Fraud Vulnerability Seen In 'Payable-Through'

NEW ORLEANS - Citicorp is abandoning "payable-through" accounts after the product cost the nation's largest bank $2 million.

The company's decision was announced just a week after the Federal Reserve warned bankers to watch customers who have check-writing privileges through foreign institutions.

Payable-through accounts are opened by a foreign bank that then sets up a series of subaccounts to allow its customers to write checks on a U.S. bank. Regulators are concerned that the accounts are used to launder money.

Jane L. Wexton, a vice president in Citicorp's legal department, told a compliance conference here last week that Citibank lost $2 million when a foreign bank customer kited checks via a payable-through account.

The government is investigating four payable-through accounts Citibank has opened for 12 foreign banks, according to Ms. Wexton.

"Citibank has made a decision to shut down a highly profitable business . . . payable-through accounts," Ms. Wexton said at the conference, which was sponsored by the Bank Administration Institute. "The person who was writing checks off of a subaccount in a foreign country started out with checks of $10,000, $20,000, $30,000, and $100,000. Finally, in the last couple of weeks of the deal, he took down $2 million."

Ms. Wexton admonished her audience to be more vigilant around holidays - including holidays in foreign countries - when criminals are more likely to strike. Citibank was hit the week between Christmas and New Year's, she said.

Banks must upgrade their fraud detection systems, she urged.

''We live today in an electronic age that permits the purchase and movement of value to cross borders and state lines in seconds, and we are using fraud-prevention controls that belong in the horse and buggy era," Ms. Wexton said.

Fraud detection at Citicorp is made more difficult by the company's size and scope: It employs 87,000 people in 94 countries, and it moves $98 trillion a year in electronic wire transfers.

"Electronics make . . . the criminals' job a lot easier," Ms. Wexton said. "You can be ripped off left and right."

But a bank can use computers to protect itself, she noted. Computers highlight anomalies that may show violations of regulations or bank policies.

For example, when dealing with cash-intensive businesses like movie theaters, a bank should guard against laundering by figuring out how much money should be coming in, she explained. The bank could simply multiply the number of seats by the maximum ticket price to set an upper limit.

Different banks have different weaknesses, so Ms. Wexton advised her audience to assess their own institutions' vulnerabilities.

As an example, she said, Citibank lost several million dollars in the last three years by following fake instructions that came in by fax.

Today, all faxed instructions are verified before a transaction is executed, she said. In addition, any fax that comes into Citibank after hours now is automatically routed to a machine in a locked room. That way, Ms. Wexton explained, no one wandering around the offices can pick up account numbers or other important information that might appear on a fax.

It's important, too, to check out every customer because the well- dressed Peruvian depositor may be a government scout trying to build a money-laundering case, she said.

"Undercover operations have become a major tool of law enforcement," Ms. Wexton warned.

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