SPEAKERS CONTENTS INSERTS
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26–777PDF
2006
OFFSHORE BANKING, CORRUPTION, AND THE WAR ON TERRORISM
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
OF THE
COMMITTEE ON
INTERNATIONAL RELATIONS
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
MARCH 29, 2006
Serial No. 109–154
Printed for the use of the Committee on International Relations
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Available via the World Wide Web: http://www.house.gov/international—relations
COMMITTEE ON INTERNATIONAL RELATIONS
HENRY J. HYDE, Illinois, Chairman
JAMES A. LEACH, Iowa
CHRISTOPHER H. SMITH, New Jersey,
Vice Chairman
DAN BURTON, Indiana
ELTON GALLEGLY, California
ILEANA ROS-LEHTINEN, Florida
DANA ROHRABACHER, California
EDWARD R. ROYCE, California
PETER T. KING, New York
STEVE CHABOT, Ohio
THOMAS G. TANCREDO, Colorado
RON PAUL, Texas
DARRELL ISSA, California
JEFF FLAKE, Arizona
JO ANN DAVIS, Virginia
MARK GREEN, Wisconsin
JERRY WELLER, Illinois
MIKE PENCE, Indiana
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THADDEUS G. McCOTTER, Michigan
KATHERINE HARRIS, Florida
JOE WILSON, South Carolina
JOHN BOOZMAN, Arkansas
J. GRESHAM BARRETT, South Carolina
CONNIE MACK, Florida
JEFF FORTENBERRY, Nebraska
MICHAEL McCAUL, Texas
TED POE, Texas
TOM LANTOS, California
HOWARD L. BERMAN, California
GARY L. ACKERMAN, New York
ENI F.H. FALEOMAVAEGA, American Samoa
DONALD M. PAYNE, New Jersey
SHERROD BROWN, Ohio
BRAD SHERMAN, California
ROBERT WEXLER, Florida
ELIOT L. ENGEL, New York
WILLIAM D. DELAHUNT, Massachusetts
GREGORY W. MEEKS, New York
BARBARA LEE, California
JOSEPH CROWLEY, New York
EARL BLUMENAUER, Oregon
SHELLEY BERKLEY, Nevada
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GRACE F. NAPOLITANO, California
ADAM B. SCHIFF, California
DIANE E. WATSON, California
ADAM SMITH, Washington
BETTY McCOLLUM, Minnesota
BEN CHANDLER, Kentucky
DENNIS A. CARDOZA, California
RUSS CARNAHAN, Missouri
THOMAS E. MOONEY, SR., Staff Director/General Counsel
ROBERT R. KING, Democratic Staff Director
Subcommittee on Oversight and Investigations
DANA ROHRABACHER, California, Chairman
EDWARD R. ROYCE, California
JEFF FLAKE, Arizona, Vice Chairman
MARK GREEN, Wisconsin
MIKE PENCE, Indiana
JOE WILSON, South Carolina
WILLIAM D. DELAHUNT, Massachusetts
HOWARD L. BERMAN, California
BETTY McCOLLUM, Minnesota
ADAM B. SCHIFF, California
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GREGG RICKMAN, Subcommittee Staff Director
GREGORY MCCARTHY, Professional Staff Member
CLIFF STAMMERMAN, Democratic Professional Staff Member
EMILY ANDERSON, Staff Associate
C O N T E N T S
WITNESSES
Arthur D. Middlemiss, Esq., Assistant District Attorney, Bureau Chief, Investigations Division Central, New York County District Attorney's Office
Mr. Michael Herde, Managing Director, Region Americas Head of Compliance, UBS Investment Bank
Mr. Rodney M. Gallagher, OBE, Partner, Gaffney, Gallagher & Philip
Mr. Robb Evans, Principal, Robb Evans & Associates
John Moscow, Esq., Partner, Rosner Moscow & Napierala, LLP
Jonathan M. Winer, Esq., Partner, Alston & Bird, LLP
LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING
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The Honorable Dana Rohrabacher, a Representative in Congress from the State of California, and Chairman, Subcommittee on Oversight and Investigations: Prepared statement
Arthur D. Middlemiss, Esq.: Prepared statement
Mr. Michael Herde: Prepared statement
Mr. Rodney M. Gallagher, OBE: Prepared statement
Mr. Robb Evans: Prepared statement
John Moscow, Esq.: Prepared statement
Jonathan M. Winer, Esq.: Prepared statement
OFFSHORE BANKING, CORRUPTION, AND THE WAR ON TERRORISM
WEDNESDAY, MARCH 29, 2006
House of Representatives,
Subcommittee on Oversight and Investigations,
Committee on International Relations,
Washington, DC.
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The Subcommittee met, pursuant to notice, at 2:04 p.m. in Room 2200, Rayburn House Office Building, Hon. Dana Rohrabacher (Chairman of the Subcommittee) presiding.
Mr. ROHRABACHER. This hearing of the Oversight and Investigations Subcommittee is called to order.
We are convening this hearing of the Oversight and Investigations Subcommittee to discuss the role of banking institutions, especially international banking institutions, and their connection to corruption and the war on terror.
We have all heard about the existence of banks operating in Switzerland and in the Caribbean and that these banks perhaps cater to companies and people seeing to avoid taxes. Yet, the same system also makes it possible for drug lords and even terrorists to do their business.
This Subcommittee's recent investigation into the United Nations showed how one corrupt procurement officer, an Alexander Yakovlev, was able to hide at least $1 million in an offshore bank in Antigua. He was not alone, however. According to the Bank of International Settlements, which is essentially the central bank of central banks from all over the world, it is estimated that in 2004, there was some $2.7 trillion in offshore accounts. Now, that is trillion with a T and not with a B, not billions, but trillions of dollars.
While I would like to believe that this money largely comprises funds from tax cheats or even people who maybe feel they are overtaxed, it seems more logical to believe that as Raymond Baker and Jennifer Nordin wrote in the Financial Times last October, and I quote: ''It is virtually impossible to do business using tax havens, secrecy, and secret jurisdictions without abusing transfer pricing and using anonymous entities and secret accounts,'' and, here it is, ''without breaking laws and perpetrating injustices in many countries.''
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So offshore banking involves methods by which money can be purposely hidden and transferred and then, as has long been the case, used for illegal and even violent purposes.
Not only people and companies use these institutions to obtain safe haven for their assets, but countries use these vehicles and the leaders of countries use these vehicles and, I might say, countries and leaders who are under United States sanction use these vehicles. They use these banks for their own purposes as well as to just evade sanctions.
In this first hearing on the corrosive nature of offshore banking, we want to not only learn how these banks operate and how the bad guys get away with these transactions, but also how these institutions work against the United States by aiding countries and, yes, even terrorists, who oppose us.
In this instance, I want to briefly discuss the role of the Swiss bank UBS, or the United Bank of Switzerland. Swiss banks have long been known for their bank secrecy. More recently, however, what comes to mind when one discusses the Swiss banks' corruption and duplicity, is the role in withholding assets, for example, of the Holocaust victims and their heirs for over a half a century.
UBS is one of the Swiss banks that settled a class action lawsuit against Swiss banks with the survivors of the Holocaust for $1.25 billion in 1998.
Since this time, we have heard other stories of UBS malfeasance, including U.S. regulatory fines, lawsuits and other accusations of impropriety, including the fact that UBS once held an account for none other than Osama Bin Laden.
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What concerns us greatly is the role UBS has played in not only supplying United States dollar bank notes to Iran several years ago as part of the Extended Custody Inventory program, or the ECI program, but also their reasons for doing this. The ECI program serves as a means to facilitate the international distribution of U.S. bank notes and the return of old design bank notes and to strengthen U.S. information gathering on the use of U.S. currency and the source of counterfeiting and the use of counterfeit U.S. currency abroad.
According to UBS, over $440 million in United States bank notes was supplied to Iran during the 1990s and beyond that through the ECI program. This was in total contravention to the United States sanctions on Iran. We need to know about that.
What concerns us is the motivation for supplying this money to Iran against the directions of the ECI program. Was UBS worrying about other business that it had with Iran? Did those in the bank think that supplying these bank notes would help in that business? So were they sacrificing the interests of the United States for very parochial interests on their part?
Iran at time was facing a credit crunch by the United States as we attempted to prevent international investment in Iran's energy sector. I believe, of course, the targets and the goals set out by the United States were legitimate goals, and we can see even to this day that the failure of achieving our goals with Iran through some economic pressure like this—the fact that that did not work—they put the whole world in jeopardy, when a radical regime like that exists in Iran in possession of nuclear weapons. A grave threat that might be traced right back to a major financial institution in the world dealing with the Iranian Government in a way that contradicts an understanding with the United States Government.
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If the United States was trying to restrict Iran's flow of income but UBS was working to supplement it through loans and credit, then it seems to me that the bank, which has a substantial presence here in the United States, was working directly against the interests of our country and, yes, the interests of a safer and more stable world.
It seems to me that if we are going to permit banks to operate freely and they are having that type of negative impact, we need a second look at the whole premise of our relationship with the world financial institutions like UBS.
To make matters worse, when UBS then transferred United States bank notes to Iran in violation of the very program that they were entrusted to run, I should state that UBS was indeed fined $100 million by the United States Government for these violations. We are, however, interested in learning about the bank's role in opposing United States efforts to restrict Iran's flow of income and why they took the extraordinary effort to illicitly transfer bank notes to that country in the first place.
Today, we have a number of prominent practitioners in the field of anti-corruption who deal with banking institutions around the world and they will discuss not only the UBS problem but how banks do business in hiding the wealth of dictators, drug dealers, and others threatening the financial well being of our country and the peace of the world and how they are helping others actually make their profit through corruption—you might say accomplices in what should be considered criminal activity.
When dictators like Mobuti, Duvalier and others raid the wealth of their countries and hide it in respected financial institutions, then these banks end up treating the money like it belongs to them, which is bad for the people who it was stolen from—the dictator stole it from somebody—but it is bad for the entire world and undermines any efforts to try to bring the third world up to a level of prosperity so their people can live a decent standard of living. It is a horrendous crime.
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These practices must end and the first thing we do to try to end it is to shed some light on the issue, and this is the first in a series of hearings that we will hold on international financial institutions, finding out how they operate, what their motives are and whether or not we need to rein in some of these practices that I just mentioned.
I will now turn to my friend and Ranking Member, Mr. Delahunt, if he has a statement to make.
[The prepared statement of Mr. Rohrabacher follows:]
PREPARED STATEMENT OF THE HONORABLE DANA ROHRABACHER, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA, AND CHAIRMAN, SUBCOMMITTEE ON OVERSIGHT AND INVESTIGATIONS
We are convening this hearing of the Oversight & Investigations Subcommittee to discuss the role of banking institutions and their connection to corruption and the war on terrorism.
We have all heard of the existence of banks operating in Switzerland and the Caribbean that cater to companies and people seeking to avoid taxes. Yet, this same system also makes it possible for drug lords and even terrorists to thrive.
This subcommittee's recent investigation into the United Nations showed how one corrupt procurement officer, Alexander Yakovlev, was able to hide at least $1 million in an offshore bank in Antigua.
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Mr. Yakovlev was not alone, however. According to the Bank for International Settlements, which is essentially the Central Bank of Central Banks from all over the world, it is estimated that in 2004 there was some $2.7 TRILLION in offshore accounts—that's TRILLION, not Billion.
While I would like to believe that this money largely comprises funds from tax cheats, it seems more logical to believe that as Raymond Baker and Jennifer Nordin wrote in the Financial Times last October, ''It is virtually impossible to do business using tax havens, secrecy jurisdictions, abuse transfer pricing, anonymous entities and secret accounts without breaking laws and perpetrating injustices in many countries.''
Offshore banking involves methods by which money can be purposely hidden and transferred and then, as has long been the case, used for illegal and even violent purposes. Not only people and companies use these institutions to obtain safe haven for their assets, but countries—even countries under US sanctions—use these banking institutions as well for purposes of sanctions evasion.
In this first hearing on the corrosive nature of offshore banking, we want to not only learn how these banks operate and how the bad guys get away with these transactions, but also how these institutions work against United States by aiding countries that oppose us.
In this instance, I want to briefly discuss the role of the Swiss Bank, UBS or the United Bank of Switzerland. Swiss banks have long been known for their bank secrecy. More recently, however, what comes to mind when one discusses the Swiss banks corruption and duplicity. When I speak of this, I speak of their role in withholding the assets of Holocaust victims and their heirs for over half-a-century. UBS was one of the Swiss banks that settled a class-action lawsuit against Swiss banks with the survivors for $1.25 billion in 1998.
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Since this time, we have heard other stories of UBS' malfeasance including US regulatory fines, lawsuits, and other accusations of impropriety including the fact that UBS once held an account for Osama Bin Laden.
But what concerns us greatly is the role UBS played in not only supplying US dollar banknotes to Iran several years ago as part of the Extended Custodial Inventory program or ECI program, but also their reasons for doing so. The ECI program serves as a means to facilitate the international distribution of U.S. banknotes and the return of old design banknotes and to strengthen U.S. information gathering on the use of U.S. currency and sources of counterfeiting of U.S. currency abroad.
According to UBS, over $440 million in US banknotes was supplied to Iran during the 1990s and beyond through the ECI program in contravention of US sanctions on Iran.
What concerns us is the motivation for supplying this money against the directions of the ECI program. Was UBS worrying about other business that it had with Iran and did those in the bank think that supplying these banknotes would help that business?
Iran at that time was facing a credit crunch by the US as we attempted to prevent international investment in Iran's energy sector. If the US was trying to restrict Iran's flow of income, but UBS was working to supplement it through loans and credit, then it seems to me that the bank which has a substantial presence here in the US was working directly against the interests of the country that acted as one of its most important sources of business.
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To make matters worse, UBS then transferred US banknotes to Iran in violation of the very program they were entrusted to run. I should state that UBS was indeed fined $100 million by the US government for these violations. We are however interested in learning of the banks' role in opposing US efforts to restrict Iran's flow of income and why they took the extraordinary effort to illicitly transfer banknotes to that country.
Today we have a number of prominent practitioners in the field of anti-corruption who deal with banking institutions around the world and they will discuss not only the UBS problem, but how banks do business in hiding the wealth of dictators, drug dealers and others threatening the financial well-being of our country and others through this corruption. When dictators like Mobutu, Duvalier, Abacha, and others raid the wealth of their countries and hide it in these banks, the banks then treat the money like it belongs to them, not the people the dictator stole it from. These practices must end
I now turn to my friend the Ranking Member, Mr. Delahunt to make his statement.
Mr. DELAHUNT. Yes. I am going to be very brief, Mr. Chairman.
Let me just make an observation that you have heard at just about every hearing. This Congress, between a variety of Subcommittees, has held numerous hearings on the UN, on the UN Oil-for-Food program, and today we are having a hearing on a Swiss bank, even though there have been several hearings in front of the Financial Services Committee on this particular matter. It was investigated by Federal law enforcement and by Swiss authorities and the Chair is correct in terms of the sanction that was imposed on UBS. The matter was settled and that is good.
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We do have much to learn, but I think it is fascinating that we are unable to have hearings relative to reports of corruption and possible illegal activity when it comes to matters that might cause some embarrassment to the Administration.
Media reports, for example, over the past several years have raised serious questions about the propriety of business dealings by Halliburton's wholly-owned subsidiary, Halliburton Products and Services, that they conducted with Iran.
The Chairman mentioned Iran and I remember watching a 60 Minutes report that I found rather shocking. In fact, the Department of Justice (DOJ) has initiated grand jury investigations into whether the subsidiary's activities have violated U.S. sanctions laws.
Now, I recognize that Halliburton Products and Services is nominally incorporated in the Cayman Islands. I think it is fair to say that the Cayman Islands is an OFC (Offshore Financial Haven) or a tax haven. However, according to the media report that I alluded to, the registered address of the subsidiary was located in a building owned by the local Caledonian Bank. However, according to the manager of that bank, there actually is no office for the company there, just a mail box, and that he forwards mail that is addressed there directly to Halliburton's Houston headquarters.
I suggest that this calls into question the legal requirement that a subsidiary operate independently of its U.S. parent.
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I am glad to hear, Mr. Chairman, that we are going to have additional hearings on this issue and I would hope that we could invite members of the Halliburton Corporation and its subsidiary before this Subcommittee to examine its conduct. I think some balance is necessary here. We just simply cannot ignore the realities and continue to focus on issues that assuredly will not prove to be an embarrassment for the Administration.
So with that, I will conclude, and I look forward—I did read the testimony. I found it interesting and insightful. I noted that two of the individuals, Mr. Moscow and Mr. Middlemiss, work for the District Attorney in Manhattan. Mr. Morgenthau, whom I had occasion to interact with during my previous career—I have great respect for Mr. Morgenthau and he clearly was a leader in terms of dealing with the issues that we are concerned about and deserves great credit and, I would suggest, could serve as a role model for some of our Federal agencies.
With that, I will yield back.
Mr. ROHRABACHER. Thank you very much.
Ms. Ros-Lehtinen?
Ms. ROS-LEHTINEN. Thank you so much.
I thank Chairman Rohrabacher for the opportunity to participate in today's Subcommittee hearing. The timing could not have been more appropriate, as it comes on the heels of the Full Committee's adoption of my Iran sanctions legislation, House Resolution 282, that is co-sponsored by 356 Members of Congress and it underscores the commitment of the United States Congress to deny the regime in Iran the resources to engage in state sponsorship of global terrorism and to continue to develop its chemical, biological and nuclear weapons program.
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So it is therefore incumbent upon this Committee and all of us in Congress to investigate the activities of financial institutions and assess whether they are assisting the war on terrorism or in some instances are enabling jihad of the individuals or groups or state sponsors of terrorism who seek our destruction.
I am particularly interested in hearing from Mr. Michael Herde of UBS regarding what he states is the bank's highest priority, to be a strong ally in the fight against money laundering and terrorist financing.
My experience with UBS in the last few years regarding UBS's transactions with terrorist regimes under the Extended Custodial Inventory program calls into question the extent of the bank's stated commitment to fight terrorist financing. However, I will go back to the ECI transactions in a second.
I would hope that Mr. Herde would elaborate on the indicators that UBS uses to determine if money laundering and terrorist financing is taking place, what preventative safeguards are in place, and what corrective actions are taken to immediately shut down UBS as a vehicle for such activity.
Mr. Herde's written testimony says that UBS's new policy tracks economic sanctions imposed by the United States, Switzerland, the EU (European Union) and the UN Security Council, so if an individual entity or government is subject to U.S. sanctions but not UN Security Council sanctions, which one would UBS use to determine how to proceed? For example, if Iran's so-called President sought to deposit funds in a UBS account and sought to use UBS services, what would be the response of UBS?
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Turning to another brutal dictator and state sponsor of terrorism, if Fidel Castro were to seek UBS services, what response should he expect?
Does Castro or any other Cuban official agency or instrumentality of the Cuban regime currently have accounts in UBS?
In information provided by UBS to the Subcommittee, UBS states that it is ending all other—that is, beyond ECI—business dealings with a limited number of countries, including Iran. The information then says, ''Except for transactions permitted'' for such certain international organizations like the UN.
I hope that the witness would elaborate on the extent of UBS's previous and current transactions with Iran, China, North Korea, or any other country designated the United States as a state sponsor of terrorism. What about officials and entities of these regimes?
Reports have stated that Saddam Hussein, even when Iraq was under UN sanctions, had accounts in UBS. This has implications for this Subcommittee's Oil-for-Food investigation.
As you know, Mr. Rohrabacher, I have been following the issues we are discussing today for several years now and my interest was reinvigorated in April 2003 when a United States Army sergeant broke through a false wall in a building in Iraq and discovered more than $600 million in new United States currency. The Federal Reserve and the Department of Treasury determined that through the Extended Custodial Inventory (ECI) program, UBS had engaged in billions of dollars worth of transactions with terrorist regimes and sanctioned countries, including Cuba and Iran; this in clear violation of United States laws.
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Of the $5 billion in total transactions among all entities subject to U.S. sanctions, $5 billion, $3.9 billion worth of U.S. currency went to the Castro regime.
Since June 2004, some of my colleagues and I have been meeting with and writing to UBS officials to ascertain the extent of the bank's dealing with the Cuban dictatorship and any possible linkages between the Cuban and Iranian counterparties. Some of the questions posed were, for example, was the account of the Cuban counterparty involved in the transaction with UBS permanently closed and, if so, where are the funds that were in that account?
Did the funds remain at UBS or were they transferred to other banks?
Were these foreign banks, and, if so, where are they headquartered?
What was the pattern of activity of the account? Were there any spikes in activity and for what purpose?
Was there any interaction between the Cuban and Iranian counterparties?
The latter is particularly relevant, given the joint statements made by Iran's Grand Ayatollah and Castro in the summer of 2001, declaring their commitment to ''bring American to its knees.''
It is particularly relevant given the growing relationship between the two regimes across multiple sectors, yet beyond just general apologies and assurances from UBS to trust that the ECI violations were an isolated incident, our requests were essentially ignored.
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As President Ronald Reagan said, ''Trust but verify.''
I would like to have, Mr. Chairman, my correspondence with UBS on these matters included in the record of today's hearing and ask the Subcommittee's assistance in securing the responses and documentation from UBS relating to these.
Mr. ROHRABACHER. Without objection, that will be placed in the record and the Subcommittee staff will be at your service to pursue the answers to those questions.
[The information referred to follows:]
[Note: Image(s) not available in this format. See PDF version of this file.]
Ms. ROS-LEHTINEN. Thank you, Mr. Chairman.
If I could just wrap up, I further request that my queries to the Department of Treasury, the Federal Reserve and the U.S. Attorney's office on this matter, along with their responses, also be included in the record.
In closing, I would like to express my appreciation to all of the witnesses appearing before us and I welcome Mr. Rodney Gallagher from the law firm of Gaffney, Gaffney, Gallagher & Philip, which is close to my congressional district in Miami. I have read the testimony provided by all of the witnesses and have specific questions for you if the Chairman permits and, in particular, I would like Mr. Moscow to elaborate on a reference he makes to the system used by the Cuban regime to avoid United States sanctions.
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As you know, these are very specific guidelines and restrictions in United States law relating to, for example, agricultural or medical sales to Cuba, and these include prohibitions on any type of export credit or guarantee or any other United States assistance for agricultural sales requiring cash sales only.
I am interested in if the fraudulent scheme can be used to avoid these types of regulations.
Mr. Chairman, I thank you very much for calling this hearing. I look forward to this one and many others that we will have on this very important topic of terrorist financing, offshore banking, corruption, and the war on terror.
Thank you.
Mr. ROHRABACHER. Thank you very much.
Again, with unanimous consent, the questions that you have submitted for the record will be placed into the record and we will be anxious to see the specific answers to those questions.
[The information referred to follows:]
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Mr. ROHRABACHER. Mr. Wilson, do you have an opening statement?
Mr. WILSON. Mr. Chairman, I do not. I just want to thank you for getting the hearing together and I appreciate the persons being here today, but I particularly appreciate your leadership and I am delighted to be here.
Mr. ROHRABACHER. All right. We thank you very much.
On hearing Ms. Ros-Lehtinen's description of breaking the wall down and finding this treasure house of cash, it is maybe symbolic of what we are trying to do at this hearing today, to break down the wall and find out what is going on behind that wall and where that money has come from and where it is going to. The public deserves to know.
Our first panel, we will hear from Assistant District Attorney Arthur Middlemiss, who is the Bureau Chief of the Investigations Division Central, a part of the Investigations Division of the New York County District Attorney's Office that is responsible for investigating and prosecuting banking and security frauds. He was named to this post December 2004. He has supervised many significant investigations, including the 2005 investigation into the Israeli Discount Bank of New York. In 2003, he co-led the District Attorney's 18-month investigation into the role of New York-based financial institutions in the Enron collapse.
We thank you very much.
Next, we will hear from, in the first panel, Mr. Michael Herde, who is the Managing Director of UBS's Investment Bank Region Americas as Head of Compliance. Mr. Herde will discuss the role of UBS and the bank's operation of the Extended Custodial Inventory program as it relates to Cuba and Iran.
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We thank you, Mr. Herde, for being with us. We thank the bank for what I consider to be a demonstration of good faith that you are sitting there, willing to participate in this hearing, and so we appreciate you and your bank's representation.
So with that said, I usually admonish witnesses to keep their testimony down to 5 minutes, but I do not see how we can do that in this particular case. I would think that a number of issues have been brought up that you might want to comment on and so please do not take a half an hour, but if you could make sure you have laid the foundation for the discussion that will follow.
Thank you very much.
Mr. Middlemiss, you may begin.
STATEMENT OF ARTHUR D. MIDDLEMISS, ESQ., ASSISTANT DISTRICT ATTORNEY, BUREAU CHIEF, INVESTIGATIONS DIVISION CENTRAL, NEW YORK COUNTY DISTRICT ATTORNEY'S OFFICE
Mr. MIDDLEMISS. Thank you, Mr. Chairman. I will be relatively brief in my remarks and be happy to answer whatever questions the Subcommittee has about the cases that have been prosecuted by the Manhattan D.A.'s office.
Let me thank you, Mr. Chairman and Members of the Subcommittee, for inviting me to speak today as part of this important panel.
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Mr. Chairman, as you noted, I am an Assistant District Attorney in Manhattan and to clear up whatever error occurred in the typo, I am most decidedly a local prosecutor, albeit one who works for district attorney with an international reputation, that being Robert M. Morgenthau, who has served as the New York County District Attorney since 1975.
It is perhaps a combination of the location of the New York County D.A.'s office and the interest and sophistication of Mr. Morgenthau in prosecuting these crimes that leads a representative of his office to be sitting before you today.
The simple fact is that sophisticated crimes often involve international money flows and many of the cases that I have summarized in my remarks bear that out.
In 2004, Mr. Morgenthau appointed me to run a bureau in the D.A.'s office called Investigations Division Central (IDC). That bureau had formerly been run by another of your panelists here today, Mr. John Moscow, who preceded me in the position.
As summarized in my written remarks, IDC, the bureau that I run in the office, has prosecuted several cases involving the international money remittance business. For example, Beacon Hill was an unlicensed money remitter that moved $6.5 billion in 6 years from South America through New York. More recently, we investigated a case involving the Israel Discount Bank of New York that enabled illegal Brazilian businesses to move another $2.2 billion through New York. In the last year, we have also successfully prosecuted three illegal money remitters in New York who moved $132 million from New York to Vietnam.
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Mr. ROHRABACHER. Before you go on, could you tell us what you mean by moved through?
Mr. MIDDLEMISS. Certainly, Mr. Chairman. With respect to the money remitters themselves, these businesses were essentially in the business of collecting money from people who wanted to send it abroad and made that happen, very similar to the way that a Western Union would operate, except without any of the safeguards that are built in with a Western Union type transaction. For example, one of the money remitters that we prosecuted in New York essentially would take clients' money in several times, in fact, hundreds of times, more than $10,000 at a clip. Instead of filing any CTRs (Currency Transaction Report), none were filed, none of the activity was scrutinized for suspicious activity, so no suspicious activity reports were filed, and none of the identities of the persons who were transmitting these huge sums of money to Vietnam were screened through the OFAC (Office of Foreign Assets Control) process to see if they were known terrorists, drug traffickers, or other criminals on that list.
Mr. ROHRABACHER. Excuse me for taking the prerogative, but why did they not just send it to Vietnam in the first place? Why did they have to go through somebody in New York?
Mr. MIDDLEMISS. Well, probably one of the reasons is that they wanted to avoid any regulatory scrutiny whatsoever. What they paid for, the service that they got from the illegal business that we prosecuted, was secrecy, essentially. They did not have to open a bank account in their name. They did not have to submit themselves to whatever scrutiny that bank would have. There were no reporting requirements to the U.S. Government. In short, if you wanted to move money illegally from New York to Vietnam, these three businesses provided you an excellent means to do that.
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Mr. ROHRABACHER. You said they went to Brazil to New York to Vietnam?
Mr. MIDDLEMISS. Yes.
Mr. ROHRABACHER. Why did the Brazilians go through New York rather than just go directly to Vietnam?
Mr. MIDDLEMISS. I think that we have had some miscommunication. Several of the cases that we have prosecuted have involved huge sums of money coming from Brazil through New York. A separate set of cases that the office has prosecuted have dealt with businesses in New York that have moved money to Vietnam. The businesses are similar in that they offer the clientele the benefit of secrecy, no SAR (Suspicious Activity Report) filings, no CTRs, no OFAC screening, but there are two separate types of businesses that we have prosecuted.
Mr. ROHRABACHER. I still do not understand why they would go through New York. Pardon me for getting stuck on this, but why would someone in Brazil—it is one thing, we understand people carrying brown paper bags across the border or something, but why would someone in Brazil want to go through New York and then have it transferred rather than just going straight to Vietnam?
Mr. MIDDLEMISS. Let me step back and perhaps answer the question this way. For Brazilians, there are essentially two ways for them to get money out of Brazil and, not to make this simplistic, but there is a legal way and an illegal way.
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The legal way requires Brazilians to register their outgoing money transfers with the Brazilian Central Bank. That exposes them to Brazilian regulatory scrutiny. For example, they know how much money you have if you register that it is going out of the country.
If you do it the illegal way, you use what in Portuguese is called a ''doleiro'' or a ''casa de cambio,'' which essentially is a money exchanger in Brazil and these companies in Brazil are—what they can do is change money for you, like a money exchanger here. What they cannot do legally is to send money out of the country. Despite this, on a regular basis, these doleiros have managed to open up accounts with United States financial institutions, whereby they accept money on behalf of their Brazilian clientele and then wire it to their account at the New York bank. This enables the Brazilian citizen or Brazilian criminal, because we really do not know, to have access to the United States financial system and people in Brazil want to get their money out for currency stability, because they want access to the efficiencies that are provided by our financial system, and from New York, once it gets here and you are engaging in a dollar transaction, you can move your money to the Caribbean or another offshore location and you can take advantage of all the benefits of secrecy of tax havens or offshore financial centers.
For example, a Brazilian wants to send $100 million out of Brazil. He takes it to a doleiro in Brazil. The Brazilian doleiro has an account with, for example, Israel Discount Bank in New York. The transaction from the Brazilian standpoint will look like the Brazilian doleiro sending $100 million to the bank in New York. Once it gets to the bank in New York, the customer in Brazil can instruct the doleiro to move that money from New York, essentially wherever he wants it to go, including an account that that individual himself has opened up at IDB.
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These are some of the advantages that you have if you are a Brazilian citizen.
Now, what this exposes us to in the United States is the fact that the bank's client, to wit, the doleiro, has clients of its own, and the doleiro does not scrutinize the activity of its clients for suspicious activity. So this exposes us to scenarios that we have seen where, for example, huge sums of money are coming out of parts of Brazil through doleiros that simply do not have the industrial base to send those sums of money, and we can draw certain inferences about the source of that money from that fact.
We have worked closely with Brazilian prosecutors in the Manhattan D.A.'s office. We know for a fact that one individual, the former Governor and Mayor of the city and state of Sao Paolo in Brazil, an individual named Paolo Maluf, moved as much as $250 million that was the proceeds of a kickback scheme in Sao Paolo through doleiros to New York and on to what are considered offshore financial centers.
Mr. Maluf is presently under indictment in Brazil for essentially having stolen this money and illegally moved it out of Brazil.
The fact that he was able to do it through New York leads me to one of the points that I wanted to make before the Subcommittee. With IDB, for example, IDB's clients were engaged in illegal activity.
Mr. DELAHUNT. Can you tell us who IDB is?
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Mr. MIDDLEMISS. I am sorry, sir. That is an acronym for Israel Discount Bank of New York. As summarized in our remarks, we did an investigation in conjunction with the New York State Banking Department and the FDIC (Federal Deposit Insurance Corporation) that led to a settlement with IDB (Israel Discount Bank) based on deficiencies that IDB had in its anti-money laundering policies.
IDB, as a result of this settlement with the Manhattan D.A., with the FDIC, with New York State Banking, essentially had to put in a regimen of hopefully better anti-money laundering controls, as well as pay a fine of $8.5 million to the city and state of New York and I believe as much as $16.5 million additional civil money penalties to FINCEN (Financial Crimes Enforcement Network), the FDIC and other Federal regulators, as well as the New York State Banking Department.
Mr. DELAHUNT. How much was it?
Mr. MIDDLEMISS. $8.5 million as a fine to the city and state of New York, and as much as $16.5 million in civil money penalties to the other agencies involved in the settlement.
Mr. ROHRABACHER. You may proceed with your testimony.
Mr. MIDDLEMISS. I think the point that I was trying to make was that the individuals at Israel Discount Bank essentially had clients who were engaged in illegal activity.
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Now, we look upon our banks as having to know their customers and put teeth into the compliance regimen. I think it is interesting to look at the New York bank's activities from the perspective of the Brazilian prosecutors.
The Brazilian prosecutor is faced with a bank in another jurisdiction that enables criminals and others to move massive amounts of money out of his country. The evidence of those transactions is located in New York, far away from Brazil and difficult for the Brazilian prosecutor to obtain. The money is also located in New York, and it is hard for a Brazilian prosecutor to forfeit that money, should he identify a bad guy in Brazil that he is prosecuting.
From the perspective of the Brazilian prosecutor, our bank was the offshore bank and I am sure that they had the same complaints about our banks that will be voiced during this hearing and I am sure others regarding offshore financial centers.
So in sum, my remarks come down to we should basically exercise the Golden Rule and that what is good for the goose is good for the gander. If we want to control illegal monies going to offshore jurisdictions, we should look at and force our banks to live up to the substance of the rules, the compliance rules, that Congress has written for them to do. If they do not, then a lot of the exercise that we go through in trying to track down money and to prosecute these crimes essentially will be fruitless. And I also think that it would be more of an incentive to encourage other jurisdictions to put in place anti-money laundering controls if our banks themselves are willing to live up to our own.
[The prepared statement of Mr. Middlemiss follows:]
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PREPARED STATEMENT OF ARTHUR D. MIDDLEMISS, ESQ., ASSISTANT DISTRICT ATTORNEY, BUREAU CHIEF, INVESTIGATIONS DIVISION CENTRAL, NEW YORK COUNTY DISTRICT ATTORNEY'S OFFICE
Thank you, Mr. Chairman and members of the Subcommittee, for inviting me to speak today. My name is Arthur Middlemiss. I'm an assistant district attorney in Manhattan, and I work for Robert M. Morgenthau. Since late 2004, I have run a bureau at the Manhattan D.A.'s Office called Investigation Division Central, or IDC.
IDC, as does other office bureaus, prosecutes banking and securities frauds, many of them having international ramifications. Manhattan, a world center for banking and securities transactions, is home to many financial institutions, which sophisticated criminals use to defraud investors, companies, and even foreign governments of billions of dollars. Even in cases of domestic fraud, criminals often conduct some of their activities outside the United States, keeping funds and incriminating evidence overseas away from police and prosecutors. IDC works with foreign governments, victims, and multi-national corporations to conduct extensive international investigations so that it can uncover and prosecute large-scale frauds and thefts. Through IDC's efforts, more than one billion dollars has been returned to investors, and hundreds of defendants have been convicted and sentenced.
My comments today will focus in two areas: 1) the international money remittance business, and 2) the role offshore jurisdictions play in securities fraud cases here in the United States. I hope to explain some of the concerns that regulators and law enforcement have about some practices among banks and businesses in the money service industry, and to express Mr. Morgenthau's hope to encourage legitimate businesses, banks, and other financial institutions to take appropriate action when they see the red flags that should alert them to illegal activities.
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MONEY TRANSMISSION AND MONEY LAUNDERING
The best way for me to give you some idea of the dimensions of the problems we are facing in regards to money laundering and the urgent need to do something about them, is to describe some of the cases involving money service businesses we have prosecuted at the Manhattan District Attorney's Office.
Over the past several years, the Manhattan District Attorney's Office has focused on underground remittance systems and the financial institutions that allow them to operate. To be sure, legitimate money service businesses play an important role in the lives of many New Yorkers, especially for recent immigrants, many of whom rely on check cashers to cash their checks, and on money remitters to send money home to their families. However, unlicensed, and therefore unregulated, money service businesses pose to a threat to the integrity of the nation's financial system and to our safety and well-being.
As Mr. Morgenthau has said, ''These underground remittance systems provide a window of opportunity for many types of criminals to move their ill-gotten gains: narcotics traffickers, gun smugglers, corrupt foreign politicians, and terrorists.'' To date, the Manhattan District Attorney's Office has prosecuted a number of these financial businesses, which together have wired more than $9.8 billion worldwide.
The businesses prosecuted by the Manhattan District Attorney were—like all money service businesses—obligated under both federal and state law to develop and implement effective anti-money laundering programs, to file suspicious activity reports (''SARs'') with law enforcement if suspicious activity was identified, to follow currency transaction reporting (''CTR'') requirements for transactions over $10,000, and to screen customers' identification against lists of known terrorists and narcotics traffickers (''OFAC''). In the face of those regulations, the subjects of the Manhattan District Attorney's investigation enabled their customers to avoid all regulatory scrutiny and to move massive amounts of money worldwide anonymously.
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For example, in February 2004, with the assistance of the New York State Banking Department, Beacon Hill Services Corporation (''Beacon Hill'') was convicted, after a jury trial, for operating as an unlicensed money transmitter; in its last six years of operation, Beacon Hill had moved more than $6.5 billion through accounts it maintained at a major New York bank.
Beacon Hill was operating as a money transmitter without a license, a felony under New York State law. Beacon Hill ran its money transmitting business out of offices on the seventh floor of a midtown Manhattan office building. It had about a dozen employees. It was open for business from 1994 to February 2003, when we executed a search warrant on the premises.
It is doubtful that very much of this money was moved through Beacon Hill for legitimate purposes. Legitimate clients would have dealt directly with a bank rather than pay the extra fees required to do business through Beacon Hill. What the clients got for their extra money was secrecy and protection from the scrutiny of government authorities. Beacon Hill did not keep proper records and much of its business was transacted with offshore shell corporations and ''casas de cambio,'' or exchange houses, in Brazil and Uruguay. Accordingly, it was nearly impossible to identify the real parties in interest behind Beacon Hill's transactions, or to trace the money through the company's accounts. Nonetheless, it is reasonable to believe that a great portion of the money that passed through Beacon Hill's accounts was linked to unlawful capital flight, narcotics trafficking or other criminal activities. We do not know the extent to which the facilities of Beacon Hill may have been used to fund terrorist activities. Records do show, however, that Beacon Hill transmitted $31.5 million to accounts in Pakistan, Lebanon, Jordan, Dubai, Saudi Arabia, and elsewhere in the Middle East.
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After the Manhattan District Attorney indicted Beacon Hill, we met with Brazilian police officials and prosecutors and representatives of a special commission investigating the movement of some $30 billion out of Brazil. Much of this was thought to be the proceeds of official corruption, government fraud, organized crime activities, and weapons and narcotics trafficking. More than $200 million of this money had moved through Beacon Hill and accounts at other New York banks; these funds were alleged to have belonged to Paulo Maluf, the former mayor and governor of the city and state of San Paolo, Brazil. Maluf now faces charges in Brazil that he stole hundreds of million of dollars as part of a construction kickback scheme.
The above-described meeting was not the only example of cooperation between Brazilian and New York authorities. In August 2004, Brazilian law enforcement authorities, in the largest operation of its kind, executed over 120 search warrants and over sixty arrest warrants, and charged over 100 individuals with money laundering and related financial crimes throughout Brazil as part of Operation ''Farol da Colina''—Portuguese for ''Beacon Hill.'' This operation was based in part on information gathered from the Manhattan District Attorney's investigation and prosecution of Beacon Hill. Close cooperation between the Manhattan District Attorney's Office and Brazilian federal police and prosecutors continues.
The Manhattan District Attorney has also focused on the role played by the United States banks and financial institutions that allow these illegal activities to go on. As the District Attorney has said, he will not ''tolerate violations of the requirements that [U.S. financial institutions] know their customers and adhere to all anti-money laundering standards. Financial institutions that harbor illegal operations will be investigated and appropriate steps will be taken to ensure their compliance with the law.''
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For example, Beacon Hill itself conducted its business through accounts maintained, for nine years, at a major New York bank. This illegal business was able to flourish for as long as it did only because the bank closed its eyes to numerous warning signs that the accounts posed a high risk for money laundering.
There were several red flags raised by Beacon Hill's business that the bank involved should have recognized. First, many of Beacon Hill's clients were themselves in the business of moving money to South America, and the identities of their customers were unknown and unknowable by the bank. Wire transfer documents often identified the beneficiaries of transfers only as a ''customer'' or ''valued customer.'' Other Beacon Hill clients were offshore shell corporations. A large portion of Beacon Hill's business was run out of a pooled account which served many customers, making it impossible to link deposits with transfers out of the account. Finally, the London office of the bank had shut down Beacon Hill's accounts in 1994 and, as the bank knew, Beacon Hill did not have a license to operate in the State of New York. As Mr. Morgenthau has stated, ''It is fair to say that, in this case, the bank's compliance department completely fell down on the job.''
As a result of leads developed during the Beacon Hill investigation, the District Attorney's Office launched an investigation into Hudson United Bank (''HUB''). On March 2, 2004, the District Attorney's Office reached a settlement with HUB relating to the failure of the HUB branch located at 90 Broad Street in Manhattan to monitor and assess accurately the money-laundering risks posed by its international wire transfer business. Specifically, the HUB accounts engaged in more than $65 million of transactions originating or terminating with individuals and companies doing business in the tri-border region of South America (formed by the borders of Paraguay, Argentina and Brazil), as well as with other bogus South American money transmitters. As part of the settlement, HUB agreed to reform its anti-money laundering policies and procedures, and to pay a total of $5 million to the City of New York, which included costs of the investigation.
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During the course of both the Beacon Hill and HUB investigations, the District Attorney's Office developed leads indicating that Israel Discount Bank of New York (''IDBNY'') accounts were also being used to facilitate and conduct illegal money transfers from Brazil. The investigation into those leads disclosed that IDBNY's private banking customers, both individuals and companies, would bring Brazilian currency to ''doleiros'' (foreign exchange houses) in Brazil. These doleiros are authorized to conduct currency exchanges in Brazil, but are not authorized to engage in foreign money transfers. The doleiros would then transfer money from the doleiro accounts at IDBNY to the private banking client's account at IDBNY. The funds would then go wherever IDBNY was instructed to send them. This process evaded Brazil's strict controls over foreign money transfers and was illegal in Brazil. Thus, in reality, the doleiros were conducting money transfer businesses in New York, through their operations in their IDBNY account.
In addition to breaking Brazilian law, this particular ''nesting'' violated United States and New York banking regulations and money laundering laws. IDBNY failed to maintain accurate and complete customer information in violation of state and federal rules. IDBNY's money-laundering policies, systems and controls failed to prevent illegal transfers from passing through accounts at IDBNY. IDBNY also violated regulations governing the filing of SARs by failing to report suspicious transactions in a timely manner and in an accurate and complete manner.
In a related operation, authorities in New York and Brazil took action against Transmar Turismo (''Transmar''), an illegal money transmitter with offices in Brazil, who had used its account at IDBNY to make illegal money transfers. While Manhattan prosecutors froze Transmar's account at IDBNY in Manhattan, the Brazilian federal police executed seven search warrants on the offices of Transmar, as well as at the offices and homes of its principal owners and officers. The president of the company, Algemiro Moutinho, was taken into custody pursuant to an arrest warrant issued by a Brazilian federal judge. Moutinho and two other officers of Transmar were charged with Money Laundering, Crimes Against the National Financial System (operating an illegal money remittance business), Managing a Financial Institution with Fraud, and Racketeering. Meanwhile, prosecutors in Manhattan will seek to forfeit the assets in Transmar's New York accounts.
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In short, the District Attorney's investigation revealed that IDBNY had deficiencies in its anti-money laundering policies and controls. As a result of those deficiencies, IDBNY failed to monitor the risks that its customers were engaged in illegal activity, and enabled certain bank customers to move over $2.2 billion illegally from Brazil into IDBNY.
Along with the New York State Banking Department and the Federal Deposit Insurance Corporation (''FDIC''), the District Attorney's Office entered a settlement with IDBNY that required IDBNY to install a regimen of compliance and controls to insure that the bank complies with all anti-money laundering requirements. In addition, IDBNY was required to pay $8.5 million to the City and State of New York, and to cover the costs of the investigation. IDBNY may face additional Civil Money Penalties not to exceed $16.5 million in the aggregate to NYSBD, the FDIC, and the United States Department of the Treasury's Financial Crimes Enforcement Network (''FinCen'').
With the participation of the New York State Banking Department, the Manhattan District Attorney's Office has also prosecuted other illegal, unlicensed money service businesses operating out of Manhattan, some literally within a stone's throw of our Office. Three of these businesses successfully enabled their customers to move more than $132 million anonymously over the last five years to Vietnam. For the most part, the operators of these businesses simply used their bank accounts to conduct their transactions. They would take their customers' money, bundle it together, deposit it into bank accounts, and send it abroad, where it was separated and distributed according to the customers' instructions.
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To their credit, some banks recognized that these businesses were unlicensed, and therefore illegal, and refused to do business with them. However, at least three New York banks allowed these illegal businesses to operate using bank facilities, even though the highly questionable nature of their activities should have been obvious to the banks. Of course, had the banks truly known their customer, and thus been positioned to assess whether their customer's activity was suspicious or not, they would have known that these businesses did not have licenses to transmit money, and thus were operating illegally.
In the case of these three businesses, some of the money involved was likely sent home by immigrants to support their families. We know that because some of the amounts were small, a couple of hundred of dollars. Other transactions, however, involved large sums of cash. Because these businesses were unlicensed, they did not file CTRs or SARs, and did not make and keep the records they were obligated to about their customers' activities; for that reason it is nearly impossible to sort out the legitimate transfers from the illegitimate. What we do know, however, is that if someone wanted to move a lot of money out of New York without garnering regulatory or law enforcement scrutiny—and plenty of criminals want to do just that—these illegal businesses provided an open window through which to do it.
Money laundering poses a real threat to our collective well-being because it facilitates a wide range of criminal activities, from tax evasion to international terrorism. Like other criminal organizations, international terrorist networks need money to function. Terrorist networks need funds for training and supplies and to support their operatives around the world; they also need to able to receive and transmit funds across national borders, including our own. In investigations at the Manhattan District Attorney's Office, we have seen tens of millions of dollars transmitted to and from parties in the tri-border region of Brazil, Argentina and Paraguay, which is notorious for supplying funds to terrorist groups in the Middle East.
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OFFSHORE JURISDICTIONS AND SECURITIES FRAUD
I also want to comment on the role that offshore jurisdictions play in securities fraud cases here in the Untied States. Many of the New York-crimes investigated by IDC involve ''offshore jurisdictions,'' tax havens such as the Cayman Islands, the Bahamas, and the British Virgin Islands, which have no significant economies of their own, but use their strict bank and corporate secrecy laws to attract money from more developed countries. Because of their unwillingness to share information with lawful authorities from other countries, these jurisdictions present extraordinary difficulties for regulators and law enforcement authorities in the United States and other developed countries. For the same reason, they present opportunities to criminals.
Companies and accounts in the tax haven countries often play an integral role in a securities fraud scheme. For example, the Manhattan District Attorney's Office has convicted four New York stockbrokers of using MasterCards issued on offshore bank accounts to launder more than $750,000 realized from fraudulent stock deals. The proceeds from the stock fraud were paid to the brokers into accounts at the Leadenhall Bank & Trust in Nassau, the Bahamas. The brokers, who have since been convicted of felonies and barred from the securities industry, withdrew more than $750,000, using MasterCards at ATM machines in New York City and Atlantic City, New Jersey, among other places.
Notably, it is not only stock fraudsters that use offshore debit cards for illegal ends. In July 2004, we convicted a doctor for evading taxes on $300,000 of income, $126,000 of which he put into an account at Leadenhall in the form of checks, ostensibly in payment of rent for his office. In fact, he owned the building in which he had the office. Like the crooked brokers, the doctor used a MasterCard to withdraw money at ATMs and to make purchases with the offshore funds. The doctor also used offshore accounts and a shell company to shelter another $76,000 of income that he failed to report.
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In another case, a real estate agent used an account at Leadenhall to hide income of approximately $75,000 from her real estate business that was earned in New York. The real estate agent sent the money to the Bahamas by use of Fed Ex packages, the charges for which appeared on her American Express card. The defendant accessed the offshore account from the United States by use of a debit card that she used to make purchases in Manhattan and elsewhere.
As part of the offshore credit card investigation, which was conducted with the assistance of the New York State Department of Taxation and Finance, we learned that, in 2001, 115,000 separate offshore MasterCard accounts were used in the New York, New Jersey, and Connecticut area. The MasterCards were used in 2001 to access over $100 million that had been deposited in banks located in at least seventeen secrecy jurisdictions, including the Bahamas, Barbados, Belize, and the Cayman Islands.
The same offshore tools available to the above-referenced stockbrokers, doctor and real estate agent to commit relatively simple securities crimes and to evade taxes are also used to conduct more sophisticated schemes. For example, in a 2003 case, a solicitor from London, England, Andrew Warren, pled guilty to Attempted Enterprise Corruption, a class ''C'' New York felony, in connection with a stock fraud conspiracy operating in Great Britain and New York.
The criminal enterprise was run by principals of Westfield Financial Corporation, a broker-dealer on Park Avenue, in Manhattan. In the scheme, securities were sold pursuant to SEC Regulation S—which permits the sale of unregistered securities to foreign investors—to some twenty companies chartered in Liberia and the British Virgin Islands, and ostensibly managed from the Isle of Jersey, one of the Channel Islands. In fact, the offshore companies were merely nominees for insiders from the New York metropolitan area, who bought the Reg S stock on margin, ran up the price in trading between the Jersey companies, and used the stock they bought on the cheap to cover their own short sales, cashing in for millions at the expense of innocent investors and the companies that issued the stock.
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In November 2002, two other lawyers were convicted on charges of participating in a related scheme. The defendants in that case, Stuart Creggy and Harry J.F. Bloomfield, were convicted of conspiracy and falsifying business records after a six-week trial.
Creggy was a senior partner at the law firm of Talbot Creggy in London. He was also a part-time Magistrate Judge for Westminster and Kensington, in London. Bloomfield had been a lawyer in Montreal, Canada, a senior partner in the Bloomfield, Bellemare law firm, a Queen's Counsel, and an honorary counsel for the country of Liberia. Creggy and Bloomfield recruited others, including Liberian diplomats, to pretend to be the owners of the off-shore companies. The off-shore companies, established in Liberia and the British Virgin Islands, among other places, were used by the defendants' clients for various purposes, including the Regulation S scheme that was the subject of Warren's guilty plea.
Another securities-related matter involved an offshore investment fund known as Evergreen Security, Ltd., which was chartered in the British Virgin Islands and had offices in the Bahamas. Investors in Evergreen, which was actually managed from offices in Orlando, Florida, were promised an annual return of 9% to 10% on funds nominally held in offshore trusts organized in the Bahamas and Costa Rica. In fact, Evergreen was run as a Ponzi scheme, with the money from later investors being used to pay earlier investors. Thousands of Evergreen investors were defrauded. No doubt, it was the allure of investments in lucrative offshore trusts, marketed to the public as ''asset protection trusts,'' that attracted so much money to Evergreen in the first place. Investors lost $330 million in fraud; Evergreen filed for bankruptcy in January 2001.
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Five defendants were convicted in New York in connection with the thefts from the Evergreen fund totaling over $34.2 million. In each of the thefts, money was transferred from Evergreen to offshore shell companies controlled by one or more of the defendants. Other defendants, including one of those convicted in New York, were convicted in federal court in Tampa, Florida.
Offshore entities also played a central role in facilitating the notorious accounting fraud at Enron Corporation. In July 2003, the Manhattan District Attorney's Office, along with the SEC, announced a settlement with J.P. Morgan Chase and Citigroup, concluding an eighteen-month investigation into $8.3 billion in loans that had been structured by the banks in such as way that permitted Enron to account falsely for the transactions in its financial statements.
Our investigation showed that the loans to Enron were structured as prepaid forward commodities transactions between the banks, Enron, and ostensibly independent counterparties offshore. In fact, the offshore parties were so-called ''Special Purpose Entities'' located in the Isle of Jersey and the Caymans which the banks controlled and which were involved in the deals only to make them look like commodities trades; this was done to accommodate Enron's desire to be able to account for the revenue as cash flows from operations rather than cash from bank financings. These sham transactions contributed to Enron's collapse, which had disastrous effects for thousands of Enron's employees and shareholders.
As Mr. Morgenthau points out in his public remarks, which themselves are the source of the vast majority of information provided herein, there are international aspects to many, if not most, sophisticated frauds. In today's global economy, it is increasingly rare to encounter a significant financial crime that is strictly a local matter. Prosecutors pursue these cases to extent we can, but criminal investigations and prosecutions are far from a complete answer to the problem.
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Law enforcement cannot do the job of policing illegal money flows alone. We need the cooperation of the money service and banking industries to know who they are dealing with and to help identify other businesses that may be operating illegally. And, we need the regulators to make certain that money transmitters and the banks are doing what the law requires. Finally, we need authorities here in the United States and abroad to make it more difficult for criminals and other lawbreakers to avoid proper scrutiny by conducting their financial affairs in offshore secrecy jurisdictions. These are difficult problems, and law enforcement needs all the help we can get.
Mr. ROHRABACHER. Thank you very much. I know we are going to have quite a few questions for you when we return, but maybe not as tough as questions we will have for Mr. Herde.
You may proceed, Mr. Herde.
STATEMENT OF MR. MICHAEL HERDE, MANAGING DIRECTOR, REGION AMERICAS HEAD OF COMPLIANCE, UBS INVESTMENT BANK
Mr. HERDE. Mr. Chairman, thank you for inviting UBS to this hearing.
Mr. ROHRABACHER. Would you mind moving a little closer to the mike?
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Mr. HERDE. Thank you for inviting UBS to this hearing. I am Michael Herde, Head of Compliance for the UBS Investment Bank in the Americas.
UBS is a New York Stock Exchange listed company with more than 26,000 employees in the Americas operating through 420 offices.
I will discuss our AML (Anti-Money Laundering) compliance program, our global sanctions policy, and our failings in connection with the ECI program.
Last year, we adopted an unparalleled worldwide economic sanctions policy. The policy combines EU, United States, UN and Swiss measures against companies, regimes, terrorists and others, and applies all of them globally to our businesses.
UBS operates a comprehensive anti-money laundering program. I would like to highlight three aspects of this program.
First, know your customer. Knowing your customer is the first line of defense in preventing money laundering. UBS does not accept business with accounts in fictitious names. It does not accept accounts with businesses that are shell companies and it does not accept business with money changers.
We have global standards on the identification of client beneficial ownership, on clients connected to higher risk countries, and on politically exposed persons. We seek to understand the source of each client's assets.
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Second, monitoring. UBS has invested heavily in intelligent technology and human resources to implement our controls. This technology includes sophisticated monitoring tools designed to screen payments to comply with our sanctions policies and to identify suspicious transactions.
Third, culture of compliance. Our employees in the United States and all over the world appreciate the important role that financial institutions play in the prevention, detection and reporting of money laundering.
We provide regular training to employees and a firm-wide culture that emphasizes compliance with our policies and the law.
Mr. Chairman, I want to make clear that when we suspect money laundering activity we take action. We investigate the activity, report our suspicions, and we support law enforcement authorities all over the world in their investigations.
United States authorities, for example, may access Swiss Bank customer information through well established processes for mutual legal assistance. Senior United States officials have repeatedly observed that Swiss financial privacy laws are not an obstacle in the war on terror.
UBS is committed to being a strong ally in the fight against money laundering and terrorist financing. I would like to take a moment to discuss our failings in connection with the ECI program.
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Between 1996 and 2003, UBS participated in the Federal Reserve Bank's Extended Custodial Inventory program. One aim of the ECI program was to exchange old U.S. bank notes for new ones, which are more difficult to counterfeit. UBS acted unacceptably in its operation of the ECI facility. Some former employees engaged in bank note transactions with countries that were subject to U.S. economic sanctions. These transactions were improper in light of our obligations to the Federal Reserve Bank of New York. UBS deeply regrets these failings.
UBS, with the assistance of Swiss counsel and United States counsel, conducted a full investigation and fully cooperated with the investigations of United States and Swiss authorities. Our investigation found no evidence that any of these bank note exchanges involved money laundering or terrorist financing.
UBS has learned a great deal from its ECI-related failings. First, we accepted full responsibility for the ECI matter and took severe disciplinary action, including dismissing several employees.
Second, we ended our international bank notes trading business.
Third, as you noted, we paid a $100 million civil penalty to the Federal Reserve and accepted additional inspections and a reprimand from the Swiss Federal Banking Commission. Our actions were the subject of comprehensive hearings in both the House and Senate in 2004.
More recently, UBS adopted a worldwide economic sanctions compliance program. Our new policy tracks economic sanctions imposed by the United States, Switzerland, the EU and the UN and applies them all globally to all of our businesses. We took this step for a number of reasons, including the increasing globalization of our business.
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As a result, UBS has decided to exit business in Iran, Cuba, Syria, Sudan, North Korea, and Myanmar. Limited business, where permitted by law, including United States law, is accepted. No other non-U.S. bank has to our knowledge taken a similar step.
To conclude, Mr. Chairman, first, UBS deeply regrets its failings related to the ECI program. It has sought to learn from them. Second, UBS has developed what we believe is a leading global sanctions compliance program and is committed to maintaining a leading AML compliance program. Third, UBS is committed to participating effectively in the fight against money laundering and terrorist financing.
Thank you and I would be happy to answer any questions to the best of my ability.
[The prepared statement of Mr. Herde follows:]
PREPARED STATEMENT OF MR. MICHAEL HERDE, MANAGING DIRECTOR, REGION AMERICAS HEAD OF COMPLIANCE, UBS INVESTMENT BANK
Mr. Chairman, thank you for inviting UBS to participate in this hearing regarding international banks and their role in the global fight against money laundering. I am Michael Herde, a Managing Director and Head of Compliance for the Americas, at UBS' Investment Bank. Previously I was Head of Compliance for the Investment Bank in Europe, the Middle East and Africa, based in London. As you may know, Mr. Chairman, UBS AG is a financial institution incorporated in Switzerland and operating globally, including through over 420 offices in the U.S. UBS employs more than 70,000 employees globally, with over 26,000 in the U.S. In addition to investment banking, we offer wealth management, asset management, and business banking services. Our three primary regulators are the Swiss Federal Banking Commission, the Federal Reserve System, and the U.K.'s Financial Services Authority.
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We are pleased to have the opportunity to discuss our firm's extensive anti-money laundering and compliance programs, and in particular, our groundbreaking global sanctions policy. In the words of our Chairman, Marcel Ospel,
We recognize that for criminals to benefit from their crimes, the proceeds derived must be secure and accessible to them, and banks are naturally targeted to provide these services. Banks like UBS have long recognized the need for concerted action in denying criminals access to our services. We also recognize the more profound need to protect the integrity of the global financial system of which we form part.
September 2004
We believe that UBS' anti-money laundering policies and procedures are among the most stringent in the world. We know, however, we must always be looking for ways to further improve our operations as new threats are posed by those wishing to test the integrity of the world financial system. With this in mind, in 2005, we adopted an unparalleled, uniform, worldwide economic sanctions policy that combines U.S., E.U., U.N. and Swiss measures against countries, regimes, terrorists, narcotics traffickers, and proliferators of weapons of mass destruction. We apply these measures collectively and globally to all our businesses.
UBS' AML PROGRAM
UBS operates a comprehensive series of anti-money laundering controls focusing on key risk areas and dedicates substantial resources towards preventing criminals, corrupt officials, and terrorist financiers from using the firm's services. These compliance initiatives are designed to meet the highest international standards, including those established by the USA PATRIOT Act, the EU 3rd Money Laundering Directive, and the Swiss Money Laundering Ordinance.
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I will highlight three primary areas that we focus on as we implement our programs:
1. Know Your Customer: Knowing our customers and their financial profiles is a critical first step in assessing our relationships with current and potential clients. As such, UBS does not accept business with anonymous accounts, accounts in fictitious names, or shell companies or trusts lacking transparency as to the beneficial owner. As part of our standard process, every effort is made to identify the source of account assets. We have global standards on the establishment of beneficial ownership and dedicated compliance teams focusing on clients connected to countries of higher risks and on Politically Exposed Persons. In short, we go to great lengths to know potential customers before deciding whether or not to do business with them.
2. Monitoring and Intelligence: We need the best intelligence to assess our current and potential customers. Therefore, UBS has made substantial investments in intelligent technology and human resources to implement our controls. This technology includes sophisticated monitoring tools designed to screen payments to comply with our sanctions policy and to identify suspicious transactions. UBS now employs approximately 1,750 legal and compliance professionals, of which a substantial number are focused primarily on money laundering prevention.
3. Culture of Compliance: Having the best policies is important, but they can only be truly effective by establishing a culture among our employees to embrace and implement these policies. Our employees in the United States and all over the world, from senior management on down, appreciate the important and unique role that financial institutions must play in the prevention, detection, and reporting of money laundering. We provide regular training of employees and a firm-wide culture that emphasizes compliance with our policies and the law.
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UBS is a founding member of the Wolfsberg Group. The Wolfsberg Group is named after the UBS training center in Switzerland where, in 2000, groundbreaking global industry AML standards on private banking were formulated. The Wolfsberg Group is an association of twelve global financial institutions including Citigroup, Goldman Sachs and JP Morgan Chase, working together to develop state-of-the-art financial services industry standards in the areas of Anti-Money Laundering and controls to Counter Terrorist Financing. The Group has produced statements of industry standards on areas such as correspondent banking, suppression of financing of terrorism, and dealing with Politically Exposed Persons.
Mr. Chairman, I want to make clear that when we suspect money laundering activity, we take action. We investigate potential suspicious activity, file suspicious activity reports, and we support law enforcement authorities all over the world in providing requested banking information. UBS has no higher priority than to be a strong ally in the fight against money laundering and terrorist financing.
UBS fully supports law enforcement authorities around the world against money laundering and the war against terrorism. For example, U.S. authorities may obtain access to Swiss bank customer information through well-established, cross-border channels allowing for mutual legal assistance. As a result, senior U.S. officials have repeatedly observed that Swiss financial privacy laws are not an obstacle in the war on terror. For example, speaking in the wake of September 11, 2001, former U.S. Attorney General John Ashcroft said:
The Swiss banking system is well known as an example to the world. But one of the myths once held around the world was that the system was somehow incapable of acting to support law enforcement against terrorists and organized crime. That myth has been dispelled by the constructive conduct of the Swiss government and the Swiss banking system.
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Switzerland is an intersection on the world's financial highways, and Switzerland operates this intersection very responsibly.
The world should take note of the responsible way in which the Swiss have acted . . . The world is a safer place because of the Swiss approach.(see footnote 1)
UBS welcomes the close working relationship it has developed with U.S., Swiss, and other law enforcement authorities, and we will continue to support their efforts.
ECI PROGRAM FAILURES
Our commitment to build a cooperative relationship with U.S. banking regulators is evident in the work undertaken by our senior management in 2003 and 2004 in response to the discovery of failures in our administration of a contract with the Federal Reserve Bank of New York. From March 1996 through October 2003, under a contract with the Federal Reserve, UBS participated in the Extended Custodial Inventory Program, known as ECI. The ECI has several purposes, one of which is to exchange old U.S. banknotes, held internationally, for new U.S. banknotes, which are more difficult to counterfeit.
UBS acted unacceptably in operating its ECI facility. In breach of the ECI contract, some of our employees engaged in banknote transactions with countries that were subject to U.S. economic sanctions. UBS deeply regrets these failures.
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Upon learning of this problem, our senior management instituted its own internal investigation and fully cooperated with the investigations underway by the U.S. and Swiss authorities.
Our investigation has found no evidence that any of these banknote exchanges involved money laundering or terrorist financing.
Our firm has learned a great deal from its ECI-related challenges. We have committed ourselves to enacting the proper remedies to correct our deficiencies and improve our compliance programs.
First, we accepted full responsibility for the ECI matter and we instituted severe disciplinary actions, including dismissing several employees.
Second, we ended our international banknotes trading business.
Third, UBS was sanctioned by our U.S. and Swiss regulators. We paid a $100 million civil penalty to the Federal Reserve and accepted additional inspections and a reprimand from the Swiss Federal Banking Commission. Our actions were the subject of two comprehensive hearings in both the House and Senate in 2004.
More recently, UBS adopted a uniform worldwide economic sanctions compliance policy. Our new policy tracks economic sanctions imposed by the United States, Switzerland, the European Union, and the resolutions of the United Nations' Security Council. It applies them collectively and globally in all of our businesses in all jurisdictions in which we operate.
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As part of this unique initiative, UBS has made the business decision to exit business in Iran, Cuba, Syria, Sudan, North Korea, and Myanmar, with limited exceptions and only where they are permitted by law, including U.S. law. Permissible transactions include activities that are specifically authorized by law or exempt from the economic sanctions: for example, financial transactions in support of authorized humanitarian work by international organizations in Sudan.
To conclude, Mr. Chairman:
First, UBS deeply regrets its failures relating to the ECI program.
Second, we have developed what we believe is a leading global sanctions compliance program, and we are committed to maintaining one of the most stringent AML programs in the industry.
Third, UBS is committed to being an effective participant in the fight against money laundering and terrorist financing, supporting efforts to prevent use of the international banking system to further illicit activities.
Thank you for your attention to our testimony today, I will be pleased to respond to any questions you may have.
Mr. ROHRABACHER. How long have you been with UBS?
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Mr. HERDE. I joined the bank in January 1999.
Mr. ROHRABACHER. So about 6 years, 7 years now?
Mr. HERDE. Yes, sir.
Mr. ROHRABACHER. All right. Thank you.
I will proceed with a few questions here.
Mr. Middlemiss, you have charged several of these banks with crimes and you have actually convicted and had recent convictions. You talked about $100 million that went from Brazil into this bank in New York and then it was headed for Vietnam.
What happened to the money?
Mr. MIDDLEMISS. Well, first of all, Mr. Chairman, with respect to money coming from Brazil and going to Vietnam, let me just clarify that those two sets of cases are not linked, they are two separate cases, each of which involved money remitters.
Mr. ROHRABACHER. Okay. When you get a bad guy and you have found somebody trying to transfer money, what happens to the money?
Mr. MIDDLEMISS. Well, I can give you two examples. With respect to the money that went to Vietnam, to state the obvious, the $132 million that was transmitted went to Vietnam. In fact, money remissions I think is perhaps the second largest component of the Vietnamese economy. So, for example——
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Mr. ROHRABACHER. Let us not move on. So Vietnam is now becoming a destination place for dirty money? Is that right?
Mr. MIDDLEMISS. I think the point is, Mr. Chairman, that we do not know how much of the $132 million is dirty or not dirty. It would be unfair to say that the entire amount is in fact dirty. The problem and the E felony——
Mr. ROHRABACHER. We do know that it is not transparent, right? They are seeking to go through New York and other ways to try to make this not transparent.
Mr. MIDDLEMISS. This is the gravamen of the offense. The business itself is prosecuted because it is illegally moving the money and not keeping to the regulatory requirements.
Mr. ROHRABACHER. The chances of it, it is possible that somebody just does not want to pay their taxes, but it is also possible that this could be really dirty money. This could be organized crime, gangster money from Brazil, drug money, any number of things, or it could be just somebody not wanting to pay their taxes, but it is still dirty money.
Mr. MIDDLEMISS. Yes, that is exactly the point. And it is very difficult because these corrupt enterprises do not keep the proper records to drill down and get to the ultimate person who is transferring the money and to identify the reasons why.
Mr. ROHRABACHER. So to go back to the question, is Vietnam becoming a center for receiving dirty money?
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Mr. MIDDLEMISS. I certainly cannot tell based on the data that I have in front of me, based on these cases. I can tell you that it is fair to infer that large sums of money, we know not from where, are being sent to Vietnam. I can tell you that I suspect that businesses in New York may well be funneling off their assets and not paying taxes on the money that they earn and sending it directly and secretly to Vietnam.
Mr. ROHRABACHER. And now what we need to do also, then, is find out how many banks in Switzerland or other places get transactions from Vietnam, right?
Mr. MIDDLEMISS. Well, I think what you are leading me to is that I would have no idea how to do that because I would not be able to get records from the Vietnamese bank.
Mr. ROHRABACHER. Right. Correct. And, again, back to the dirty money idea, let us say you get somebody and you finally have got them, their money is somewhere, it is probably in some bank somewhere, does the bank end up with the money? You do not know how much it is, you do not know——
Mr. MIDDLEMISS. The banks that we have looked at and the tools that we have in New York are slightly different than those available to Federal prosecutors. For example, one of the money remitters, going back to the Brazilian set of cases, was a company called Transmar and essentially it was a doleiro in Brazil. It was in the business of helping its Brazilian clients illegally move money out of Brazil. The money went into the New York Transmar account, and millions of dollars flowed through the account. Sometimes, the money went to other dollar dealers. Sometimes, it went offshore to the Caribbean. Sometimes it went to other accounts, but at the end of the day, when we got to the account, despite the fact that—I think the amount is listed I my remarks, but millions of dollars had flowed through the account, we were left with $158,000 that we could seize.
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Mr. ROHRABACHER. I see.
Mr. MIDDLEMISS. There was no money there.
Mr. ROHRABACHER. The rest of the money is off in the electronic world of somebody's account somewhere.
Mr. MIDDLEMISS. Exactly.
Mr. ROHRABACHER. In the never never land of international banking.
Mr. MIDDLEMISS. What we have tried to do is shut one of the windows through which that money can flow.
Mr. ROHRABACHER. I guess what I am asking you, can we assume that some banks have ended up with a lot of money throughout this process, in the process and in the end?
Mr. MIDDLEMISS. Yes.
Mr. ROHRABACHER. How much? We are saying a lot of money, let us say $100 million, how much of it is going to end up—can you estimate? Even if they are not caught, of course, you have a certain amount of money that is being made by the client and banks are making profit all the way along the line on this, right? That is why they are doing it. They would not be doing it because it is a public service.
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Mr. MIDDLEMISS. Yes, I think that with each particular transaction that takes place, there is a fee. But also, for example, with Israel Discount Bank of New York, one of the reasons why these transactions were enabled was so that the bank itself could grow its presence in South America—so that it could facilitate transactions with people that they wanted to have other relationships with, perhaps more profitable ones, such as loaning them money, rather than merely doing them the service of wiring their money from place to place.
Mr. ROHRABACHER. So we have people at these financial institutions who are making money and that is off bad money, so to speak, but then we have bad guys who the reason they want to sometimes take money from one place to another is so they can accomplish evil things, like blowing up buildings or destroying people in certain places that they do not like them or growing poppies or cocoa or whatever, which is all facilitated by this transfer.
Mr. MIDDLEMISS. That is correct. And, again, it is hard to get to the ultimate bad guy, although because we have been able to share information with our Brazilian colleagues, our Brazilian prosecutors and police officers have taken information that we have developed in New York and successfully prosecuted a lot of bad guys in Brazil.
Mr. ROHRABACHER. So we have a lot of folks in $2000 suits and driving fancy sports cars, pillars of their community in different parts of the world who are bankers but are really accomplices in some of the most horrific crimes we could imagine. Is that correct?
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Mr. MIDDLEMISS. I do not think that is an unfair statement. Yes.
Mr. ROHRABACHER. All right. That is all I needed to hear.
Let us get over to Mr. Herde now.
Nothing of what I just said needs to reflect badly on you or your bank, first of all, let me note, but let me ask about a specific thing.
Your bank was fined $100 million for violating the Extended Custodial Inventory program. Now, can you explain to me why the employees of your bank chose to violate the program? What did they expect to get out of it? Why would they do that?
Mr. HERDE. The investigation that was conducted with both United States and Swiss outside counsel reached the conclusion that none of the employees involved stood to gain personally in a pecuniary way from their transgression.
Mr. ROHRABACHER. That makes it even more damning on the bank, I might add. If they did not do it for their own personal gain, you would understand that they were gaming their employer, but they must have thought that your bank was going to be the beneficiary, then.
Mr. HERDE. At best, the investigation reached the conclusion that those employees had the misunderstanding, I should say, that operational efficiencies in the short term would be in the interests of the bank. Those employees have been fired. Our senior management has definitively spoken and made clear that operational shortcuts are not an acceptable means of advancing the bank's business.
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Mr. ROHRABACHER. Why would they think it would be in the interests of your bank?
Mr. HERDE. They thought they were saving some money.
Mr. ROHRABACHER. Saving some money?
Mr. HERDE. They thought that by conducting the ECI facility in the way that they did they were saving literally tiny sums of money in operational processes.
Mr. ROHRABACHER. What was the level of business that your bank held in Iran and Cuba outside of the ECI program?
Mr. HERDE. Specifically—I am not sure if I can recall specifically the total amounts. If you took all the countries where there are U.S. economic sanctions involved and put them together, whether by assets or revenues, it would amount to about 1/20 of 1 percent of our overall business, so it is a tiny sum.
The scale of businesses outside of the ECI program relative even to these particular areas were 1.5 percent of——
Mr. ROHRABACHER. But in terms of your management of that program, this was a huge percentage of those particular accounts. Maybe a minuscule amount of the overall accounts, but of these two accounts, Iran and Cuba, what we have here is probably—because they are so minuscule in relationship to the ECI, the ECI must have been a significant part of your dealings with them, right?
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Mr. HERDE. Certainly there were large volumes of transactions with those two countries or the banks in those two countries through and related to the ECI program.
Mr. ROHRABACHER. And then would not these employees who lost their jobs, they were the ones who were just in charge of those two countries for the ECI account, right?
Mr. HERDE. No, sir. The ECI program as administered by the U.S. Government sought to recirculate new U.S. dollar bills into the international economy. Our business, I think, was $170 billion. I think that we did. And we did that with France, Germany, Italy, Spain. Also Cuba, also Iran. That was wrong, no question. And the individuals who were involved in doing this operational business on a day-to-day business did the whole program, ECI, non-ECI, all of the physical bank notes trading business.
Mr. ROHRABACHER. Well, were the employees that we are talking about here, were they trying to protect UBS's business outside of the ECI program by giving these bank notes to Iran and Cuba? Was there some sort of business that they were trying to promote or to protect that your bank is involved in in order to transfer these notes? Was there any indication of that?
Mr. HERDE. The best and most solid indication that we have is that—and this is what the investigation, I believe, found, was that the employees thought that they were gaining some operational efficiencies primarily.
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Mr. ROHRABACHER. But not necessarily protecting investments in other economic activities that the bank was involved in in Cuba and Iran.
Mr. HERDE. I do not think there has been any evidence to suggest that there is a linkage between these businesses and the other businesses.
Mr. ROHRABACHER. I will return. I have used more than my time, but we will have a second round of questioning.
Mr. Delahunt, go right ahead.
We have been joined by Mr. Royce, Chairman of the Terrorism and Non-Proliferation Subcommittee.
We appreciate your presence here, Ed.
Mr. ROYCE. Thank you, Mr. Chairman.
We will have Mr. Delahunt now and proceed.
Mr. DELAHUNT. Mr. Middlemiss, it would appear to me, and I guess I am stating the obvious, that the significant issue here is the issue of secrecy and lack of transparency. In your experience, has there been any improvement in terms of the international relationships that currently exist in terms of more transparency?
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Mr. MIDDLEMISS. In terms of more transparency?
Mr. DELAHUNT. Are we trending in the right direction, I guess is the question. I know there exists a convention, but reading your testimony and that of Mr. Moscow and recognizing the experience that you have, how do we go about achieving the level of transparency that would be necessary so that the issue of money laundering and our concerns, which are justifiable, would be obviated? Give me the solution.
Mr. MIDDLEMISS. I wish I could do that. I wish there was an easy answer and I think if there was one, someone smarter than me would have already given you that answer. I can talk about the importance of information such as the beneficial owner of a trust needing to be available. I can talk to you about the importance of there not being bearer share corporations and suggesting to you that——
Mr. DELAHUNT. But this would have to be achieved in conjunction with other nations, it would have to be done via a new international convention. Is that a fair statement?
Mr. MIDDLEMISS. I think it would be, or one of the ones that exist presently.
Mr. DELAHUNT. Amending or enhancing?
Mr. MIDDLEMISS. Right. But certainly asking a prosecutor in New York now to do our job, which essentially is to trace the money, in the current international climate—that is impossible to do.
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Mr. DELAHUNT. That is the reality. It is impossible.
Mr. MIDDLEMISS. There are significant difficulties tracing money around the world——
Mr. DELAHUNT. Particularly if we have hostile relationships with another nation state.
Mr. MIDDLEMISS. Not necessarily even hostile relations, but you still have to go through an inordinate amount of paperwork and time to get the most basic records out of certain countries.
Mr. DELAHUNT. Just for the record, I would note that under Section 311 of the USA PATRIOT Act, there have been eight international banks that have received so-called special measures, one in Macau, two in Latvia, First Merchant Bank of the Turkish Republic of Northern Cyprus, the Info Bank of Belarus, a bank in Syria, a bank in Lebanon, a bank in Burma, the Asian Wealth Bank, and the jurisdictions we are talking about are Burma in November 2003, Ukraine in 2002, and I did not even know that this nation existed, Nauruo in December 2002. As the Chairman indicated in his remarks, he was going to be educated, but I can only see this issue being resolved by an agreement on an international level to enhance transparency and removing these impediments that allow the kind of progress, I think, that we all would embrace.
Have you had any dealings with OFAC?
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Mr. MIDDLEMISS. Not directly, no.
Mr. DELAHUNT. Okay. Let me ask you a question. Is it customary for a wholly-owned subsidiary of a U.S. company to use offshore banks essentially as a mail drop for their purposes?
Mr. MIDDLEMISS. I cannot speak as to whether or not it is customary, although I believe I can think of an example where I saw something at least very similar to that.
Mr. DELAHUNT. If you could, then, relate that example. I am referring, of course, to the use of—I guess it was the Cayman Islands for a subsidiary of Halliburton to be utilized, I guess, according to this report, as a mail drop for the parent company of Halliburton.
Mr. MIDDLEMISS. I am not familiar with that particular fact pattern, although I can give you an example of a similar situation.
Mr. DELAHUNT. As a prosecutor, would that raise concerns for you, whether there was a potential violation of the sanctions law?
Mr. MIDDLEMISS. Is that something that I would look at?
Mr. DELAHUNT. Yes.
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Mr. MIDDLEMISS. I think as a New York County prosecutor, perhaps not. As a Federal prosecutor, I would hope so.
Mr. DELAHUNT. As a Federal prosecutor, you would hope so. If in fact at that particular office in the Cayman Islands, if there was nobody there—let me give you a hypothetical. If there was nobody there, there was an office and a telephone and the phone never rang and mail was forwarded to the parent company that was headquartered or at least had an office in Dubai, and we are familiar with Dubai, we have been reading about Dubai for the past month or so, and this company was doing business in Iran, a rogue state, providing some $40 million worth of services to enhance their ability in the energy field, and the law stated that the subsidiary had to operate independently, and that is the legal term, would you infer that maybe the parent company was operating there rather than the subsidiary and that the subsidiary was a fiction and that this company was doing business with a rogue nation, a member of the Axis of Evil club? Would that come to your mind?
Mr. MIDDLEMISS. I think it is an issue——
Mr. DELAHUNT. If you were a Federal prosecutor, Mr. Middlemiss.
Mr. MIDDLEMISS. Well, actually, with respect to being a state prosecutor, the issues that you raise are very similar to ones that involve the Enron case, where certain entities that were shams were used to take part in transactions that were designed to bolster Enron's books and records in real ways.
Mr. DELAHUNT. Right. Right.
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Mr. MIDDLEMISS. With respect to the issue of the subsidiary, I cannot speak to it.
Mr. DELAHUNT. I cannot, either. I would like to hear, though, from representatives of the parent company and the subsidiary, but I have a strong suspicion that I will not have an opportunity to ask a representatives of either Halliburton or Halliburton's subsidiary that was doing business to the tune of tens of millions of dollars with a rogue state, but with that I will yield back.
Mr. ROHRABACHER. Thank you very much.
If somebody is transferring $100 million from Brazil to a bank in New York and then it goes on to Vietnam, how much money does the bank in New York make on doing that?
Mr. MIDDLEMISS. I cannot state with specificity, Mr. Chairman, but I can say that with respect to wire transfers I believe that banks make a very small amount of money based on that business alone.
Mr. ROHRABACHER. Okay. So you are not talking about $10 million to transfer $100 million, you may be talking about $100,000?
Mr. MIDDLEMISS. No, I do not think so. I think it is less than that.
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Mr. ROHRABACHER. Less than that?
Mr. MIDDLEMISS. Less than that. Yes.
Mr. ROHRABACHER. All right.
Ileana?
Ms. ROS-LEHTINEN. Thank you so much.
Mr. Rohrabacher, thank you very much for letting me participate in your Subcommittee hearing on this important topic and I look forward to being a part of the upcoming hearings as well.
Mr. Herde, I had some questions for you. In your testimony before us today and in your written testimony as well, you use these exact phrases: Its failings, its failures, acted unacceptably, improper actions, deficiencies. Then, after Mr. Rohrabacher's questions, you used the phrase operational shortcuts, and finally the word wrong. Nowhere is the word illegal.
Did you pay a $100 million for deficiencies, shortcuts, or were you paying a fine because of illegal transactions? Was UBS breaking the law?
Mr. HERDE. We owed certain obligations to the Federal Reserve Bank of New York. Those obligations——
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Ms. ROS-LEHTINEN. Did UBS commit an illegal act when it was involved in these ECI transactions with OFAC sanctioned countries? Was it illegal for UBS to be involved in these operations?
Mr. HERDE. Non-United States banks and foreign incorporated subsidiaries of United States banks may permissibly engage in transactions, for example, with Iran. Had UBS conducted those transactions away from its ECI program, it would not have violated its obligations.
Ms. ROS-LEHTINEN. Why is it that you paid a $100 million civil penalty to the Federal Reserve and accepted the reprimand?
Mr. HERDE. Because we undertook certain obligations to the Federal Reserve Bank in New York and we failed to meet those obligations and that is a very serious matter. We also——
Ms. ROS-LEHTINEN. Were there two sets of books, one internal that UBS had, where, I imagine, the reports have indicated you kept good records of what Cuba was sending and other countries that are sanctioned countries that could not participate in this program—one set of internal records and another set of records that were given to the Federal regulators? Were there two sets of records?
Mr. HERDE. There was one set of records, but there was a series of false reports submitted by the bank staff that——
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Ms. ROS-LEHTINEN. False reports. Is that an illegal activity? Where does the word illegal come into play with what is going on? And I hope that it is in the past tense, but I am not so sure. It is so hard to pinpoint you and it has been so difficult after so many months to have you say what it is that you were involved with. And I do not mean you personally.
Mr. HERDE. Of course.
Ms. ROS-LEHTINEN. I meant the institution you represent.
Mr. HERDE. Of course. I stand here on behalf of UBS. There is no question. UBS is not happy with its conduct.
Ms. ROS-LEHTINEN. Not happy with its conduct. Well, what kind of conduct was it? Illegal conduct?
Mr. HERDE. We failed to meet our obligations to the Fed.
Ms. ROS-LEHTINEN. Failed to meet the obligations. So when the Federal regulators were investigating UBS, the level of cooperation by UBS, months and months and months of pushing UBS for money laundering, terrorism financing, illegally using the ECI program, having different books, and then UBS has the position that it was some minor employees, eight employees, perhaps, and they were fired and that the problem is taken care of.
If we could go back to the relationship between the ECI program and other business dealings with Cuba, for example, you are saying that you did not pursue ECI programs with the regime in the hope of getting more business out of it with Cuba or any other rogue states?
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Are you saying that you are satisfied with UBS's relationship with the Castro regime and does that mean that UBS had an extensive relationship with Cuban entities and the regime?
What is the nature or what was the nature of this transaction? Can I ask you again, did UBS employees violate the ECI program with the intent of enhancing UBS business relationships with Iran, Cuba or other rogue regimes?
Mr. HERDE. As I believe I indicated previously, the investigation concluded that a primary driver for the activity by the individuals who were involved was a misguided perception that operational efficiencies would be in the interests of the institution.
Ms. ROS-LEHTINEN. Misguided perception that operational efficiencies? I just want to make sure—misguided perception by the employees of UBS who were doing that transaction?
Mr. HERDE. Yes.
Mr. ROHRABACHER. The Chairman would like to interrupt. That does sound like very suspicious language, pardon me for being a former journalist, but when I hear a corporate representative use that description, I would be very suspicious of it.
Mr. HERDE. Let me be quite clear. UBS is not proud of its failings in connection with the ECI program. I use that word quite delib