Federal regulators today will propose rules to discourage money laundering that are less stringent than a draft released in October but could still be controversial.
The rules would require banks to verify the identify of their customers, determine their sources of funds, and check for suspicious transactions. But regulators clarified that the policy would apply to new customers and to any who make suspicious transactions. Banks would not have to re-check the identity of most existing customers.
Implementation, originally set for Oct. 1, 1999, will be delayed until April 1, 2000. And the Fed, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Federal Deposit Insurance Corp. will put the proposal out for 90 days of comment, 30 days longer than initially recommended.
With a General Accounting Office report just out that was highly critical of Citibank's anti-laundering program, banks' efforts to combat this type of crime are expected to generate hearings. But lobbyists and other Capitol Hill sources downplayed prospects for new legislation.
"We have a good story to tell about the steps the industry has taken to combat money laundering," said John J. Byrne, senior counsel and compliance manager for regulatory and trust affairs at the American Bankers Association.
"This is something that quickly grabs the attention of legislators and regulators," said Richard J. Whiting, general counsel to the Bankers Roundtable. "But I don't see legislation on the horizon. The problem in the Citibank case was that its existing rules were not followed. If those rules had been followed, the problems would have been caught."
The GAO report concluded that Raul Salinas de Gotari-brother of former Mexican President Carlos Salinas de Gotari-transferred up to $100 million of alleged drug money from 1992 through 1994 from Mexico to Europe via New York, using accounts and offshore shell companies established by Citibank's private banking department. The bank earned $1.1 million of fees off the Salinas accounts, which are now frozen.
Though not finding that Citibank violated any laws or regulations, the GAO faulted bank executives for violating internal policy by failing to conduct a financial background check of Mr. Salinas. Instead, the report said, Citibank relied on a referral from Mexico's agricultural minister.
A spokesman for Citigroup, the holding company for Citibank, reiterated that the company has not broken any laws. He said the GAO report contains factual errors but declined to comment further, saying the company is cooperating with federal investigators.
The Office of the Comptroller of the Currency has concluded that Citibank did not break any civil anti-laundering laws, but the Federal Reserve Board declined to comment, the GAO report said. Federal prosecutors in New York are conducting a criminal investigation.
The report and congressional investigations "reveal a disturbing vulnerability of private banking to money laundering," Rep. Spencer Bachus, the Alabama Republican who chairs House Banking's oversight subcommittee, said in a prepared statement. "Private banking, when abused, can be little more than authorized money laundering."
Sen. Carl M. Levin, who will be the ranking Democrat on the Senate's permanent subcommittee on investigations, has already called for hearings next year on the Citibank matter. Spokesmen for the Michigan Democrat as well as for members of the House and Senate banking committees said lawmakers will have to study the regulatory proposals in detail before deciding whether they are adequate to address the policy issues raised in the GAO report.
The proposed rule is expected to draw fire from smaller banks.
Robert G. Rowe, regulatory counsel at the Independent Bankers Association of America, said the proposal would be a "compliance nightmare.
"Larger banks already have monitoring systems in place so they can catch things that are out of the ordinary," he said. "But small banks don't."
Fed Governor Edward W. Kelley Jr. defended the rule, and noted that the comment period has been extended.
"I'm optimistic it will be a big help for everyone," said Mr. Kelley, who instructed the staff in 1996 to draft a know-your-customer rule. "This will make know-your-customer policies far more uniform across the country and far more comprehensive. It also will help alleviate any money laundering activities that might be occurring from nefarious activities occurring around the world."