so one of the great questions we have as a country is how do we disincentivize people using those countries, and I would like to make it very clear if the Justice Department does not get full cooperation from countries like the Caymans, clearly the Congress is going to have to move in directions to disincentivize that kind of country from being utilized. And I believe that that is something we ought to be looking at seriously, and I would be looking at constructive advice from the Justice Department in that vein.
Well, let me just conclude by noting that sitting behind you is Mr. Mark Richard, who is a longtime Justice Department employee who is moving on to a new assignment. We want to wish him well in his new assignment as we wish you well in your current assignment. Thank you very much.
Mr. ROBINSON. Let me just say as a footnote to that, Mark is going to be in Brussels, still with the Criminal Division, and I think it is symptomatic of the fact of the required reach of our international law enforcement efforts that Mark will be working with the European Union and working with our offices abroad in trying to deal with the very complexities of the kinds of things we have been talking about at this hearing.
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Chairman LEACH. Well, thank you very much, Mr. Robinson.
Mr. ROBINSON. Thank you.
Chairman LEACH. I would like to ask now our second panel, which is also a one-person panel, to come forward. Our second witness today is Mr. Yuri Shchekochikhin, who is a member of the Russian Duma and an editor of the Moscow paper called Novaya Gazeta. We welcome Mr. Shchekochikhin who is violating two normal precedents of the Congress; that is, we normally do not invite foreign witnesses and particularly foreign government witnesses. We are particularly appreciative that you have agreed to come, and normally we do not invite members of the press as witnesses. You happen to be a member of the first and fourth estates in terms of an American term of art.
Mr. Shchekochikhin's newspaper has been a leading reporter of certain issues of corruption in Russia, and for that reason we wanted to invite his perspective before the panel. Mr. Shchekochikhin is joined by an interpreter, and we invite him to proceed as he sees fit. Welcome.
STATEMENT OF YURI SHCHEKOCHIKHIN, MEMBER OF THE RUSSIAN DUMA, EDITOR OF MOSCOW NEWSPAPER, ''NOVAYA GAZETA''
Mr. SHCHEKOCHIKHIN. Thank you, Mr. Chairman, and Mr. Chairman, Members of Congress, my English is not good enough for so serious a report, and I ask Natasha to help me to translate.
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Chairman LEACH. Of course.
Mr. SHCHEKOCHIKHIN. Mr. Chairman, I would like to thank you for this invitation to participate in the hearings, which I am sure will play a major role in our joint struggle against corruption and in Russian-American relations. Although, both yesterday and today, I felt as if I were at a meeting of the Russian Ministry of the Interior. I heard the same names and the same numbers, almost as if I were at home.
I am a member of the Committee on Security and a member of the Committee on Struggle with Corruption, and I represent the Yabloko faction in the Duma. At the same time, I am Deputy Editor of the newspaper Novaya Gazeta, New Gazette. It is a weekly which has a circulation of about half-a-million. Unfortunately, the investigations we do are sometimes more effective than the investigations done by the government. At least three Vice Premiers had to resign after publications in our newspaper. However, the new ones who came were no better than the old ones, but that is our life today.
Yes, it is our life where corruption has become the main stumbling block to development in our society. The public is firmly aware of the concept, ''the family'' now, and by that we mean not only the president and his immediate family, but the people surrounding him.
As the leader of our faction, Grigory Yavlinsky said ''You can see the same thing only in Indonesia.'' A day doesn't go by that our press does not mention the name of the dark genius, Boris Berezovsky. The President of Sibneyts, Raymond Mabrovich, who is called head treasurer of the family. By the way, it was our newspaper that has found criminal action, and based on this case, he should be in prison right now and not in the Kremlin.
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Another hero of our times, the President of the bank Unicom, Ashor Ygadzon, who managed to steal about a million dollars from an organization Rosvooruzheniye, Ross Armaments, but this was the man who organized the provocation against Skuratov, the Attorney General, and another ten or dozen names which defined the life in our country.
I am sorry that I could not prepare a written statement for these hearings, but there were reasons for this. Right before my trip to Washington, 24 hours before the trip, I returned from Dagestan, where there are new Caucasus wars taking place. Local residents openly called this war a money war, and even the eagles of the mountains know the name Bidirovsky. There I had occasion again to be convinced that corruption is not only an evil, but it also leads to the loss of life of innocent people and bloodshed, but these are all our problems.
I am thinking about something else, why today money laundering in Russia has become such an important issue here in the United States. The constant publications and the press here and releases remind me of a bombing attack. All of this happened a long time ago. America knew about this. Why only today? I want to warn you about coming to conclusions about the money laundering situation in the Bank of New York. Maybe these are international organizations, maybe ours. Don't forget that Russia is still a wealthy country. Two hundred years ago, our historian Karamzine, when he saw fellow Russians in Paris, and this Russian asked him, ''Well, what is happening in Russia?'' He responded, ''They are stealing.'' During those 200 years, they haven't managed to steal everything, and because of that, the $1.5 billion that is leaving Russia, more often than not, it is our money.
There are American traces for this money. Five years ago we had the history of Mr. Stroiyev. An American mass media called him one of the best businessmen in Russia. Newsweek had a photograph of him on its first page. He was a member of the Moscow government, and at the same time President of the firm Perestroika. He stole everything that he could. And bought everything that he needed or wanted in America. He ran away from Russia two days before my article about him appeared, and now he is leading a calm life in Atlanta, and he is afraid to return to Russia.
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I also researched the history of oil. The money received for the sale of this was supposed to go to the Republic of Komi. The Republic received only about $1 million. The other $11 million turned up in pockets of various officials. When in Copenhagen, I found a list of these officials and of the money that was lost, and at that time huge sums were transferred to the U.S.
The Committee for Fighting Corruption and my fellow members in the Duma raised the question of raising a criminal issue about this, and this case was given to the procurer of the small town Solikamsk, and the official there in charge of the investigation has no money to travel anywhere to investigate this issue. And the information I had, the bills, are still lying in my safe at home, because it seems that nobody was interested in this.
The truth of the matter is that the local governor has ties to the president's family. As I was told in Copenhagen, one of the oil companies, Tabakiev, was sold at auction offshore in the Virgin Islands. The son-in-law of President Yeltsin, Aleksandr Uchinko, was involved in these dark dealings.
There is another American connection, the city of Monroeville in Pennsylvania, that one of the founders of the firm Alletta, who was buying Russian nuclear technology, he is a member of the ministry named ADAMAT, and the account for this company, and possibly the Minister itself, is in a PNC Bank in Pennsylvania. Much has been written and said about this, but even though the premiers in Russia have been changing, the ministers still stay.
Now, about credits. We took an interest in the expenses or in foreign credits, and among those receiving them were now defunct banks, Menatep, Imperial, Inkombank, Dacca bank, and what was even more surprising to us, $400 million are to be spent in aid to Mongolia, Tunisia, Cuba and Vietnam, and so forth, Algeria. We are not rich enough these days to be able to do this. And the most interesting thing, or maybe interesting for my American colleagues, each third item in the credits is titled ''consulting.'' Could it be that during those last two years, all of this consulting done for our officials has not taught them anything? But who are these consultants?
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A few years ago, with my American colleagues, we studied the question of where the credits for supporting small business disappeared to. It turned out that they were in several books which remained in the Russian Embassy, but more than that, I was told that money which is given by the West is not only stolen by our officials, but is also going into the pockets of these numerous consultants, including those from the USA for expensive Moscow hotels, for travel with family and friends to Moscow, and so forth, and I want to stress and repeat that I know this from my American friends.
I am very grateful that yesterday I heard in this hall that the state Duma still exists, but America is a strange country. It only knows symbols. Gorbachev is a symbol of Perestroika. Yeltsin is a symbol of democracy. Chubais is a symbol of privatization.
The conclusions of the commission of which were about the reasons for the default of August, which were created by a decision of the federal council, it gave the names openly of Kadiyevka, Dubenya, Chubais as the authors or the executors of this financial crash. More than that, in this conclusion, Chubais is accused of giving out certain interested to financial groups, both ours and foreign, the timetable for the financial crash that was to come. There is a different opinion of Chubais in different parts of society, and including my colleagues, the members of the democratic faction Yabloko.
But even during the non-official visits of Chubais to Washington, he is received by the highest officials of the U.S. Administration. There is a double bookkeeping, both here and there. I think that the decision of the U.S., that was not well thought out, and an inadequate evaluation of the current situation in Russia leads to the fact that the higher officials in Russia feel that they can do whatever they wish, their hands are not tied. This happened in the fall of 1993 when the American Administration in practical terms approved of the dissolution of parliament, no matter how I personally felt about the parliament at that time.
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I remember a conversation I had with a high-level government official in Washington. He said what Russia has to do in parliament is turn off all the water supplies so they would be forced to leave, and I asked him, would he advise that to his own President, to cut off the water supply in the Senate or Congress? And this leads to what we are talking about here and even more than here, in Moscow.
From time to time I hear from our officials, well, what is this, somebody received $10,000 or $100,000 for a book that has not been published yet. Is that money? And I am reminded of our teachers, our doctors, our soldiers who are fighting in the Caucasus, and our officers whose salary is 22 rubles a day, which is enough to buy a pack of cigarettes.
Thank you very much.
Chairman LEACH. Well, thank you very much, Mr. Shchekochikhin, and let me stress in terms of symbols, I think the Shchekochikhin symbol will be straight talk. Your issue of book publishing is not novel to Russia.
Let me ask a question just about reactions in your country. You have a few Russians today who have bought major real estate in the United States, in Pebble Beach and Palm Beach. What do Russians think of this? Are they offended or do they think this is right and proper?
Mr. SHCHEKOCHIKHIN. You know, we can't say today that everyone who buys real estate is a bandit or a criminal, but I think we have to go not from private property to crime, but from facts which take place in Russia and then go to the real estate. And unfortunately, the cooperation between our special services is very bad, no matter what is said here or contrary to what is said here.
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Chairman LEACH. What are the best estimates of the capital flight from Russia? And can you give us your assessment of why so much investment from Russians has fled Russia? Is it the economic stability, the political instability, the absence of legal protections in property? Why have Russians lost confidence in their own country and determined to allow so much capital to go abroad?
Mr. SHCHEKOCHIKHIN. That is a very important question. When President DeGaulle, when he came to power in France said, I ask the French to put their money in French banks and I promise that not one centime will be lost—unfortunately we have no one to say something like that. And of course, lack of trust in the government is the first or the foremost reason. In spite of the efforts of the Yabloko faction to change the tax laws, nothing is happening. If one were to pay all taxes, then there wouldn't be any business at all. It is safer to hold the money in the West. Unfortunately, foreign banks are not working in Russia. There are many reasons. It is like the thousand and one nights.
Chairman LEACH. One final question. What role do you see being played by what are called offshore banks, banks in Antigua and Cyprus, and is there any reason why the Duma could not pass a law that disallowed capital flight to countries that didn't have well-regulated banking systems?
Mr. SHCHEKOCHIKHIN. Yes. The Duma could pass a law about that, but what will happen after that? With the dissolution of the Soviet Union and with the formation of new countries with which we do not have normal boundaries, with this enormous amount of joint enterprises or firms, the money will flow out. I am not even talking about the direct carrying out of cash money.
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About five years ago I saw someone in Washington who carried out $3 million in cash. I asked him, ''How did you manage to do that?'' And his eyes became very sad, and he said, ''I had $5 million.''
Chairman LEACH. Thank you, sir.
Mrs. Maloney.
Mrs. MALONEY. Welcome, Mr. Shchekochikhin, and thank you for joining us here today. In this country, money laundering is enforced by our bank regulators, the Treasury, through FinCEN, the Justice Department, the FBI and many other agencies. Could you comment on the level of commitment to combat money laundering in your own country, what are the agencies combatting money laundering, and do they have a strong political and popular support?
Mr. SHCHEKOCHIKHIN. There is a presidential veto on the law that is about money laundering. This law is not perfect, but it is this kind of law that is not perfect in many other countries, too, but you need some sort of basis or foundation. Then, second, there was a commission formed to deal with money laundering, with representatives from several agencies, but this is a very complicated question and not only in Russia.
In this very room yesterday, I heard from a colleague of yours that I know that American banks launder money, but not a single bank lost its licensing during this time. And of course we need cooperation between our financial organs, exchange of information with each other, trust in each other. That is the most important thing.
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Mrs. MALONEY. Could you elaborate? You said there was a law that passed that was vetoed by the president. You said there was legislation with a presidential veto. Could you clarify?
Mr. SHCHEKOCHIKHIN. You know, it would be easier for the president to explain this.
Mrs. MALONEY. But he did veto the legislation.
Mr. SHCHEKOCHIKHIN. Yes, he vetoed a law which was passed by the Duma. Right now, a committee is working on this.
Mrs. MALONEY. What was the reason he gave when he vetoed the Duma's legislation on money laundering?
Mr. SHCHEKOCHIKHIN. Well, first, because the law was not perfect and there is one thing in the law that you can take issue with, and our colleagues from the Communist Party and we argued with them about this.
Mrs. MALONEY. What was the point they took issue with?
Mr. SHCHEKOCHIKHIN. OK. The terminology used was ''unlawful income'' rather than ''criminal income,'' because unlawful is a much more embracing or wider embracing term. You could take some grandmother who is selling flowers at a metro stop, but this gave the president a reason to veto this law.
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Mrs. MALONEY. Well, Mr. Chairman, I want to compliment you on calling this hearing and for the legislation that you introduced yesterday, and I have reviewed it and I look forward to working with you to enact it in this Congress, even though it is not perfect. It is a step in the right direction, and I support it.
Chairman LEACH. Thank you very much. And I want to make it very clear that this hearing is not designed to investigate Russian Bablashisks.
Mrs. Roukema.
Mrs. ROUKEMA. All right. Thank you, Mr. Chairman.
I do want to ask a question for clarification. I believe you said that foreign banks are not active in Russia. Did you indicate that? But does that mean that only U.S. banks are active in Russia. Or did I misunderstand you?
Mr. SHCHEKOCHIKHIN. No, no, you misunderstood. There are no——
Mrs. ROUKEMA. No foreign banks?
Mr. SHCHEKOCHIKHIN. There are no foreign banks in Russia. You said that America welcomes a number of foreign banks in Russia. That was said here yesterday in these chambers.
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Mrs. ROUKEMA. Oh, I see.
Mr. SHCHEKOCHIKHIN. But I think that active Russian banks—and the Western banks in Russia probably, that is equal to zero right now.
Mrs. ROUKEMA. But there are still some American banks active in Russia or have been up until now?
Mr. SHCHEKOCHIKHIN. No, I think that American banks are acting or active with Russian money in the U.S.
Mrs. ROUKEMA. We will come back to that, but let me ask this question. At the beginning of your testimony today you made this statement: ''I want to warn you about coming to conclusions about the Bank of New York,'' but you didn't state your warnings about the conclusions. Can you comment on that subject?
Mr. SHCHEKOCHIKHIN. I read the American press about this scandal. The same facts are repeated, and I don't see any proof, but I read that this scandal involves money from the IMF and that somehow this is linked to whether aid should be given to Russia, and I am afraid when criminal questions are taken over by political questions, and that is why I would not rush to conclusions. Maybe those, the commentators are correct, but maybe not.
Mrs. ROUKEMA. I hope you would feel confident at this point in time. I am confident that the investigation through the criminal justice system is being properly handled. It will have due process under the laws of our country. Let me go on and ask you this. One of our people yesterday on the panel made this statement: ''Russia is too important to abandon.''
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A question I have for you is how and when can we restore our economic and foreign policy ties to Russia in your opinion?
Mr. SHCHEKOCHIKHIN. Well, right now there is the hope for America and Russia, it is gone. What I am saying is what people feel over there.
Mrs. ROUKEMA. Yes, yes.
Mr. SHCHEKOCHIKHIN. Maybe it will come back. I hope that this will happen. Who will make the first step? I came to Washington right after the bombings in Belgrade and I tried to explain to the high officials and the Administration in the U.S. The experience from Vietnam, from Afghanistan, from Iraq, it all turns out to be something other than what it was supposed to be. It is a very complex question, and this really had an impact on the relations between Russia and the U.S., and I was told that I don't understand anything in foreign policy.
Mrs. ROUKEMA. I thank you for your response.
Chairman LEACH. Thank you.
Mr. Bereuter.
Mr. BEREUTER. Thank you, Mr. Chairman.
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Mr. Shchekochikhin, thank you very much for your testimony. I heard your story about someone in this Administration suggesting the water should be shut off on the Duma. They have the same attitude in some places about the Congress shutting off the lights and the water. They love democracy in the abstract, but when it comes to the inconvenient appendage called the Congress, which is tenacious and inquisitive, it creates a lot of problems for those people who prefer an elected absolute monarch.
Having commiserated with you as a parliamentarian on that, I would like to ask you what you meant when you said there is double bookkeeping in both places.
Mr. SHCHEKOCHIKHIN. Well, it is a double moral standard. It is not a financial category right now.
Mr. BEREUTER. We have had people come before us and in other sessions, Russian economists from outside of the government and institutes, who have suggested that the West should provide no more financial assistance to the central government, but should, in fact, provide multilateral and bilateral assistance to building democracy by working with people at the local level and by pushing for a rule of law. They have also gone on to say that since the debt of the Russian government seems so hopelessly large, a better solution would be to forgive the Soviet debt which falls on Russia today. That
would five the Russians some hope for actually meeting debt requirements which, in turn, could cause a positive effect upon performance.
Now, it is easy for an American to embrace that possibility, if it is a good one, because most of the Soviet debt is held by German banks. What is your reaction to: One, shutting off aid to the central government?; and, second, sending it out to governors and local groups that are doing their job—focusing on democracy and rule of law?
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Mr. SHCHEKOCHIKHIN. You know, I am not an economist. I am in the Security and Corruption Committees, and I am not as intelligent as the economists, but I am afraid of the words ''give money for democracy.'' Because then what happens is that democracy is being built on only one small part of the territory for one person. I think we have to try to get joint projects, joint technologies where a year from now you could actually feel or see the results, what is happening.
I am sure that Russia does not need any more consultants from the U.S. or from Germany on how to build democracy. The world is small. We have to work together.
Mr. BEREUTER. Mr. Shchekochikhin, I want to fit in one more question if I may on my time. What is your best judgment about the extent to which Russian organized crime has succeeded in gaining control or ownership of Russian banks?
Mr. SHCHEKOCHIKHIN. You know, I heard a colleague talk here today of the hearings, and for many years I have been trying to find the Russian mafia in America. A lot has been written about it and a lot is being said about it, and there is only one criminal case against Yaponchik, and I am getting tired of all of these mysterious figures, the Russian mafia, because I see the same thing in Russia also. Organized crime is actually being suppressed by the officials in the administration. It is the officials who are getting the money.
These are new processes. I have been studying this issue of all of these criminals for twenty years, you can believe me, and that is what is frightening, and today the organized crime is turning to narcotics and things like that.
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Mr. BEREUTER. Thank you, Mr. Chairman.
Chairman LEACH. Thank you. Just to clarify what you are saying, is there is an increase in public corruption as contrasted with traditional criminal activities?
Mr. SHCHEKOCHIKHIN. Yes, that is correct.
Chairman LEACH. Thank you.
Mr. Barr.
Mr. BARR. During the course of the last two years in our country, we have investigated extensive use of illegal foreign money into the President's reelection campaign, including large amounts of money coming in from Communist China and other countries in the Far East. Are you aware of any evidence that any money from Russia, including from organized crime elements, has been funneled into any political or election campaigns of public officials here in this country?
Mr. SHCHEKOCHIKHIN. No, ours—they won't give money for that.
Mr. BARR. They are somewhat unique then. Do you have any evidence, I know you touched on this very briefly, but could you indicate if you have any further evidence that the money that is being accumulated by organized crime in Russia is being used to traffic in armaments with groups outside of Russia, groups inside Russia, or other countries?
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Mr. SHCHEKOCHIKHIN. Yes. A lot has been said and written about this. Criminal cases were begun—again several generals who had ties with these bandits, with bandits. But, you know, the armaments market is traditional for organized crime and for high-level officials who are linked to that.
You especially see this in the Caucasus. Right now you had this case with this invasion of Dugestan and there was an international brigade in Dugestan at that time. I myself saw people who were killed who were from the Sudan, and they had the newest kind of armaments, which the Russian army doesn't have. Almost every one of them has this English sniper rifle, Magna, whereas in the territory of Dugestan there are only two of those. And so, as you can see, it is a very big market.
Mr. BARR. Any evidence that that market includes biological or chemical weapons?
Mr. SHCHEKOCHIKHIN. There is some, a little bit written about this, and especially the younger investigators are looking into this. But those conflicts that I had looked into, I did not see any evidence of this or I would have written about it.
Mr. BARR. Is there any evidence that the trafficking of armaments, or the funding of sales of armaments, extends to terrorist nations such as Iraq or Libya?
Mr. SHCHEKOCHIKHIN. Well, you know, I am convinced that those attacks on Dugestan were funded by Arabic countries, and everyone knows about this, and a lot of money—big money, is going. You know, the main purpose there is to establish Islamic Fundamentalism, or even worse, on Dugestan territory. And so a lot of money has been given for this, and I think that this whole Caucasian business is, it is not only a Russian affair, it should be international, or it is international. Because there are a lot of links there with countries that are traditionally supported by the USA.
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Mr. BARR. Thank you.
Chairman LEACH. Thank you very much, Mr. Barr. And let me thank you, Mr. Shchekochikhin.
I would also like to extend personal thanks to the interpreter who represents the Library of Congress, and I think she has reflected very well on herself and the Library and we appreciate very much your being able to do this today. And I might ask that you introduce your name for the record if you would.
The INTERPRETER. Natalia Montviloff. Thank you.
Chairman LEACH. Thank you. Thank you, Mr. Shchekochikhin. Thank you.
Our third panel is—we welcome Thomas A. Renyi. Mr. Renyi is Chairman of the Board and the Chief Executive Officer of the Bank of New York.
And your full statement will be placed in the record. And you may proceed as you see fit and read the full statement or parts as you prefer.
STATEMENT OF THOMAS A. RENYI, CHAIRMAN AND CEO, BANK OF NEW YORK
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Mr. RENYI. Thank you, Mr. Chairman. Mr. Chairman, Members of the committee, my name is Tom Renyi, and I am Chairman of the Board and Chief Executive Officer of the Bank of New York.
I appreciate the opportunity to testify before the House Banking Committee on behalf of the Bank of New York. Our bank was founded in 1784 by Alexander Hamilton. Our business today focuses on the global financial services sector, and we are one of the leading correspondent banks for commercial banks around the world. We provide corporate and retail services in our home market, as well as a variety of other trust and investment services.
The Bank of New York has consistently enjoyed a reputation for prudence and responsibility while producing amongst the highest earnings in our industry for our shareholders. I have been dismayed by suggestions in the press that the Bank of New York was somehow actively involved in the reported Russian money laundering scandals. Let me said the record straight, no charges have been filed against the Bank of New York, no relevant authorities have asserted that the bank is engaged in money laundering or violated any other law. No customer of the bank, nor the bank itself has lost money as a result of the activities in question.
During the past year, we have worked closely with all of the ongoing investigations. We have provided thousands of documents and millions of electronic bits of information, and these investigations are not yet complete. They remain highly confidential, and as you can understand, there are limits to what we can disclose prior to their completion.
Mr. Chairman, in my written statement I have provided detailed information on the six specific topics raised in your letter inviting me to appear today. I would like to use this limited time available to me now to discuss several basic questions: What events actually took place, how did they take place, what have we done as a result of these events, and the subsequent inquiry. And, finally, Mr. Chairman, I would like to suggest policy issues that the committee may wish to consider.
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Press accounts have tended to ignore the Bank of New York's cooperation with the investigating agencies both here and abroad. And although, Mr. Chairman, there are limits as to what I can say again about these investigations, let me try and describe what I can.
The bank learned of these investigations a year ago in September of 1998, and when we requested the U.S. Attorney's permission to close the accounts, we were asked to keep the accounts open, to advise no one, other than our bank regulators, and to take no action that would compromise the investigations. We did all of these things.
This was our commitment then, and it remains our commitment now to cooperate fully with all law enforcement agencies. Now when opened, the accounts were quite normal. The principal accounts were opened at a New York City branch of the bank by Peter Berlin, a New Jersey resident, who became a U.S. citizen in 1996 and who represented himself as operating small businesses in the New York metropolitan area.
The accounts were referred to us by an officer of the bank, Lucy Edwards, Mr. Berlin's wife. The initial history of these accounts were unremarkable and account activity was consistent with a modest business.
However, the volume of funds moving through these accounts increased to levels well beyond what would have been expected for businesses of this kind. And when bank employees noticed the increase in volume, questions were raised within the bank both about Mr. Berlin and his companies. But the questions were not pursued with sufficient vigor or follow-through and the questioners relied too heavily on the fact that Mr. Berlin was married to a well-regarded bank officer, Ms. Edwards, who again originally referred the accounts.
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Allowing these accounts to remain open and active without sufficient questioning was a lapse on the part of the bank, and I have taken personal responsibility for implementing remedial actions, which I will describe later in my testimony. But let me turn, Mr. Chairman, to the Bank of New York's business dealings in Russia. The bank has done business in Russia since 1922. And with the collapse of the Soviet Union in 1991, a new banking system began to emerge in Russia. And we, as many of the nation's leading commercial and investment banks, were asked to aid in the development of their banking system.
The role we chose was similar to what we do in many other countries and more limited than what many other banks chose. In our case, correspondent banking and securities processing activities, bank-to-bank business that generates stable predictable fees with relatively low risk in capital exposure was what we chose. To correct any misimpressions, I want to underscore the fact that Bank of New York has no branches or bank subsidiaries in Russia, just a small five-person office that performs administrative functions.
When we open correspondent relationships, we are selective. We do business only with banks that meet the high standards in their particular marketplace. We require documentation from them as to the legality and the creditworthiness of their businesses and we review their capital adequacy and their reputation in the local marketplace.
But having a correspondent relationship with a bank, Mr. Chairman, does not give us nor any bank much direct knowledge about that correspondent's customer accounts. This results from the opaque nature of the electronic global payment system. Information regarding the sender and receiver of funds consists little more than sums, account numbers and digital information regarding the bank identified.
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The system is excellent at tracking funds' flows within its electronic pathways, but the system is not very good at identifying who controls the origination or destination accounts, how they may have come by the money or what they plan to do with it. So we share that frustration that all of the authorities who are our partners in these ongoing investigations have regarding these accounts.
In the last five weeks, we have examined vast amounts of data, but we do not have all of the answers that we want and we don't know when or if we will. Working with outside auditors, we have reviewed the program we employ for identifying and reporting suspicious activity, and we have identified several areas of our improvements and have implemented already most of the changes.
We have formed——
Chairman LEACH. Mr. Renyi, if I can interrupt you for just a second.
Mr. RENYI. I'm sorry, Mr. Chairman.
Chairman LEACH. I apologize, we are interrupted by a vote on the floor, maybe several votes, and it strikes me that it might be better to recess in the middle of your testimony than just before you finish so that you have a better chance to give a flow.
Mr. RENYI. Fine, Mr. Chairman.
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Chairman LEACH. So what I would suggest is that the hearing recess pending the several votes, and then we will return to your testimony. And you can proceed as you see fit at that time.
Mr. RENYI. Very well.
Chairman LEACH. So the hearing will be in recess pending the vote.
Mr. RENYI. Thank you.
[Recess.]
Chairman LEACH. The hearing will reconvene.
When we recessed for a series of votes, Mr. Renyi was in the middle of his testimony, and I would like him to proceed.
Mr. RENYI. Thank you, Mr. Chairman.
Prior to the vote, I had summarized much of the activities that were taking place in the Bank of New York that is subject to our investigation and, most importantly, what we did about them, what we are doing about those activities, those investigations.
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I was at the point where I would like to really discuss and offer some public policy commentary and being that one of the central issues, one of the central questions that are coming before this subcommittee is the possible misuse of international funds transfer system, which we feel is a truly important issue that affects clearly all of the banking system here in the U.S.
It is an issue that has two components, the granting of access to the global payment system and the monitoring of activity taking place within the system. Mr. Chairman, if Congress concludes that the access to the payment system should be tightened, I would urge strongly that this be done through a process of international cooperation, otherwise, if we restrict access in any one country, we may simply drive would-be wrongdoers to less stringent points of entry into the system.
The U.S. dollars, the unquestioned currency of choice of payments, for payments moving through the global system, any policy action that reduces the importance and attractiveness of the U.S. dollar for world trade would place the United States at a competitive disadvantage.
As we look at monitoring activity within the payment system, we should as well determine how U.S. foreign policy should address illicit business activity that uses this payment system.
Today, an agency of the U.S. Treasury, the Office of Foreign Access Control provides enforcement against academically embargoed countries. Should that approach be applied to money laundering? Should it be applied to capital flight? Could it be done without hindering legitimate trade flows? And if we choose to step up surveillance activities, can we do so with appropriate respect for our fellow citizens' right to privacy?
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Mr. Chairman, you have expressed a policy concern about the role of U.S. banks in establishing correspondent relationships in Russia and other emerging countries where there are clear concerns for corruption. Let us be careful that if Western banks redline Russian banks, the emergence of a modern capitalistic economy in Russia will probably be impossible.
In conclusion, I believe that these are legitimate and important issues that touch on the central themes of these hearings. Yet the broader considerations should not obscure the essential responsibility that we and all the participants in the global system have in ensuring its appropriate use. When any financial institution provides access to the system or facilitates its use, it must do everything it can to prevent illicit activity from taking place as a result. And if illicit activity does take place, it must detect it and bring it promptly to the attention of appropriate authorities. This is our responsibility and on behalf of the Bank of New York, I reaffirm that responsibility today.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you very much, Mr. Renyi.
Let me say that there is an element of awkwardness in all of this hearing in that we have before us today one of the most reputable banks in the world and a bank with an enormous history, in fact, as stated in your initial comments, the oldest bank in the United States founded by the man many of us considered to be our greatest Secretary of the Treasury, Alexander Hamilton.
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The fact that it is such a great bank and such a reputable bank makes the questions at stake rather large, because if our best and strongest are part of a system in which money can be laundered, whether it be through fault or not fault of the bank, is very difficult.
So let me just begin by saying, can you give us a sense of the magnitude of funds that you believe have come from Russia through your bank?
Mr. RENYI. I am sorry, I didn't hear you. What is the source?
Chairman LEACH. The magnitude of funds that would be considered in a traditional way. You know, press accounts are in the $10 billion figure; you indicated to me privately perhaps less than that.
Mr. RENYI. Somewhat less than that. We are in the process of our own investigation, which really started five weeks ago when the leak first occurred in the press, and as you can imagine, this is a very, very complex, very complex situation to review, and there are literally thousands of pages of documents, thousands of credits and debits flowing in these accounts.
What we have been able to determine is that the central accounts in question here that were controlled seemingly by Mr. Berlin moved $7.5 billion over the past three years, roughly three and one-quarter years, roughly even throughout the course of those 3 1/2-3 1/4 years. So the magnitude is very substantial under virtually any type of measurement.
Chairman LEACH. So these are the accounts controlled by this one individual? How many Russian banks are correspondents that you work with?
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Mr. RENYI. Today, Mr. Chairman, we have roughly 160 banks that we work with. That represents approximately 10 percent of the universe in Russia today.
Chairman LEACH. Yesterday a former CIA station chief indicated that his judgment was about 85 percent of the Russian banks are fraudulent, and the figures are a given kind of magnitude that have been talked about for some time, and that Russian banks in many cases are considered money laundering platforms.
Do you have figures on dollar volume of Russian bank funds run through your bank?
Mr. RENYI. We do, Mr. Chairman. Obviously through the course of this examination, we have literally pored over every type of statistic that we can to develop a sense of dimension to this issue within our own organization. I think it gives some degree of dimension as well to the issue overall through the U.S. banking system.
With regard to our banks, our correspondent banks in Russia, we looked at specifically a timeframe of last July and last August, which coincides with the IMF payment last year, to determine what volumes were flowing through our accounts. And at that time it was $3.7 billion per day.
Chairman LEACH. $2.7 billion per day?
Mr. RENYI. $3.7 billion per day on average and a fairly tight range, $3.2 to $3.8 billion.
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Chairman LEACH. How would this relate to say three months earlier and three months later?
Mr. RENYI. It appeared to be very, very similar. There was a slight runup since the early part of 1998, but it has stayed very stable around that $3.7 billion. I might add that represents less than 1.5 percent of all of the dollars that we clear for all of our correspondents, which is about $600 billion.
Chairman LEACH. Of these amounts, how many would have had any origin in let us say from offshore banks, or are these directly from Russia?
Mr. RENYI. This would all be from Russia.
Chairman LEACH. Directly?
Mr. RENYI. These are all Russian.
Chairman LEACH. Using no intermediaries?
Mr. RENYI. Russian domiciled organizations, yes, Mr. Chairman.
Chairman LEACH. Now you have an offshore subsidiary, is that correct, in the Caymans?
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Mr. RENYI. We have both a branch and a subsidiary trust company.
Chairman LEACH. For what reason would you have a branch in the Caymans?
Mr. RENYI. The Caymans branch is a funding vehicle for the bank overall. It is similar to virtually every Cayman branch that any U.S. bank would have. It strictly offers an ability for us to be able to quote different rates than what we have here in the U.S. The Cayman branch that we have is under the jurisdiction of the Federal Reserve.
Chairman LEACH. Now, today's Wall Street Journal reports that investigators were reviewing two accounts at your Cayman branch that are beneficially owned by Leonid Dyachenko, who is married to President Yeltsin's daughter and close political adviser Tatyana.
The article suggests that the Cayman accounts were opened in the names of two offshore companies, the ownership of which appears to be a bit unclear, and the deposits into the account came from two companies owned by Mr. Dyachenko and incorporated in the Caymans. These two companies are in turn reported to be affiliated with the Russian company that published President Yeltsin's memoirs.
Can you tell us, first, is it true that the Bank of New York maintains accounts for Mr. Dyachenko in the Cayman Islands?
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Mr. RENYI. As you can imagine, Mr. Chairman, this is an exceptionally sensitive issue. Because it is very much under the purview of the ongoing investigation, we by policy do not discuss relationships with any of our clients. That is a policy that is shared by virtually every bank that I am aware of, compounded by the issue surrounding the investigation. Obviously given the commentary today in today's press, what I can say is to confirm the fact that those two accounts do exist at the Bank of New York, that Cayman Island branch. Again, as any deposits that may be, any accounts in the Cayman Island branch is under the supervision and jurisdiction of the Federal Reserve, just as every branch in the United States is.
Chairman LEACH. Jurisdiction implies regulatory.
Mr. RENYI. Regulatory review.
Chairman LEACH. But that is different than legal jurisdiction.
Mr. RENYI. I am implying the regulatory review.
Chairman LEACH. I think that is a distinction that is of some profoundness.
Did you make inquiries to determine who the beneficial owners were when these deposits were made? Did you know that at the time?
Mr. RENYI. That, Mr. Chairman, I am again quite sensitive to, and I am not sure I am in a position to respond to that, again, given the ongoing investigation.
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Chairman LEACH. This is just a question for the bank, to the bank's knowledge.
Mr. RENYI. In terms of the bank's own actions, yes, we did. We asked and went through, to the best of my knowledge, and I have reviewed that, the typical routines that we have for know your customer, which includes an identification of the beneficial owner and source of proceeds.
Chairman LEACH. Do you maintain accounts, to your knowledge, for any other members of President Yeltsin's inner circle?
Mr. RENYI. To my knowledge, no. And I might add, we have tried to do as thorough an investigation over the course of the five weeks to try and identify any of those accounts.
Chairman LEACH. Is there anything unique about Russian bank correspondent relationships with your bank; that is, relative to other countries? Do you charge different fees? Do they have different patterns of activity?
Mr. RENYI. The style and the character of the business that we do with our Russian correspondents are very, very similar to what we do elsewhere in the country and elsewhere in the world, especially as it relates to other emerging or developing countries. In those types of countries, our correspondent banking business tends very much to be in the deposit side of the dollar clearing, in providing cash management services with a very modest level of credit exposure, and that does exist, that profile, that character is very, very similar—in Russia—similar to everyone else.
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In terms of the fees, we did also investigate. Again given the press reports that would indicate that significant amounts of profitability were gained from our Russian business, I looked very specifically at fee comparisons as to what we have been able to charge, what we charge for our Russian correspondent banking business and elsewhere around the world and where we have found, with the exception of Europe, which is the most competitive portion of the world, Eastern Europe, generally in Russia, in particular, had the next lowest rate fee, rate of fees that we were charging.
I asked why, and the immediate response is the competitive atmosphere, given the fact that we are not the only organization that has similar banking relationships, correspondent banking relationships and dollar clearing accounts.
Chairman LEACH. Let me be clear about this. You just go to the numbers, because numbers can be numbing. We had $7.5 billion cleared through one account, and $3.5 billion a day through just general correspondent relationships with Russian banks?
Mr. RENYI. Yes.
Chairman LEACH. To your knowledge, is this typical of other banks in New York, or are you different?
Mr. RENYI. I believe it is typical, Mr. Chairman. The $7.5 billion that I referred to was a cumulative number over three years. The average volume per day was approximately $6 million. I think there is a need to compare that and characterize that in the context of our overall clearing, which I indicated was about $600 billion a day for all of our correspondent banking relationships.
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Mr. LAFALCE. Can I interject for one second, are you comparing $6 million to $6 billion per day?
Mr. RENYI. In terms of the dollar clearing that we do, yes.
Mr. LAFALCE. I wasn't sure that I got the Ms and the Bs straight. Thank you.
Mr. RENYI. There were three, three figures, three statistics that, Mr. Chairman, I think you were discussing, and that is the daily flow within the principal accounts of the so-called Berlin accounts, all of our correspondent banking within Russia and then our entire dollar clearing business enterprisewide, and that is $6 million for the Berlin accounts, $3.7 billion per day with regard to the Russian banking correspondents, and $600 billion enterprisewide. We are the second largest dollar clearing organization in the U.S.
Chairman LEACH. As a financial company that is central to this worldwide movement of capital, what is your personal sense over the last three or four years of how Russia is behaving? Do you have a view that we have a problem in this great country of Russia, or is this something that the bank is neutral about?
Mr. RENYI. Well, I suspect, Mr. Chairman, that just given the nature of the proceedings and what I heard last night on television of yesterday's proceedings and clearly seeing this firsthand myself this morning, it is not an uncomplex issue. There are a lot of other very countervailing forces here. Clearly there is an intention since 1991 to bring Russia west, if you will, to effectively provide for them to offer to them a Westernized capital markets.
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We also have, I think, as an intention from a government-to-government view to certainly support Russia in its view to democracy, what we have found in every other country that the strength of a democracy, the strength of an economy is based on its banking system, and, thus, when we were asked when we saw opportunities clearly as a commercial bank in the U.S. dealing with offshore components to be able to conduct business and then encouraged by numerous governmental agencies to be supportive with regard to the development of a capital market, we saw great opportunity, therefore—and encouragement, and therefore we have been active as many banks, as very many commercial banks as well as investment banks within that Russian market.
At the very same time, we clearly have been seeing the growing pains that exist within Russia as it has been in virtually every emerging country. Every developing country has gone through similar phases, if you will. The degree of volatility within the Russian economy, Russian banking system may be somewhat unique. I am not sure I am the best person to respond to that.
Chairman LEACH. Let me just conclude with one kind of tying the numbers. You have indicated a figure for Russian banks, you have indicated a figure for the Berlin associated companies. Are there other Russian companies or individuals that you have figures for?
Mr. RENYI. No, that is by far and away the statistics—there is, I don't believe, any relevant statistics, I think, relative to the issue on the table today.
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Chairman LEACH. Thank you.
Mr. LaFalce.
Mr. LAFALCE. Thank you very much.
Let me make sure I have a correct, accurate grasp of the statistics. When you were referring to $6 million per day, you were referring to one account, the Berlin account; is that correct?
Mr. RENYI. To be very clear, it is several accounts, but it is essentially operated by one individual.
Mr. LAFALCE. About how many different accounts operate?
Mr. RENYI. Approximately I believe there were eight in total. I think there were probably three or four active at any one time.
Mr. LAFALCE. I see. Are these bunched together in any computer's mind or any——
Mr. RENYI. Yes.
Mr. LAFALCE. You would review those?
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Mr. RENYI. Absolutely, they were clustered to a point where we had one individual overlooking all of them.
Mr. LAFALCE. So we can look at the $6 million. And then the next data is $3.7 billion per day, is that correct, and that was for all Russian accounts?
Mr. RENYI. All Russian correspondent bank accounts.
Mr. LAFALCE. Correspondent bank accounts, yes.
Mr. RENYI. Yes.
Mr. LAFALCE. And then the third figure was $600 billion per day, and that was for all correspondent bank accounts; is that correct?
Mr. RENYI. That is correct, sir.
Mr. LAFALCE. OK. Was there anything that in retrospect should have raised a red flag either to you or someone working under you or to the Federal regulator responsible for the Federal Reserve Board.
Mr. RENYI. There certainly were flags that were raised not necessarily unfortunately to my level personally or to the regulators, but that there were individuals who supervised the account on a day-to-day basis who did see a marked increase in volume over what was originally reported to be or represented to be expected to go through those accounts.
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Those individuals who did raise the questions unfortunately raised them without really much vigor, without much follow-through, without raising it up through their own chain of command within their own organization. Our own investigation would indicate that those individuals took comfort in the fact that those accounts, particular accounts, were referred to by a very well regarded bank officer, who happened to be Mr. Berlin's wife.
Unfortunately, I can't get into the psyche of those individuals and in the minds of those particular individuals, but they did not see the obvious conflict that we might see in hindsight.
Mr. LAFALCE. All right, thank you. The Federal Reserve Board has the legal regulatory authority over the Bank of New York?
Mr. RENYI. That is correct, sir.
Mr. LAFALCE. Now, A: what does that authority consist of with respect to accounts like this, and what is the nature of their periodic examinations of accounts such as this, most especially with respect to the money laundering laws? It is my understanding that the law enforcement officials criminally rely in large part on the regulatory authority's examinations to detect whether there is some criminal violation of the money laundering laws.
Can you expound upon that?
Mr. RENYI. Congressman, it probably is a very appropriate question. I suspect that even a better person to respond to that would be some Federal Reserve officers. However, from my perspective, as someone who is regulated by the Federal Reserve, my experience has been is that they would come in and review, in a very thorough manner, I might add, the process upon which we organize and manage our own organization. In certain areas such as credit extension, they take an even further and more detailed review of our accounts.
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One of the very basic components of a Federal Reserve exam is reviewing the nature of the oversight process we have not only in anti-money laundering or in Know Your Customer, but as well every other facet of our management approach to the bank. So they are very much intent on looking at our management team and looking at the organization.
Mr. LAFALCE. So their examination is more of system than account examination?
Mr. RENYI. That is correct. It is much more systemic, much more process-oriented reviewing the reports that I might see, other members of our management team might see.
Mr. LAFALCE. One of the difficulties is if criminal enforcers are reliant upon that examination, a systems evaluation is probably the least likely to discover some type of wrongdoing, I would think.
Mr. RENYI. It would certainly discover if there was anything that was truly systemic or endemic in the organization. There would be no question, I think, that the Federal Reserve and any regulator, whether it is the Fed or OCC or even our own State banking regulators in New York, would look at the situation to determine is there a systemic issue. If it is a case where there is an isolated issue with regard to a set of accounts, they may or may not pick that up. That is something clearly our own internal auditors should also pick up.
Mr. LAFALCE. Let me ask you two more questions, if I might try to ask them at the same time. On the one hand, we hold dear to the principle that all individuals are presumed innocent until proven guilty. On the other hand, you have to file Suspicious Activity Reports, and I am wondering how you draw the line, you know, where is the gray area, what do you do. That is the first question.
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The second question is this: I know that there are bankers groups that get together to discuss the appropriate use of derivatives, and so forth. Is there a group of bankers that gets together to discuss the approach that banks will take domestically and internationally with respect to money laundering? And the reason I ask this question is because if some banks are very, very rigorous, they just might not get the business, and so some other banks might be less rigorous and obtain the business. There could be a competition for laxity, both domestically and internationally, and I am just wondering if within the banking community there is any coordinating mechanism, group of CEOs, and so forth, that gets together to discuss this. If everybody has to live by the same rules, it is great. If somebody doesn't have to live or doesn't live by those rules, they have an unbelievably unfair competitive advantage.
Those are two questions I would like you to answer.
Mr. RENYI. Let me answer the first, and that is with regard to any cooperative efforts. Personally I am not aware of any efforts at a chief executive or an executive management level, and I really don't have—no, I can't identify a particular group within the U.S. or certainly extraterritorial, outside the U.S., that meets specifically on any money laundering issues. I think it would be a very good suggestion. It may or may not exist, and I would suggest that possibly some of our compliance officers within our organization who are attending these—we do have it, a local-level New York clearinghouse, we do have committees that look specifically at these issues.
Within the first question, with regard to SAR, and I think your point is with regard to privacy, specifically the regulations surrounding the Suspicious Activity Report filings require absolute privacy, absolute confidentiality for, I think, the very specific reason you are intimating here in that there could be a guilty-until-proven-innocent view toward any accounts we might file an SAR on. To that extent we are under strict guidance not to reveal filings of SARs, and I suspect for that very specific reason.
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Mr. LAFALCE. Not to reveal to whom?
Mr. RENYI. Not to reveal to the public.
Mr. LAFALCE. My question is whether you reveal them to the public. You do file them. You are mandated to file them. Who do you file them with, and how do you make the judgment as to whether to file or not? If I go to, you know, three different caseworkers, and I ask in my district how many cases do you have, I find out each of them has a different measurement as to what constitutes a case. Some might say a phone call does, somebody else might say it is not a case unless I have to work on it for at least a week or so, and I am just wondering what goes on in your bank's mind in determining whether or not to file a Suspicious Activity Report report, and is there any commonality that is enforced by the regulators on this issue?
Mr. RENYI. Well, Congressman, I don't believe that there is, and I don't know the regulations precisely, but I know what we do and how we do it, which leads me to believe that there is not necessarily a preset criteria of review that each bank must follow in order to file an SAR. I say that because we have filed many, many hundreds of SARs over the past year or two. Most recently, obviously, given the incredible oversight that the press reports and this investigation has created, we are filing many, many more for simply the reason that we see that a particular account may have received a debit or a credit from a name that we see in the press, and to err on the cautiousness side, we would file an SAR.
Mr. LAFALCE. Thank you.
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Chairman LEACH. Mrs. Roukema.
Mrs. ROUKEMA. Mr. Chairman, you indicated in your introduction that you had an element of awkwardness here because of the status of the bank. I have another element of awkwardness here, which I only learned about last night, and that is that Mr. Renyi is a constituent of mine. I learned that last night. This makes questioning a little awkward, but I think we can speak frankly and directly in the interest of getting full information so that we can do our job and that you can do your job. I recognize that the bank is under investigation, but no charges, as you quite correctly pointed out, have been made.
But it seems to me, with all due respect, I do have to point out you just ended your discussion with Mr. LaFalce with respect to the Suspicious Activity Reports, and I don't know exactly how this fits in, but it seems to me that it should have been caught earlier, because it was over a period of years, involving billions of dollars, and with the fact that Mr. Berlin and Lucy Edwards, and officer of the bank, were married. It would seem to me that there should have been some understanding of the potential for the conflict of interest. Can you tell me either how you dealt with that and why you dismissed the need for the SARs to be filed and how you now would apply it in view of the experience and the new knowledge that you have in understanding?
And then I want to go on to the global payment system.
Mr. RENYI. There are really, Congresswoman Roukema, there are two issues I think you raised in that question, and that is, one, the filing of an SAR, and then the conflict of interest. The SAR, to begin with, during the course of those three years of activity within those Berlin accounts, there is no question that people at a lower level, people who are looking over the operations of that account, raised issues, raised questions as to the validity or the rationale as to why the volume, vis-a-vis an export/import company or a tour company, of which he variously over a period of time identified himself as, why that volume would exist. So that we do see people in our organization, again retrospectively, who have identified an issue, but not sufficient follow-through, and I think that is where clearly the awkwardness, the embarrassment on our part, mine in particular, as to why those individuals saw fit not to report that up the chain of command which ultimately would have resulted in an SAR, it did not get up to a level which was the compliance officer in those particular areas, and that is, I think, the awkward question here, why an SAR was not filed.
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Mrs. ROUKEMA. How can we reform that system in this legislation that we are dealing with? I am an enthusiastic co-sponsor, but I am not quite sure anything in this legislation will deal with targeting that responsibility.
Mr. RENYI. That is very much of an internal issue, Congresswoman. I don't think I saw in the brief read of the legislation proposed elements that deal directly with that. Having said that, I do think it is very much incumbent upon the organization itself not only to have the process which we do, but the culture of being inquisitive, of questioning, of ensuring that every question that has to be asked is asked, and that no assumptions are made. The fact that people made an assumption that a well-regarded officer of the bank referred these accounts, gave an ability of that individual to be less concerned, that should not happen.
Mrs. ROUKEMA. I think this bears more review and study by those of us on the committee, but let me get to what you have quite correctly pointed out very well.
I believe, although I am not quite sure, that I understand the specifics of your recommendations about not only the nature of the global payment system, but the increasing complexity of it. I think you called it the opaque nature of it.
Mr. RENYI. Yes.
Mrs. ROUKEMA. And of course the huge daily volumes are increasing. I am not sure, have you given us some specific recommendations as to how we can deal with this legislatively, or is it just through regulatory authority?
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Mr. RENYI. I have not offered what I would call great specifics or a great detailed recommendation with regard to the global payment system. Its characteristics of being huge, complex, immediate and instantaneous in its style for some very explicit reasons, because of its size, because of the cost of errors, the high cost of errors, the need for straight-through automatic processing also offers it this opaqueness that I referred to in my remarks and in my testimony whereby the information that is obtained from the global payment system in terms of the remitter and beneficiary of payments is quite abbreviated, very much in the form of digital code rather than more, in layman's terms, identifiers, words describing who owns the account, where is that money going to.
There are some very good reasons for that to happen, because as one puts words, sentences in direction and instructions as to where moneys go, there is the greater opportunity for error, and therefore, again, in an effort to ensure that there is a greater level of straight-through processing or automation, there has been this reduction of information that one might see as usable.
Having said that, I think the core of my recommendation here for the committee and the Congress to consider is access to the payment system, because once access is granted, once an individual has an ability to enter into the payment system, it is easily lost track of because of the nature of the system.
Mrs. ROUKEMA. So you mean controlling the access?
Mr. RENYI. Controlling the access, having greater, maybe more stringent requirements in terms of access to the system.
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Mrs. ROUKEMA. I think the Chairman's bill does go into some of that. I don't know if it is as comprehensive as we might want to make it, given what happened here, but we do begin to—and maybe it is as much as we can do in that respect—make a lot more unlawful about falsification of identity in transactions with the banks. We will look at that again. Thank you very much. I appreciate your assistance here.
Chairman LEACH. Thank you, Marge.
Mrs. Maloney.
Mrs. MALONEY. Thank you, Mr. Chairman.
The Bank of New York case troubles me for a number of reasons. As we all know, the bank has played a ground-breaking role in the history of American finance. For over two centuries New Yorkers have entrusted the bank with their life savings. This is not a bank whose culture would be expected to lead itself into the center of a major scandal. The fact that such an incident would occur at such a respected bank is frightening to me. We have to wonder if this case is simply the tip of the iceberg.
While the guilt or the innocence of the parties involved is far from determined, it would appear that insiders in the bank were able to avoid detection until foreign investigators tipped off our Government. In other words, our money laundering laws would appear to break down when confronted with insider dealing. Would you agree with that, that our laws are not sufficient now, and they break down with insider dealing?
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Mr. RENYI. Well, Congresswoman, I would say that virtually any law, virtually any regulation that would be imposed on any financial institution is at risk if there is, in fact, inside assistance. It is awfully difficult to deal with many of these issues in any way, but when there is the possibility, and I must be very careful here not to imply that there exists in our case here, but if that were to take place, it makes it even doubly difficult to deal with.
Mrs. MALONEY. To what extent was your institution's anti-money laundering policy reviewed by the Federal bank regulators? You testified earlier that they were looking at the systemic rather than actual transactions, but was there regular oversight, and was your bank ever cited as insufficient?
Mr. RENYI. There has been regular oversight. The Bank of New York has never been cited for inadequate anti-money laundering or Know Your Customers policies. It should be obvious to everyone that given the intense reporting with regard to this particular issue, that regulators have redoubled their efforts in terms of reviewing our systems internally, and I am confident that we will do well here.
Mrs. MALONEY. Chairman Leach, as we know, as has been cited earlier, is proposing legislation that would require financial institutions that open U.S. accounts to identify the beneficial owners of the accounts. It would also prohibit U.S. banks from opening correspondent accounts with so-called brass banks that are not subject to comprehensive home country supervision. How would these requirements impact upon your bank's operations on a day-to-day basis?
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Mr. RENYI. Well, I think, Congresswoman, to respond succinctly, quite little, because our business is not to do business with these brass-plate blanks in these offshore areas. So greater scrutiny, greater restrictions or requirements in terms of review of these particular banks would have certainly no negative impact, and I would welcome the opportunity to comply with those.
Mrs. MALONEY. The requirement to identify the beneficial owners of the accounts, would that impact on your day-to-day operations at all?
Mr. RENYI. That may. I would need to know clearly a bit more of the detail as in virtually every piece of legislation that would impact the banking system. It depends upon the application, the evenness of the application, which then goes to other banks possibly outside the U.S. banking system, and certainly our ability to comply with those.
Mrs. MALONEY. To what extent do you believe money laundering is taking place in the United States banks, and what can be done to prevent bank officers from facilitating laundering? You testified that the two provisions I mentioned in the Chairman's proposed legislation have little impact, but what would you suggest should be done, and how extensive do you think?
Mr. RENYI. When I say little impact, I really mean, Congresswoman, that it would not negatively impact the Bank of New York; not the fact that it wouldn't be effective, but it would not pose a problem for us to be able to comply generically with that approach.
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But I think your question with regard to the presence or the size of money laundering, that is an exceedingly difficult question, of course, to respond to. I think one of the issues that I sense is being debated here and that I offered as a possible public policy issue is the definition of money laundering, the distinction between money laundering and capital flight, some of which is, in fact, illegal, some of which has no restrictions by the host country. There is also the issue of being able to discern through the information that we would normally receive in the global payment system moneys that are sent to support legitimate business transactions or to support business transactions that are structured in the way to avoid local law, local taxes. That is a very difficult thing to distinguish in the best of circumstances.
So the issue of money laundering, and I go back, obviously, to our experience with these particular sets of accounts, given the vast amounts of data that we have reviewed, it is very difficult to determine which might be money laundering, which might be capital flight, which might be legitimate business transactions, and I suspect it might very well be some of each.
Mrs. MALONEY. My time is up. Thank you.
Chairman LEACH. Thank you, Ms. Maloney.
Mr. Bereuter.
Mr. BEREUTER. Thank you, Mr. Chairman.
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Mr. Renyi, thank you. I heard your entire testimony and the Chairman's questions from the side, if I wasn't here directly. I will ask as many questions as I can here.
First of all, as I understand it, if a bank processes a transaction knowing that it is designed to conceal or disguise the nature of the proceeds, the bank could be charged criminally or have their charter revoked. Did anyone at the management level in your bank know of Russian money laundering through your bank?
Mr. RENYI. Absolutely not, Mr. Bereuter.
Mr. BEREUTER. Thank you.
Now, Barclays Bank announced last week that it is closing a substantial number of its accounts to Russian corporate customers out of concern that it cannot verify where funds are coming or going to. Has the Bank of New York considered scaling back its presence in Russia in light of the recent allegations of possible misuse of Russian-related accounts at the bank?
Mr. RENYI. Well, Congressman, I think again you can imagine the amount of review and oversight that is taking place within our own organization, throughout our organization with regard to these types of accounts. These types of corresponding relationships, it does not simply focus on Eastern Europe by any means. Having said that, clearly we are taking a second look, another look at each and every one of our relationships to ensure that they do comply with the highest levels of compliance, not only with anti-money laundering, but Know Your Customer requirements.
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Mr. BEREUTER. Thank you.
Earlier, I think you gave a statistic of $3.7 billion from Russian correspondent banks on a daily basis. Now, that would not include corporate customers or other accounts coming from Russia or from Russian citizens; is that correct?
Mr. RENYI. We do not have corporate accounts in Russia. Any deposit relationship that we have, which I referred to the $3.7 billion, are strictly from the banking system. It is our policy only to do business on correspondent banking business with regard to credit and deposit-taking.
Mr. BEREUTER. Thank you.
Do you have correspondent banking relationships with entities domiciled in Antigua, Cyprus, and/or the Cayman Islands?
Mr. RENYI. With regard to Antigua, I believe we have one relationship. It is a relatively dormant one, very little transactions flowing through it. Cayman Islands, I am not quite sure. I do not believe we do. Cyprus, I believe we do, but I am not—I don't have the precise figures. I will be happy to come back with those.
Mr. BEREUTER. Thank you.
Has Mr. Bruce Rappaport assisted the Bank of New York in the past in developing clients or other business relationships in Russia or in Antigua?
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Mr. RENYI. I understand the source of that question, given the press reports, but I can say that there has not been any involvement by Mr. Rappaport with regard to our Russian efforts. I think it was—as it was reported in the press—he assisted us in establishing our presence in Russia. That, in fact, was simply us being able to sublet some of his space that his bank, the Inter-Maritime Bank, has in Moscow for a one-year period. It does not go beyond that.
Mr. BEREUTER. You mentioned him in your statement.
Mr. RENYI. I did.
Mr. BEREUTER. You also mentioned his Ambassadorial role from Antigua to Russia and so on.
You had a little discussion before based on Mr. LaFalce's question related to the Suspicious Activity Reports, the SARs. Were any SAR reports or potential reports suppressed by management in your bank?
Mr. RENYI. Absolutely not, sir.
Mr. BEREUTER. If you had a deposit of, say, in excess of $5 million in currency coming to your bank, would it automatically or likely generate an SAR?
Mr. RENYI. $5 million in currency?
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Mr. BEREUTER. Currency.
Mr. RENYI. Clearly would, absolutely. In fact, there is a regulation of deposits of $10,000 or more in currency, a report must be filed.
Mr. BEREUTER. Thank you.
I want to understand a little bit more about the relationship on Russian correspondent banks. Has the bank assisted any Russian banks in attempting to open representative offices in the U.S.? Have any applications been successful?
Mr. RENYI. We have, in fact, provided letters of recommendation to certain of our correspondent banks in Russia to open offices in the U.S. This has been part of the overall process of bringing the Russian banking system to the West to be able to allow them to conduct business along Western-styled banking. In some instances we have made those representations, but, again, only to those banks with whom we do business with and that we are comfortable with.
Mr. BEREUTER. But some would have been successful as far as you know?
Mr. RENYI. I believe some of them may have been successful. I don't know the specifics.
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Mr. BEREUTER. I have one more question related to correspondent banks, if I may proceed.
Chairman LEACH. Please go right ahead.
Mr. BEREUTER. Thank you.
I would like to understand what kind of advantages or privileges of services go along with being a correspondent bank to the New York bank, especially, of course, those related to Russian correspondent banks. What privileges or services do they have by virtue of their correspondent status go through your bank?
Mr. RENYI. As a correspondent, the typical correspondent banking services that we offer certainly include dollar clearing, a principal service and really the heart of our correspondent banking business. In certain instances, we also might provide short-term credit on an overnight basis. We might very well provide foreign exchange transactions as well and possibly certain securities servicing arrangements with that. In terms of privilege, we view it as a privilege for them that they can list the Bank of New York as a correspondent, because it is, in fact, I think, a very rare, very privileged view that they can, in fact, use us as a correspondent, effectively access to the banking system, and again speaks to the diligence we do on a continuing basis.
Mr. BEREUTER. Thank you.
Thank you, Mr. Chairman.
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Chairman LEACH. Thank you.
Mr. Forbes.
Mr. FORBES. Mr. Renyi, again, thank you for being here today, and I particularly appreciate that in your capacity you have taken full responsibility for straightening out the situation that led to the unfortunate revelations. And I think all of us were shocked that this undertaking was transpiring at the Bank of New York, certainly a venerable institution, well respected not just nationally, but internationally.
But let me just say that I learned today that more than I ever realized that money laundering is extremely widespread in this country, and that it is affecting far too many, and one is too many, but far too many of our financial institutions.
Since these revelations, have you heard from some of your colleagues across the country as they have maybe taken a long, hard look at their internal systems and lamented that perhaps they could be as vulnerable as the Bank of New York was, and do you have any sense in a way of validating what I think many of us have grown to understand, money laundering is a very, very widespread, serious problem in this country?
Mr. RENYI. Well, it certainly has piqued everyone's interest, Mr. Forbes. I think there is no question, and I can say universally without exception, every one of my counterparts that I have come into contact with over the last five weeks have said that this has clearly initiated a review internally. So if there is anything good that can come out of this particular issue, that of Bank of New York being the poster child for money laundering, unfairly I hope, certainly believe, then the fact that there is much more greater intention of looking at intensive review of internal operations throughout every bank in the country.
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Mr. FORBES. Well, certainly an institution like the Bank of New York, I have no doubt that perhaps this certainly caused you and all of your officials to step back for a moment. I noticed in your testimony, as you said, it is very difficult to identify, you know, origination and destination of accounts, and I know that the domestic banking community has wanted very much to partner with emerging nations and particularly nations like Russia which are trying to be more democratic and get more marketplace—free-market enterprises going, and particularly reforming the banking industry there. But has there been consideration by your bank to suspend any business with Russia or any transactions that would come from Russia?
And just to add to that, and I know that is perhaps a pretty dramatic consideration, but I think you made clear also that it is very difficult, for example, to track and review transactions that come from some preset identifiers like Cuba and Havana and Baghdad and Iraq, and I think the larger question is do financial institutions in the wake of what has happened at Bank of New York and others seriously consider that maybe there are some places where we just don't accept transactions?
Mr. RENYI. At first—the last question in terms of is there an effort to seriously consider refusing transactions from certain countries? The short answer is yes. I think that it is a matter of what is the risk and can we really accept that risk. And I think it is clear, given the circumstances here, that may very well be areas that that is an unacceptable risk under any circumstances, and I don't mean in terms of profitability or awards, but simply risk to the organization, reputational risk, which is clearly what we have here to deal with at the Bank of New York.
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Mr. FORBES. On another approach here, you know, Congress has this talent for when we see some kind of problem like we have seen with the Bank of New York and money laundering, that, you know, we want to go back in and rewrite some laws and make sure we are tougher on those laws. And I embrace those efforts, but it is hard not to think that maybe a good deal of this was tragic human oversight as far as the supervisors go and certainly outright criminality on others' part. But did the system break down, Mr. Renyi? Do you think the system broke down?
Mr. RENYI. Congressman, my view at this juncture and time is it is a preliminary review, given the fact that the investigation continues not only externally, but internally, that systems were in place. They did not necessarily break down, but their implementation was far less than perfect. Clearly the implementation was flawed. It allows us an opportunity, though, to enhance the systems, to be able to do what we can to take out the personal element in the oversight. I think that generally is an approach that we continue to follow in getting enhanced systems with artificial intelligence, behavioral analysis, so that we are taking the human element out of it. We are also attempting to take the relationship element out of it so that no one in the future has the ability to rely on any one other member of the organization for comfort as to the validity of a transaction or an account; the establishment of an anti-money laundering committee, of very senior people throughout the organization that has a mandate far broader and independent than ever before, certainly in our organization and, I suspect, anywhere else.
Mr. FORBES. Thank you, sir.
Chairman LEACH. Thank you, Mr. Forbes.
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Mr. Lazio.
Mr. LAZIO. Hello, Mr. Renyi, nice to see you again. I wanted to ask you—I would like to clarify a few points, if I heard you correctly testify that the Bank of New York had no Russian corporate accounts. Was that accurate?
Mr. RENYI. Banking accounts where we either extend credit or accept deposits.
Mr. LAZIO. OK. Wire transfer account.
Mr. RENYI. We would not have a wire transfer account. What we would have would be the ADR-DR sponsorship relationships, which are an administrative function. It is a processing function where we do not accept deposits or extend credit.
Mr. LAZIO. Of these nine accounts, I understand it that they were controlled or in the name of Peter Berlin?
Mr. RENYI. Yes.
Mr. LAZIO. How would you characterize those accounts?
Mr. RENYI. Those are U.S. domestic accounts. They are companies that are incorporated here in the U.S. We would view those as domestic accounts, and, in fact, when they were opened, they were opened by a Russian national who subsequently became naturalized as a U.S. citizen. The business may be transaction-oriented in an offshore, but it would be viewed as a domestic U.S. company.
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Mr. LAZIO. Now, let me ask you, is it possible for somebody, for an accountholder who has got a wire transfer account, to execute a wire transfer with a terminal off premises of the Bank of New York without the knowledge or assistance of a Bank of New York employee?
Mr. RENYI. We do have that service. It is a service that we, as well as—and we have checked this—virtually every other bank provides this particular type of service, which is a software-based service where we provide software for installation on personal computers, on-site locations which an individual can in fact initiate and execute transactions of wiring moneys out of their account, out of the bank to other accounts.
Mr. LAZIO. Without the knowledge of the bank contemporaneous?
Mr. RENYI. Contemporaneous. What is done is clearly a due diligence as it relates to who we are giving that service, offering that service to, so that there is a criteria that we use providing for whether that service is, in fact, appropriate for that individual or that corporation. Once that is taken care of, once we have satisfied ourselves, then that is done outside the bank without necessarily Bank of New York personnel intervention. There is oversight as we see the volumes, and as we said, we are instituting systems which will then have an oversight of those accounts to determine whether, based on certain parameters, certain criteria, that will trigger a specific oversight for that account.
Mr. LAZIO. So there is sort of an historical review that occurs on accounts, whether it is wire transfer accounts?
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Mr. RENYI. That is correct.
Mr. LAZIO. And could you just sort of describe briefly for me, if it is your own knowledge, what the due diligence principles might be for such an account?
Mr. RENYI. Knowing what business the individual is conducting, the volumes, the amounts of, the volumes that that individual would, in fact, be utilizing the service for.
Mr. LAZIO. That request would be up front.
Mr. RENYI. That would be up front before the installation is made.
Mr. LAZIO. Does a bank require documentation up front as well?
Mr. RENYI. Certainly all those reports would be noted, the documentation in terms of certificates of incorporation, the legality of that.
Mr. LAZIO. Might you ask for documentation establishing whether a corporation or the entity is properly licensed in a particular State?
Mr. RENYI. If required, if we know that a license is required, then we would request that.
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Mr. LAZIO. And is there a system, internal system, in check?
Mr. RENYI. Again, there is tremendous reliance on the individual and the relationship manager who was initiating that relationship to deal with that.
Mr. LAZIO. Now, this is an account, Torfinex?
Mr. RENYI. Yes.
Mr. LAZIO. Do you know if the bank followed that type of protocol on that case?
Mr. RENYI. Well, that is certainly part of the investigations that we are going through right now. So I am really not sure I am at liberty to talk specifically about that particular account that is subject to investigation.
Mr. LAZIO. Let me ask you this last question if I can, because this is a question that was raised yesterday involving Bruce Rappaport, who has a very interesting background, and I am just wondering if you can tell me what the present and historical relationship of Mr. Rappaport might be with the Bank of New York; and if I could briefly follow on to that, if there has been a relationship. To the best of your knowledge, has there been any attempt by Mr. Rappaport to influence the hiring and placement of Bank of New York employees?
Mr. RENYI. Let me address the latter question first in that there has been no evidence, no instance of influence that Mr. Rappaport has had over not only the bank hiring people, but also business transactions.
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Mr. LAZIO. Could you answer the first question?
Mr. RENYI. Our initial relationship with Mr. Rappaport was as he was a substantial owner of bank shares quite a few years ago. It is now, we believe, less than 1.3 percent, possibly lower in terms of relationship. At this juncture our principal relationship with Mr. Rappaport is as a shared owner of a bank in Switzerland where we have a 28 percent interest. He has the remainder.
Mr. LAZIO. What is the name of that bank?
Mr. RENYI. BNY Inter-Maritime Bank.
Mr. LAZIO. Thank you very much.
Chairman LEACH. Mr. Barr.
Mr. BARR. Thank you, Mr. Chairman.
Mr. Renyi, according to reports, and I think these figures have been gone into earlier, upward of $7.5 billion may have flowed through nine suspicious accounts at the Bank of New York over a three-year period beginning in 1996. Let us assume on the conservative side that it is $7.5 billion and not more than that. How much would the bank have earned in various commissions, points, interest income of any sort for that $7.5 billion flowing through its accounts?
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Mr. RENYI. We would have—the fees, the gross fees associated with that would probably be about $500,000 per annum.
Mr. LAZIO. What about interest on any of that money that was parked for any length of time?
Mr. RENYI. To the best of my understanding is that this was not an interest-bearing account.
Mr. BARR. So $7.5 billion would have resulted only in one-half-a-million dollars total?
Mr. RENYI. Of gross revenue, yes, sir.
Mr. LAZIO. Per year.
Mr. RENYI. Per year, out of a total of fee revenues. This would be fee revenues, Congressman, and last year our fee revenues was approximately $2.5 billion. It is a relatively modest account.
Mr. BARR. I am sorry, what?
Mr. RENYI. Relatively modest account, $500,000 in fees against a total fee revenue of the bank of about $2.5 billion.
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Mr. BARR. That is not inconsequential certainly.
Mr. RENYI. It is not inconsequential in its absolute terms.
Mr. BARR. Has there been any discussion at all with any Federal officials of immunity for the bank, any agreement not to prosecute any potential cases here for either committing illegal acts or failing to take steps to prevent illegal acts, such as failure to file SARs?
Mr. RENYI. I am not aware of any immunity offer to the Bank of New York in its investigation.
Mr. BARR. OK. Apparently, at least two individuals, Lucy Edwards and Natasha Kokolovsky, have been terminated by the bank; is that correct?
Mr. RENYI. One of them has, Lucy Edwards, and Natasha Kokolovsky——
Mr. BARR. Has been suspended?
Mr. RENYI. Is on a paid leave of absence.
Mr. BARR. Has she been suspended? Was that at her request, or did the bank take that action?
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Mr. RENYI. The bank took that action when the accounts in question were closed and the investigators asked that we secure files, and we felt it was in everyone's best interest that that take place.
Mr. BARR. Why was Ms. Edwards dismissed?
Mr. RENYI. When we were able to do our own private investigation, we reviewed her personal files and discovered paperwork that gave us evidence that she misrepresented the bank in a number of instances. Most particularly, we found out after the fact that she actually had signing authority on one or several of the accounts. In order for a staff member to have signing authority of an account—other than their own personal account—requires the approval of the chairman of the board. We have an annual code of conduct questionnaire that must be filled out with an affiliation report. Those affiliation reports that would have required her to disclose that were never filled out properly, did not disclose that. That is clear evidence, and a clear case for termination as violations of our code of conduct.
Mr. BARR. She is married to a Russian businessman who controlled nine accounts at Bank of New York; is that correct?
Mr. RENYI. That is correct.
Mr. BARR. And how long a period did that relationship exist before the bank finally terminated Ms. Edwards?
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Mr. RENYI. Well, I believe we were not quite sure, Congressman, when they were married. I believe it would have been 1992, 1994, somewhere in that timeframe. So when she obviously married, right up to the point of termination.
Mr. BARR. Are either of these individuals, Lucy Edwards or Natasha Kokolovsky, under investigation by Federal authorities?
Mr. RENYI. I believe I would have to say it is not something I can respond to.
Mr. BARR. Do you know? I mean, do you know whether or not they are——
Mr. RENYI. I do know whether there has been contact between themselves and Federal investigators.
Mr. BARR. There has been contact?
Mr. RENYI. There has been contact.
Mr. BARR. With regard to the questions that has already come up in several instances here today regarding SARs and the requirement that the Bank of New York has, as other financial institutions, to file SARs under circumstances either laid out in the statutes and then the forms with which, I presume, all of your bank officers, including the names we mentioned today, are familiar?
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Mr. RENYI. Yes.
Mr. BARR. Was there anything in these series of transactions that we have been talking about here with Benex, for example, that wasn't suspicious?
Mr. RENYI. The nature of these accounts, again through preliminary review since the last five weeks—the accounts, while large in amount, did not in and of itself pose a reason for suspicion in terms of either significant increases or changes in the flow through the accounts, it didn't necessarily warrant that, but that happened to be the judgment of an individual who followed those accounts on a day-to-day basis.
Mr. BARR. Who is that?
Mr. RENYI. An individual in our service area, individuals in our service area.
Mr. BARR. Do you know their names?
Mr. RENYI. Yes, sir.
Mr. BARR. I mean, you have gone back and looked at these, and you are saying that—I think there is just an initial round of Federal subpoenas produced over 3,500 pages of transactions for just one of these accounts with Benex involving huge sums of money—and you are saying that there was nothing suspicious about these transactions?
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Mr. RENYI. No. I shouldn't—if I said that, I misstated myself. Clearly in retrospect, after review of all of those transactions over the three-year period of time, no question there was something suspicious about it, and this—in fact, we filed a Suspicious Activity Report.
Mr. BARR. After this had already come to your attention?
Mr. RENYI. That is correct, during the course.
Mr. BARR. By the authorities?
Mr. RENYI. During the course of the three years of that, we did not file an SAR.
Mr. BARR. Now, are you satisfied that, in the words of, I think, our colleagues from the other side of aisle from New York, that this was just a tragic human error?
Mr. RENYI. I believe that it appears to be, again, given my reviews today, an element of poor judgment.
Mr. BARR. Why would these employees be terminated then if people were just involved in a series of tragic human errors? You certainly wouldn't terminate people for that reason, would you?
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Mr. RENYI. The people that were terminated were terminated for reasons having nothing to do with the conduct of the account, Congressman.
Mr. BARR. Nothing to do with the conduct of any of these accounts, even the Benex accounts?
Mr. RENYI. That is correct.
If I can restate with regard to Ms. Edwards, Ms. Edwards was terminated by us because of violations of the code of conduct surrounding the fact that she did not advise us that she was a signer for these accounts. She did not have any day-to-day activity or involvement in these particular accounts.
Mr. BARR. So it wouldn't really be accurate to say that she was not fired for any reason connected at all with the Benex accounts; there is a connection there, is there not?
Mr. RENYI. There is a connection there to the extent she was a signer.
Mr. BARR. Through her and through her husband.
Mr. RENYI. And did not reveal that.
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Mr. BARR. And through her husband there was a connection obviously.
Mr. RENYI. Yes, but that isn't necessarily grounds for termination.
Mr. BARR. But it certainly is grounds in retrospect for some rather significant suspicions.
Mr. RENYI. Correct. That is not to be debated.
Mr. BARR. I just have a general question. Would you say that any of the following are secondary to earning fees or making profits for the Bank: One, protecting our Nation's security, is that secondary?
Mr. RENYI. Absolutely not.
Mr. BARR. Compliance with our criminal laws?
Mr. RENYI. Absolutely not.
Mr. BARR. And protecting taxpayer funds?
Mr. RENYI. Absolutely not.
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Mr. BARR. Thank you.
Thank you, Mr. Chairman.
Chairman LEACH. Thank you.
Mr. Royce.
Mr. ROYCE. Thank you, Mr. Chairman.
Mr. Renyi, in your statement you describe how certain procedures that the Bank of New York follows to ensure due diligence. Basically, I guess, one of those procedures is reviewing financial statements and other regulatory filings.
Mr. RENYI. Yes, sir.
Mr. ROYCE. Reported yesterday is a story about the Bank of New York's efforts to help a Russian bank sell shares to investors and the way this aggressive pursuit was undertaken, but what is unusual in the story is that at the same time that your bank was doing that, Inkombank, the Russian bank, was undergoing its own review, and the financial status was being challenged in Russia, and Russian bank regulators that were investigating the bank had found that it had violated numerous rules, including inflating its income. In fact, the report recommended curtailing the bank's operations, and the bank has since been declared insolvent. And what is unusual here is, I think, the question, why would you pursue under these circumstances this particular customer, and why would you help it win regulatory approval in the United States to sell its stock in the U.S. as American Depositary Receipts in 1996?
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Mr. RENYI. Well, Congressman, the response is somewhat of a lengthy one, because I need to go into just a little bit the nature of the depositary receipt service that we offer, very easily confused and misinterpreted, against the investment banking opportunity where an investment bank would, in fact, sell securities or underwrite securities. In our case and in the case of any depositary receipt sponsor, what we provide is what I would call the plumbing associated with the capital market transaction, where we are the individual that provides information, provides the recordkeeping for the legal transfer and registry of ownership of those securities. We in no way underwrite, sell, or issue securities on behalf of any of our clients that we are depositary receipt sponsor for.
Mr. ROYCE. Let me ask you another question. You stated in your testimony that since the Bank of New York has been conducting its own investigations, a vast amount of data has been examined, but, quote, it is simply not possible for this data to identify the source or legality of any individual transfer of funds once a bank grants a customer access to its payment system. It is extremely difficult to track the flow of funds or to stop a transaction before it happens.
Are there any steps that the Bank of New York has taken to remedy this situation, or is it a foregone conclusion that we cannot track the flow of funds under any circumstances?
Mr. RENYI. The issue, Congressman, I believe, is a systemic one. It really lends itself to a discussion of the characteristics of the payment system, not necessarily what the Bank of New York or any other bank can or cannot do. What we are looking at is a system which requires a tremendous amount of volume and speed and automation, which, in order to ensure it takes place and it takes place flawlessly, there is a significant amount of automation, and therefore, the data that is provided in that system tends to be abbreviated. Therefore, what I was recommending in my testimony is that the Bank of New York, as well as all of the members of the payment system as supported by Congress, to ensure that access to the system is really where the point of control exists, access to the system, so that we must be much, much more diligent with regard to ensuring who we do business with.
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Mr. ROYCE. Well, thank you very much for your testimony.
Mr. Chairman, thank you.
Chairman LEACH. Well, thank you, Mr. Royce.
To continue for a moment, does the Russian Central Bank have an account at your bank?
Mr. RENYI. They opened an account, Mr. Chairman, in November of last year.
Chairman LEACH. Nothing before then?
Mr. RENYI. Nothing before then.
Chairman LEACH. Do you have any sense that, as you know, we are looking at this IMF issue in a particular timeframe, and you referenced it earlier.
Mr. RENYI. Yes.
Chairman LEACH. The Central Bank might have given deposits to any of your correspondent banks; is that a possibility in your system?
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Mr. RENYI. I would suspect that it could very well be a possibility. That is a reason why I intensely looked at the volumes going through those accounts for that timeframe. There was a press article which indicated that several days after the IMF funding, billions of dollars flowed through the Bank of New York. To the absolute best of my knowledge and review, that did not take place. The numbers that I mentioned to you really were in support of that in the context that $640 million, I understand, was the IMF advance at that point in time. The moneys flowing through the account of $3.7 billion may or may not have gone through any of those accounts. It really would be again virtually impossible to tell. There is no identifier with regard to IMF or any other type of governmental moneys.
Chairman LEACH. So all you know is that a number of Russian banks had deposits at your bank, they had flows of funds that were very large, but that they weren't terrifically out of proportion, but they were slightly higher than the previous three months and slightly higher than the three months after.
Mr. RENYI. There was a continuation of that.
Chairman LEACH. Continuation, so approximately the same thing?
Mr. RENYI. Yes.
Chairman LEACH. Part of this gets a little bit—and I wonder if you could comment on this, to the definition of a bank. That is, we use the word ''bank.'' We all have in mind a bank in our hometown, but it appears that increasingly Russian banks, as a few other societies in the developing world, are individually controlled, possibly money laundering centers. Because something is called a bank doesn't necessarily mean it is a bank in our description of the term, and so of the banks that you have relationships with, would you call these traditional banks, or would you say some of them weren't? You had this issue of Menatep which was closed and another Russian bank that was closed, and what I am getting at is there any difference between the company Berlin controlled and each of these individual banks or some of these individual banks, and do you have a judgment on that?
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Mr. RENYI. Mr. Chairman, I haven't looked at every single one of the roughly 160 banks that we do business with today. That clearly is a process that is under way, however.
In the traditional sense of a bank that I think generally the population here would consider of a retail branch, retail bank, clearly there would have to be a number of those banks that would not be viewed as purely Russian retail banks, but what I would more commonly describe as business banks, banks that are institutional banks, banks that principally did business with other Russian companies acting as their commercial bank.
Chairman LEACH. Did you ever do security services for any of these banks? For example, it strikes me—I visualize moneys coming into your bank. I don't visualize them going out. That is, as they go out, do they go to other banks, do you buy securities for these?
Mr. RENYI. We would be—the sources of those funds clearly would come from those banks' clients. Moneys—dollar funding, any dollar assets that those banks would have would be in our bank as well as other correspondent banks that those banks might have.
The flow out of those accounts could be for the purchase of goods, for importation into Russia; it could be the purchase of securities. In that fashion it could have gone to an investment bank, a broker dealer, where maybe securities may have been bought. Some of those moneys can flow to overnight investments.
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Chairman LEACH. You don't buy securities.
Mr. RENYI. We are not a broker-dealer, no, sir.
Chairman LEACH. Do you have a sense—I mean, you are an expert in the banking system, and there are allegations that an increasing number of banks in Russia are controlled by organized criminal elements. Do you have a sense for that or not?
Mr. RENYI. I really don't, Mr. Chairman. Our diligence today, certainly over the past several years, not only incorporates on-site visitations to these banks, but also visitations to the Central Bank and the authorities there to get, as best we can, a line, if you will, as to the reputation, the local reputation, of those banks, of those entities. If, in fact, during the course of those conversations that type of conversation might have come up, clearly I would not necessarily be privy to it, but I feel comfortable that those relationship managers in the Eastern European area would have done something about it and closed the accounts.
Chairman LEACH. Thank you very much.
Does anyone else have any further questions?
Yes, Mr. Lazio.
Mr. LAZIO. I just wanted to ask this question, because I was speaking to a representative of a global financial services company who gave me the vignette that they once had one former New York City police officer as their security, and now they have an entire division, including recruitment of former CIA and former FBI officials. I am just wondering if that is an experience that has been parallel to the Bank of New York, what your security system looked like when you inherited the helm and what it looks like now, with an eye to your suggestion as to what lessons can we draw from this.
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Mr. RENYI. Clearly, Congressman, one of the lessons we have learned is to look at the staffing in those particular areas for whatever talent we can get not only from law enforcement, but also from the regulatory and compliance area. So there is clearly an intent on our part to recruit those people that we think can be of great help to us with hands-on experience in precisely those areas, and that is a difference from historical terms, where clearly we are looking at—for bankers, in large part, we are now looking for people in the infrastructure of our organization to preclude things from happening as they may have happened here.
Mr. LAZIO. From 1996 to 1998 when a lot of this account activity occurred, what was the security infrastructure at the bank?
Mr. RENYI. We have a unit for physical security, physical and data security as well.
Mr. LAZIO. That is systemwide?
Mr. RENYI. Enterprisewide, enterprisewide, made up of individuals formerly from law enforcement, principally in the New York City metropolitan area.
Mr. LAZIO. You have since augmented that. Have you since enhanced that division?
Mr. RENYI. We have not from a physical security point of view. We have augmented it from a data security point of view. Our attention is certainly going to go to the physical security side as well, principally in terms of liaison with law enforcement on a day-to-day basis.
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Mr. LAZIO. Obviously there is significant concern in a sort of borderless society, especially on the economics, and it becomes increasingly difficult to regulate within borders and at the same time to have confidence in our financial systems. It is going to require a good amount of proactive engagement, voluntarily, on the part of our Nation's best financial institutions. I hope you take leadership on that.
Mr. RENYI. I certainly endorse that.
Mr. LAZIO. Thank you.
Chairman LEACH. Mr. Barr.
Mr. BARR. Thank you, Mr. Chairman. Just one quick follow-up question.
When we were talking previously about SARs, I think you indicated the bank had filed an SAR?
Mr. RENYI. On these particular accounts, yes, we did.
Mr. BARR. Yes. And do you have that with you?
Mr. RENYI. I do not.
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Mr. BARR. Could you provide a copy to the Chairman, please?
Mr. RENYI. Certainly.
Mr. BARR. Within the next week?
Mr. RENYI. Absolutely.
Mr. BARR. OK, thank you.
Chairman LEACH. Well, let me just conclude with one observation that has nothing to do with the Bank of New York, or probably not, but it strikes me in the world where you have many societies in which people in public life control—they have disproportionate influence in the commercial and financial system, that if one does a favor for someone of this nature, financial institutions can be benefited in other ways. Or if one does not, one can be negatively impacted, and there is an implicit kind of reward-punishment syndrome that can occur with public officials and their accounts abroad. That becomes a very competitive circumstance, I would assume, as well.
It just seems fairly obvious that if one is seeking the right to have a distribution channel of one kind or another in a given country, it would be helpful to have the account of the President of that country. This is something that is a very worrisome phenomenon, I would assume. I don't know if your case, you have all of five employees in Russia, so you have not been seeking a larger presence, although you do have accounts in a large number of Russian banks.
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The only thing I would add to this is the magnitude of these dollars is really stunning. International currency flows are of a volume that make even those of us who deal in Federal Government spending difficult to comprehend. You have currency flows that almost equal on a daily basis the totality of the United States budget for a year, and you have flows that come in and out of banks that are of extraordinary proportions. But, nonetheless, when you look at the issues of millions and billions applying to single individuals, it does seem to be something that our system is going to have to pay attention to.
I am struck with the likelihood that Mr. Renyi has described the Bank of New York as a possible poster boy, but there is a strong possibility that other institutions have similar kinds of accounts, and that this is an issue that does take serious review. And I am struck also with the observation of Mr. Renyi that if our country moves in a given direction without bringing along the international community, there can be difficulties, and we are all going to have to be looking at these issues with great care.
But I would say that what Bank of New York has become part of a transmission built for is something that goes beyond the banking matter, and when we look at the Russian issue and the future of Russian society, we are looking at a vital interest of the United States of America. So it means we are obligated to look at this as more than an individual institution issue, as more than a United States banking issue, but in the largest measure of the national interest of the United States and how it intertwines with the best interests of the Russian people. And that is why we have insisted that your bank appear, not out of any reason to be pointing disproportionate fingers at a particular American bank, but out of the symbolism that these are stunningly significant world events that have become centered in a financial system and then back down into a particular institution.
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I appreciate the difficulty of your testimony, and thank you for your appearance.
Mr. RENYI. Thank you, Mr. Chairman.
Chairman LEACH. Thank you, Mr. Renyi.
Our next witness is Ms. Anne Vitale, the Managing Director and Deputy General Counsel of Republic National Bank of New York. Ms. Vitale.
STATEMENT OF ANNE T. VITALE, MANAGING DIRECTOR AND DEPUTY GENERAL COUNSEL, REPUBLIC NATIONAL BANK OF NEW YORK
Ms. VITALE. Chairman Leach, Members, on behalf of Republic National Bank of New York, I would like to thank you for inviting me to appear today. As Chairman Leach said, I am Managing Director and Deputy General Counsel of Republic, where I have been employed for nine years. As part of my duties at Republic, I am responsible for the development of Republic's global anti-money laundering policy. Prior to joining Republic, I served as an Assistant United States Attorney in the Southern District of New York, where I prosecuted money laundering, narcotics and organized crime cases.
Republic supports the efforts you have made in discussing how financial institutions can protect themselves from attempts to launder money through the use of the international wire transfer payment system.
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Republic is committed to making every effort to ensure that its banks around the world are not being used for illegitimate purposes. I am here to share with you the policies and procedures that Republic has developed in order to achieve that goal with respect to international wire transfer activity.
Before a correspondent account is opened at Republic, Republic obtains information about the foreign bank, which is detailed in a seven-page questionnaire, a copy of which has been provided to the committee.
The information that Republic obtains includes the names of the owners and managers of the bank, its asset size, the identity of the bank's regulatory supervisor, and a description of the procedures the foreign bank uses to know their customers.
Republic began the process of designing systems to monitor activity through its correspondent bank in late 1997. In substance, Republic's system filters out certain transactions and captures patterns of transactions which meet or exceed selected thresholds. We then apply the combined judgment of members of the Know Your Customer Committee to determine whether the activity may be suspicious.
Republic is proud of its initiative in developing its wire transfer monitoring system for correspondent banking. We believe that it is unmatched in the industry. As stated in a letter that Republic's chairman received from the FBI, Republic's wire transfer monitoring system was found to be ''highly effective in detecting wire transfer patterns indicating possible illegal activity.''
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The FBI letter is attached also.
There are basically two types of wire transfers through correspondent bank accounts. The first type of wire transfer is a bank-to-bank transfer in which a foreign bank is making or receiving a payment for its own account, for example, to settle a foreign exchange transaction.
There are approximately 92,000 bank-to-bank wire transfers totaling $306 billion in the average month at Republic. Republic's examination of bank-to-bank transfers has not over the course of fifteen months resulted in uncovering any significant pattern of activity that was suggestive to us of suspicious activity. For this reason, Republic now excludes bank-to-bank transfers from its monitoring program.
I should add that I have had conversations with Federal agencies asking them if they had any suggestions for our system with regard to bank-to-bank transfers, and everyone came up with the same answer, that they did not know how to monitor that or how to create a system that would detect a pattern for those transfers.
The second and more critical type of wire transfer activity is a third-party transaction in which the foreign bank is making or receiving a payment for the benefit of one of its customers.
There are approximately 58,000 third-party customer wire transfers totaling $65 billion in an average month at Republic, and Republic has focused on these third-party wire transfers in its monitoring program.
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Commonly, the role of a bank in the United States is an intermediary one. There is commonly five parties to a wire transfer: an originator, an originating bank, an intermediary bank, a beneficiary bank, and a beneficiary. In most of the cases, Republic is an intermediary bank. It does not have the account of either the originator or the beneficiary. Nonetheless, when the flow of funds between an originator and a beneficiary is significant in terms of numbers and in terms of transfers, Republic seeks to capture that data.
In order to produce a report that was manageable in size and quantity of information, Republic set thresholds for the type of activity that is to be captured. After trying various approaches, Republic designed a system to capture the following data: A same originator to the same beneficiary three times a month, five times a month, whatever the number is—and I must say that none of these numbers have any special magic to them, and we vary the numbers from month-to-month—but we are looking for more than one, more than two, sometimes more than three transactions between the same originator and the same beneficiary and the aggregate amount of the dollar transfer in one month being over $500,000.
We also fluctuate the dollar amount. Sometimes we will go as low as $100,000; sometimes we will raise it higher. We are still fiddling with the system, and what we have found and what we are concerned about is what I testified to here today, is not a blueprint for individuals who want to circumvent a system. So we use varying dollar amounts as well as various figures to what constitutes a pattern. But we are focusing on patterns.
Other type of pattern we focus on is the same originator to ten or more or sometimes less than ten beneficiaries or vice versa, different originators to the same beneficiary, with a substantial dollar amount that is somewhere in the neighborhood of $500,000.
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Indeed, Republic, as I said, varies the amounts as it continues to monitor, and sometimes we will look at an account and put absolutely no thresholds in whatsoever.
Once a pattern is identified, Republic checks databases to see if there is any information about the originator or beneficiary that would support the legitimacy of the amounts and the pattern of the wire transfer. For instance, if Republic discovered information that established that an originator was a publicly traded company having business activities consistent with the amounts and geography of the transfer, Republic would document this information and take no further action.
We access Lexis-Nexis, we access the Web to try and find out information about the originator and the beneficiary that appears on wire transfers since neither of these entities are Republic's own customers. If Republic has not been able to discover anything about the originator or beneficiary that does have a significant pattern that would justify the activity and the volume, Republic contacts the originator or beneficiary bank who is our customer and inquires about the purpose of the transfer.
This has been a process of educating our correspondent banks that we need to know information as to the purpose of the transfer that would make us comfortable with the wire transfer.
I want to stress the decision of the Know Your Customer Committee, which I am the chairperson of, is by no means infallible, but it is our best efforts that we are putting forward to make a determination based on the information that we are receiving either as a result of public databases or information from our correspondent banks.
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In August of 1998, the programming generated a monthly report for wire transfer activity through our correspondent banks, and that particular activity took place in the month of July of 1998. This report identified the accounts of Republic correspondent banks which had patterns of activity and met the thresholds similar to the ones that I described.
In August of 1998, as a result of its wire transfer monitoring, and this was the first full month of transfers that we had received from the new system, Republic discovered that substantial amounts of funds were being transferred from one particular originator to four beneficiaries. From the information supplied in the wire transfer message, it appeared that the originator was a corporation which had an account at a Russian bank. The Russian bank had an account at Republic, and the four beneficiaries had accounts at three other United States banks located in New York City. One of the four beneficiaries was Benex, which had an account at Bank of New York. In one month the total amount of wire transfers from the common originator to the four beneficiaries was approximately $22 million.
Republic was unable to determine any particulars about the one originator and the four beneficiaries other than that information on the wire transfers indicated that one beneficiary, Benex, was located in Queens. After sending an investigator to this address, Republic was unable to confirm that Benex was, in fact, located there. Republic informed the FBI and other appropriate authorities about the wire transfer activity that I have described, and we made that notification both telephonically with the FBI and FinCEN and in writing by filing an SAR.
Since August 1998, Republic has continued to monitor for patterns of significant activity that may be suspicious. It has reviewed the patterns that are identified by its systems and documents its determinations resulting from its reviews. If Republic is able to obtain information that seems to justify the wire transfer activity, it takes no action. If Republic is not able to obtain such information, it reports the transactions to the appropriate authorities.
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In some instances, Republic will cease processing transactions that appear suspicious by informing the correspondent bank that it will no longer process such transactions. At other times Republic has ceased processing transactions with certain offshore havens. In yet other instances, Republic has terminated its relationship with specific correspondent banks.
The decisions, as I said, of the Know Your Customer Committee are by no means infallible. They are based, as I said, on the results of the committee's best efforts to detect, report and prevent proceeds from suspicious activities from passing through our banks.
We report, I report, to a public responsibility committee of the board of directors, and in addition to reporting to our general counsel, to the chairman of the board. The public responsibility committee has taken an active role in reviewing Republic's wire transfer monitoring system and its relationships with its correspondent banks. That committee is chaired by William Rogers, former Attorney General and Secretary of State for the United States.
In addition to the procedures in effect in the correspondent banking department, Republic has policies and procedures in effect in each area of business. We have a written global corporate Know Your Customer policy, which was codified in 1992, and which has been updated regularly since that time, and that provides the basic framework for our anti-money laundering efforts. I have submitted that also to this committee.
I hope that I have conveyed to you the importance that Republic places on its anti-money laundering efforts. In the course of my nine years at Republic, senior management has been committed to prevent the use of its banks as a vehicle to launder the proceeds of illegal activity.
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The Chairman Mr. Schlein and his predecessor Mr. Weiner, have been staunch supporters of implementing the Know Your Customer policy in all departments in all locations. Indeed, their commitment reflects the views of Republic's principal shareholder, Mr. Edmond Safra, who has repeatedly encouraged our efforts and stressed the need for ongoing training in this area.
Two years ago, at his initiative, Republic convened a two-day anti-money laundering seminar in which we called in outside experts, former Government officials from the United States, and a former magistrate from Luxemburg, a former serious frauds prosecutor from the United Kingdom, and we brought in 170 of our senior private banking officers from all Republic locations. Annually we hold training classes for all our officers in all our locations. Adherence to Know Your Customer policy and anti-money laundering programs and procedures is audited, and adherence to these policies is a condition of employment.
Finally, Republic has a policy of cooperating fully with our regulators, and I should say the OCC, which regulates Republic, has been kept abreast and has encouraged our efforts in wire transfer monitoring, and they have looked at both our correspondent banking before this system was in place as well as after.
We also cooperate with law enforcement, and I hope, as you can judge by my presence here today, with Congress.
Thank you.
Chairman LEACH. Thank you, Ms. Vitale.
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Let me just begin by asking, as you may know, several of us introduced legislation yesterday that would require banks opening or maintaining accounts for foreign entities to identify and maintain a record of the identity of each person having a beneficial ownership in the account.
Does this seem like a reasonable approach? Would it involve costly new efforts on your behalf, or do you do something rather similar today?
Ms. VITALE. We do that now.
Chairman LEACH. Does this appear to you to be common sense?
Ms. VITALE. Yes.
Chairman LEACH. It is my understanding that many banks do this, but some don't, and it seems like it is a fairly reasonable thing to require as a universal requirement. You are suggesting that that does make sense?
Ms. VITALE. I agree with that.
Chairman LEACH. Second, you have correspondent banks. Do you have many in Russia?
Ms. VITALE. Yes, we do.
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Chairman LEACH. How many?
Ms. VITALE. About 150.
Chairman LEACH. How do you look at these banks? Are they good banks? Are these accounts or banks? These are banks?
Ms. VITALE. These are banks, and we have about 150 accounts of those banks.
Chairman LEACH. How do you monitor those?
Ms. VITALE. Well, first thing, if you look at the seven-page profile, that profile is a Know Your Customer profile. We get detailed information on each bank. As I said, what we do before we open it, and for Russia, I have to sign off on them. The business manager, the head of the Russia and NIS region, has to sign off on it, and for Russia NIS I have to sign off on it.
Once again, I am not infallible, and neither is our banker or any institution, but we have a process in place that I think shows that we are being duly diligent about knowing who these banks are. We visit them every year, and we monitor the activity through our bank, and that is what is new.
We started to monitor since—well, we tried monitoring starting in late 1997, but until we developed a program that we have, the reports of this activity were too voluminous to monitor. So we had to form a system that would identify suspicious activity in terms of volumes and in terms of patterns, and that is what we look on, and we look at it on a monthly basis.
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We have meetings once a week to review the activity in our correspondent banks. Every month my department gets a report. We give the report of the activity that filters out the non-patterns and the bank-to-bank activity, and we review those, and we have weekly meetings that go on sometimes for two or three hours each week to review the activity. The correspondent banking department has its own compliance officer, who then is in charge of getting information about some of the patterns that we see, talking to our correspondent banks if she is unable to get information, and reporting back that information to the committee.
Chairman LEACH. A previous witness indicated that they had given a hard review in a given period of time regarding a particular IMF loan. Have you looked at this period of time? Is there anything unusual about it to you?
Ms. VITALE. Yes. We have not seen IMF transfers of any significant amount at all going through. One of the things with our wire transfer report is to search for names appearing in the press. Now I have a staff member who puts in the names appearing in the press to see whether the wire has gone through Republic with that name on it. We have not seen substantial IMF transfers. What we have seen is very, very minimal.
Chairman LEACH. What do you define as an IMF transfer?
Ms. VITALE. We ran just recently the International Monetary Fund, and they were a party maybe on 3,000 transfers.
Chairman LEACH. It has their name attached to it?
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Ms. VITALE. Yes.
Chairman LEACH. OK.
Mr. LaFalce.
Mr. LAFALCE. Thank you, Mr. Chairman.
Ms. Vitale, you gave a very impressive presentation, and it would appear that Republic is doing, based on your testimony in any event, quite an excellent job.
Let me ask you this: You are regulated by the OCC.
Ms. VITALE. Yes.
Mr. LAFALCE. The Bank of New York is regulated by the Federal Reserve.
Do you believe there is much of a difference in the regulation, the oversight and guidance with respect to enforcement of our money laundering laws?
Ms. VITALE. Most of my contact has been with the OCC. We have a resident examiner. The OCC has a policy of having resident examiners in the large commercial banks, and they have been very proactive. Our resident examiner, I know, is a member of the OCC's national money laundering group. I have worked very closely with him.
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Since we are also regulated by the Fed, because we are a bank holding company, we also have Fed examiners come in to review the holding company and the non-bank subsidiaries. I have not interacted directly with those examiners, but I know Rick Small, and I know the Fed has had a very conscientious approach to money laundering as well, but I am just not as familiar with them.
Mr. LAFALCE. Nor am I, but this is certainly something that I am sure our committee will be pursuing. We want to make sure there is rigorous enforcement through regulation and oversight and investigation.
Ms. VITALE. The OCC has been rigorous.
Mr. LAFALCE. That is what I have heard. That is what I have heard.
Now, tell me this. You seem to have some excellent systems in place. Did you devise those, or did the OCC give guidance that systems should be devised and we recommend the following at all?
What other banks have systems somewhat similar to yours that you are aware of? Were you here also for my questioning of Mr. Renyi?
Ms. VITALE. Yes, I was.
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Mr. LAFALCE. Then I would reiterate some of those questions I asked him to you, too, to refresh your recollection. Are there any groups of banks that get together to discuss money laundering and ways in which they can combat money laundering activities? Is there a section of the American Bar Association and their banking law experts, a special subsection on money laundering that comes up with this? Does the OCC or Federal Reserve or superintendent of banks of New York have seminars saying to banks, you know, look at three reports per day in excess of $500,000 with the same name; 10 reports if they have different names in excess, and so forth, and so forth?
What is going on out there, and what should go on out there?
Ms. VITALE. The OCC knows about our system, and when I said about trying to develop the criteria that I wanted to see the results of, I checked with our resident examiner, and one of the things that was suggested was a variance report, track each bank's volume month to month, and when you see a variance, that will show you something. That is a very valid tool when you are looking at individual accounts of individuals or even of corporations.
We tried it. It did not work. The nature of correspondent banking is just so broad that there are so many variables for activity. We had a pattern, and we were looking at any variation over 35 percent. It did not work.
Mr. LAFALCE. Because of the time constraints, about how many Suspicious Activity Reports would you file in a year?
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Ms. VITALE. On correspondent banking? We have done 25 since we put this program in place.
Mr. LAFALCE. Which is how long a period of time?
Ms. VITALE. Since August of 1998. And these are significant.
Mr. LAFALCE. OK. Now, do you know what is happening, how efficacious is this? What has happened to those?
Ms. VITALE. That is why you are having the hearings.
Mr. LAFALCE. We have this one hearing, OK. You were filing Suspicious Activity Reports before August of 1998.
Ms. VITALE. Definitely. But on correspondent banking, as a result of our wire transfer monitoring, it was August of 1998 that started it. But yes, we were filing, and we file regularly when we see violations. But most of those times it is in an account that is a Republic customer directly. Through correspondent banking, the originator or the beneficiary is not an account at Republic in most cases.
But do you want me to answer your question?
Mr. LAFALCE. Surely.
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Ms. VITALE. There are working groups. The Department of Treasury does have a bank working group that gets together and talks about issues regarding the Bank Secrecy Act. The clearinghouse in New York has working groups. Republic is a member, along with other banks, in other working groups of compliance officers, so there are meetings and discussions.
Mr. LAFALCE. Let me just ask you this. I remember meeting with a group of physicians once, and it was a rather long lunch. We discussed many issues. All of a sudden they forgot I was there and started talking about themselves. All of a sudden you heard about this malpractice case and that malpractice case went on.
When you get together at these group meetings, do you become aware that maybe certain banks are not doing what they should be doing in order to detect violations of our anti-money laundering laws?
Ms. VITALE. I think different banks have different commitments to it.
Mr. LAFALCE. Is there a reason why one would have a lesser commitment to it? Could it be profitable to have a lesser commitment to it?
Ms. VITALE. Well, I know the system we put in costs money. It probably costs $500,000, and maybe even upward of that. You need to have senior management sign off on a system like that.
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Mr. LAFALCE. All right. That is half-a-million dollars in the total scheme of things, but could there be some enhanced business opportunities because of a laxer approach to enforcement?
Ms. VITALE. I am sure there is a range of responses and a range of reasons for it.
Mr. LAFALCE. OK. I am searching for it. If you could ever help me with that.
If I can just have one last question. When the IMF is going to give assistance to any country in the world, we are aware of the privatizations that take place, too, and the huge amounts of money that are transferred at such periods of time.
Is there any mechanism for enhanced oversight and surveillance of, say, privatization transactions and the flow of money from such transactions?
Ms. VITALE. When we look at the correspondent banking activity, we don't know what is the reason behind the transaction. We know a beneficiary, we know an originator, we know an originating bank, and we know a beneficiary bank. We can go and look at databases and see what we will learn about either the originator or beneficiary who we don't know. If there are articles, if there is a business news article about someone being privatized, then we learn about it. But there is no way of capturing that until you go behind the wire transfer.
You have to first know which wire transfers to look at, and because there are so many of them, the only way you could do that is if you capture patterns, in my opinion. Once you capture a pattern, you have to then find the answer or some information about who the ultimate beneficiary and originator is.
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Mr. LAFALCE. Thank you.
Chairman LEACH. Ms. Vitale, we have votes on the floor, so what I would like to do is recess pending the vote. The hearing is recessed pending the two votes.
[Recess.]
Chairman LEACH. The hearing will reconvene. It has been a long day, but I have just several more questions. There is much interest in the issue of profitability and so you take the correspondent relations, 150 banks. We have a correspondent relationship say with Russia and others around the world. How profitable is one of those relationships per bank? I mean is it a million dollars a year?
Ms. VITALE. Per bank?
Chairman LEACH. Yes. Is it less?
Ms. VITALE. I am not the right person to talk to in terms of numbers and profitability. That is one area that I don't have to worry about. But no decision is made by Republic in this area on the basis of profitability. It is nowhere near a million a bank, I know that. Most of what I have seen has been maybe $5,000 a year per bank, some banks may be $20,000.
Chairman LEACH. As you may recall, there is a recent article in the New Yorker Magazine, actually, several years ago, a journalist by the name of Albert Friedman, he described your bank's role as shipments of dollars to Russia, and the article contained allegations that a large share of these funds were funded through imperfect Russian banks used to finance activities in perfect Russia institutions.
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Are you familiar with this article? Does it carry legitimacy?
Ms. VITALE. Mr. Chairman, that was in January of 1996. In February of 1996, New Yorker Magazine issued a two-page response, it contained six letters from the Department of Justice, from the Manhattan DA's office, from the OCC, from New York State banking, FinCEN, and I forget the sixth one. At that time Congressman Schumer had them placed in the Congressional Record, so they are a matter of public record. Each of the agencies said that they were not only aware of the bank note shipments that were made public, but that there was nothing illegal about them, and that the information in that article was not accurate. When this article was reprinted in Paris, Republic sued and obtained a judgment for defamation on that article.
Chairman LEACH. So you are suggesting that sometimes the press does not get the story right?
Ms. VITALE. Yes.
Chairman LEACH. Paris has some very interesting defamation laws. Anyone in the public life somehow identifies with the judgments against journalists. Anyway, it has been publicly reported that your bank was responsible for the initial reports suggesting that there was an account that involved the Bank of New York that should be looked at; is that valid?
Ms. VITALE. Well, we filed an SAR and before checking whether I could say that, I ran it by the Department of Justice in New York and the FBI, because as you know, there is a criminal sanction against divulging whether you filed an SAR. But they said, yes, it was already on the record, on the public record.
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Republic filed, as I mentioned in my testimony, because it saw one originator sending, I think it was over $20 million in one month to four beneficiaries, one of which was Benex, and we could not find anything on the public record about Benex that would justify that sum of money or about any of the others in the wire transfers that we reviewed.
Chairman LEACH. I appreciate that. And it certainly appears in this case that your bank's diligence in this matter has been relevant. I think it shows the import of these SARs in certain circumstances.
Well, thank you. I have no further questions.
Ms. VITALE. Mr. Chairman, I read your bill. If I may, there is—in the provisions you make an exemption for foreign entities for different jurisdictions, and I just want you to be aware of what I am saying, some offshore banks being incorporated in one of the areas that you have as an exemption, and that is the Republic of Palau, so I would suggest you may want to look at that.
Chairman LEACH. Well, thank you. I believe it is very constructive advice. And I might ask that you feel free to write us a more defined piece as well, if you have on this bill. We are certainly appreciative of that. In this matter, your bank is clearly to be commended.
Ms. VITALE. Thank you.
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Chairman LEACH. Thank you very much.
Our last witness today is Karen von Gerhke-Thompson of the First Columbia Company, Inc.
And, Ms. Thompson, we welcome you, and please proceed.
STATEMENT OF KARON von GERHKE-THOMPSON, VICE PRESIDENT, FIRST COLUMBIA COMPANY, INC.
Ms. VON GERHKE-THOMPSON. Thank you, sir. Mr. Chairman, please kindly permit me to express how extraordinarily grateful I am for the opportunity to appear before you today. This is a unique, first time experience for me. I have not had the privilege of appearing before a committee of the United States Congress, so I thank the Chairman for this opportunity.
The gravity of the significance of this hearing, an inquiry into Russian money laundering operations that may have tainted—or may have been tainted by, contingent upon one's perspective—U.S. banking and international financial institutions, cannot be sufficiently underscored. The past five years of my life have been consumed with who knew what when, relative to how all-persuasive and how high corruption reached in Russia and its former satellite republics, and why who knew what when was not reported to appropriate legislative and judicial oversight committees.
I have been asked to give a brief summary of my background. I am by profession a stockowner and Vice President of First Columbia Company, Inc., a company established in the District of Columbia in 1954. The First Columbia Company provides consultant services in international marketing, strategic alliance formation and government affairs to a host of U.S. Fortune 500 companies, primarily in the defense industry, energy and environmental services sector. Our clients in the defense industry sector include ITT Defense International/ITT Gilfillan, the former Westinghouse Electronics Systems Group International, Boeing/Argo Electronic Systems Group, Raytheon Corporation, and AT&T Ocean Systems. Other clients include, among others, Morrison-Knudsen International, Westinghouse Environmental Services Technology Divisions, Chemfix Technologies, Inc., National Environmental Control, Separation and Recovery Systems, Coastal Oil Corporation and Frank E. Basil, Inc.
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Concurrently, I was a business partner of the late U.S. Attorney John M. Mitchell, Chairman of Global Research International, and a principal in the firm of Murphy and Associates, Inc., founded by Admiral Daniel J. Murphy, U.S. Navy Retired and former Chief of Staff to then-Vice President Bush.
My first fifteen years in Washington representing some of America's finest corporate good citizens was both promising and lucrative. To borrow my much often-used quote from Sir Winston Churchill: ''Washington is ever the city at your feet, or at your throat.'' I think most of us who have lived in Washington have experienced this at one time or another, at least most of the people I know have experienced it at one point.
Since my involvement with the Central Intelligence Agency and my efforts to bring the issues of Russian money laundering operations to the attention of appropriate oversight committees, Washington has been ever a city at my throat. And my career has been dormant.
Admiral Murphy warned me ''never volunteer''; how sorely I regret that I did not heed his advice. In April of 1993, I volunteered my services as an unpaid intelligence asset to the CIA on a CIA operation to penetrate what the CIA, FBI and Department of Justice knew was a KGB money laundering operation that had tentacles that reached into the Kremlin to Boris Yeltsin. The target of the operation was Alexandre Konanykhine, the U.S. Vice President of Menatep Bank and President of Greatis USA, a public relations and advertising firm that he alleged represented Menatep Bank, the European Union Bank and Greatis Russia, among others.
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Konanykhine alleged that he controlled $1.7 billion in assets held by Menatep Bank, that he wanted to move out of Russia and Eastern European countries into the U.S., Latin America and the Caribbean. He alleged that Menatep Bank wanted to establish an offshore bank in Latin America and/or the Caribbean to protect its clients' assets and investment portfolios and to establish a bank with an initial capitalization of $1 billion U.S. dollars, to obtain 100 naturalized passports for preferred clients of Menatep who allegedly held individual assets and investment and portfolios of $100 million, 25 passports for employees of Menatep Bank and 15 diplomatic passports for very, very special clients of Menatep Bank at any cost.
This project was brought to me by Carter Cornick, Eugene Propper and Jonathan Ginsberg of the Washington, DC. based law firm of Ginsberg, Feldman and Bress. Cornick, Propper and Ginsberg wanted my help in assisting them in accessing officials who could facilitate a favorable negotiation climate for the establishment of a bank and expedite the procurement of the passports.
The $1.7 billion Konanykhine wanted to move out of Russia raised a red flag with me, no pun intended. Russia was in the early phase of its transition from a command economy to a free market economy. We had a pending $4 billion appropriation bill to provide financial aid to Russia to assist them in their transition.
I telephoned a contact I had at the CIA who served as the director of the Soviet Eastern division. His telephone call was returned to me by a Mr. Z—and I am identifying these individuals by the initial of their last name to protect their identities—who informed me that the CIA was extremely interested in obtaining intelligence on and monitoring the activities of Konanykhine and Khodorkovsky, President of Menatep Bank.
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Mr. Z informed me that I would be contacted by a Mr. V. On the same day, I received a telephone call from Mr. V. He informed me that the CIA believed that they were engaged in an elaborate money laundering scheme to launder billions of dollars stolen by members of the KGB and high-level government officials.
The operation was abruptly ended in September of 1993 when Konanykhine telephoned his Washington associate Elena Cidorchuk-Heinz-Volevok from Turkey to instruct her to terminate the contract with First Columbia Company, Inc., and to cut off all further communications with us. She cited Konanykhine's decision to terminate the contract was based on his belief that I was a phoney.
In April of 1994, I was advised by two CIA intelligence officers that the operation had been compromised by convicted spy Aldrich Ames. Mr. V corroborated that I had been compromised on the operation. He personally had routed the traffic on the operation to Ames who was responsible for monitoring money laundering operations at the CNC—the CIA's Counter Narcotics Center. An FBI report submitted to the Senate Select Committee on Intelligence confirmed that Ames and Konanykhine were in Turkey in September of 1993 at the same time, in the same location, and at the precise time that Konanykhine telephoned his assistant from Turkey to terminate the contract with First Columbia Company, Inc.
A Senate Select Committee report on the damage assessment of Ames' espionage activities also confirms that Ames was in Turkey in September of 1993, where he attended an international counternarcotics convention and where, according to a Statement of Fact, he turned over to the KGB classified cables and documents he had downloaded from the CIA's mainframe computer onto his personal laptop computer.
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This operation was not reported to Congressional Oversight Committees as mandated under the National Security Act of 1947. When it was not reported, it signaled me that it was a ''policy'' versus an ''intelligence'' failure, as is so often the case when senior executives fail to report significant failed intelligence or law enforcement operations.
From my first date of contact with the Agency in April of 1993 through September of 1993, I worked with Mr. V on a daily basis. It was evident to me, as would later be confirmed by Mr. Z, that the CIA knew who Konanykhine and Khodorkovsky were and where their money laundering trail led.
Konanykhine was a known KGB asset running a KGB money laundering operation with stolen funds that were passed through Khodorkovsky of Menatep Bank as a KGB-controlled front firm.
Konanykhine is on the top of Russia's most wanted list. He is INS' highest profile case and the FBI's biggest quid pro quo with the Russian Military Procuratura. Konanykhine was a KGB asset conducting a KGB money laundering operation out of the Willard Hotel in downtown Washington, DC. The money was being laundered through Menatep Bank that is also alleged to be KGB-owned and controlled, as is Menatep's wholly-owned subsidiary, Yukos Oil. Khodorkovsky of Menatep Bank is the subject of the investigation into the Bank of New York's involvement in facilitating the laundering of an estimated $10 billion, although I understand those estimates range between $10 billion and $7.2 million. Some of the $10 billion is believed to be money loaned to Russia by the IMF.
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Khodorkovsky and Konanykhine were also the subject of an investigation by the Federal Reserve Board of Governors for their involvement in establishment of the European Union Bank in Antigua, one of eight Russian banks in Antigua alleged to have been established for money laundering purposes.
Here is a man who conducted not one, but two money laundering operations out of the Willard Hotel directly across the street from the Office of the President of the United States: the KGB money laundering operation, and the European Union Bank, both of which were undertaken by Konanykhine on behalf of Khodorkovsky of Menatep Bank. The CIA, FBI, and the Department of Justice were knowledgeable of the KGB operation and the Federal Reserve Board was knowledgeable of the European Union Bank. Surely all were knowledgeable of Khodorkovsky's involvement with the Bank of New York.
Here is a man who first came to the United States as a member of Yeltsin's first official meeting with President Bush, a man who alleges he financed 50 percent of Yeltsin's presidential campaign, who Yeltsin then rewarded with a dacha previously owned by Mikhail Gorbachev, and who Yeltsin allegedly authorized his then-Chief of Security, General Korzackov, who I understand at the time was a colonel, to assign a Kremlin security deal for Konanykhine's personal safety and protection. Here is a man who was conducting a KGB money laundering operation with tentacles that reached to Boris Yeltsin that was penetrated by the CIA, the President's foreign intelligence operational arm, that was compromised by Aldrich Ames, and no one told the Administration and no one reported it to appropriate Congressional Oversight Committees.
I cannot remember the author, but I do remember reading a quote cited by an author who is quoted by a senior State Department official commenting half in jest: ''There are no policy failures; there are only intelligence failures and policy successes.'' There is no jest here. The operation was a foreign policy failure, a see-no-evil-at-any-cost, don't-fail-under-my-watch foreign policy of appeasement, that in no small measure helped fuel the collapse of free market reforms in Russia.
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Russia was hemorrhaging dollars at estimates as high as $2.5 billion per month. The Yeltsin Administration and his new oligarchs were bleeding the economy to near death. No tourniquet was offered to stop the hemorrhaging. To the contrary, the Clinton Administration was pouring billions upon billions of dollars into Russia that only fueled the hemorrhaging. We knew it in 1993. We may have known it earlier.
We watched it. We did nothing to stop it. We aided it and abetted the corruption by fueling it with billions and billions of dollars in foreign aid and international monetary loans. I am not a lawyer, nor do I want to be one or, for that matter, be near one. I have had my fill of attorneys. But, I would venture to guess that to knowingly aid and abet corruption may be tantamount to being a co-conspirator.
Exposing the failure of the operation would have undoubtedly proved to have been politically unpalatable to both the Yeltsin and Clinton Administrations and to the Central Intelligence Agency.
I understand my time is up, Mr. Chairman. And I thank you.
Chairman LEACH. Well, thank you very much.
Ms. VON GERHKE-THOMPSON. You are the only one left to ask questions, sir.
Chairman LEACH. Let me just thank you for your testimony. You have gone through a very unique thing in your life, and it is something that the committee respects. It is always difficult to piece together circumstances from one individual's story. In fact, I am reminded of a novel of, oh, 30- or 40-years standing, called ''The Alexander Quartet,'' which is the same story told four different times from four different persons' perspectives, and the kind of perspective you bring is important, because it indicates a perspective of an American citizen not involved in a process, getting caught up in something of some interest.
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And I thank you very much for presenting it to the committee. I have no questions.
Ms. VON GERHKE-THOMPSON. Thank you, sir.
Chairman LEACH. Thank you. The hearing is adjourned.
[Whereupon, at 5:00 p.m., the hearing was adjourned.]