The U.S. dragnet over suspected Russian money-laundering may have ensnared a niche bank in San Francisco.

Federal banking regulators began investigating Commercial Bank of San Francisco early this year after its Russian deposits spiked 10% between August and December, when Russian capital markets were in turmoil. At yearend 1998, 40% of Commercial Bank's deposits were from Eastern Europe. Now only 33% are.

This spring, the Federal Deposit Insurance Corp. issued a memorandum of understanding against the $167 million-asset bank. The bank continues to monitor all of its deposit accounts, especially those with above-average levels of activity.

Robert A. Fuller Jr., president and chief executive officer of Commercial Bank, confirmed that regulators are scrutinizing its high level of international deposits and the rapid growth of its private banking department. But he insisted that regulators do not suspect the bank's customers of money laundering.

To comply with the enforcement order, Mr. Fuller said Commercial Bank hired PricewaterhouseCoopers to perform a special audit to identify and reduce the potential for money laundering. That audit was completed in the second quarter, and he said no suspicious accounts were found.

Commercial Bank specializes in wire transfer, cash management, and foreign exchange services for Eastern European businesses.

It takes deposits from companies with annual revenues of $1 million to $10 million. The private banking unit caters mainly to Russian customers.

Commercial Bank began accepting deposits from Russian companies in 1994 when it hired Boris Goldstein, a former Eastern European banker. The Russian-speaking Mr. Goldstein, who had earned a doctorate in mathematics in Russia, encouraged Mr. Fuller to capitalize on opportunities there.

Mr. Goldstein now manages the bank's private banking unit and sits on the board.

The bank's overseas customers are primarily in Moscow and St. Petersburg and are involved in a wide range of businesses, including computers, beer, and paint. Mr. Fuller said he has personally visited many of those customers twice in the past year.

He also said the bank is complying with the FDIC's enforcement action, which, beyond the audit, required:

A plan to reduce risks posed by its private banking department

Tier 1 capital to be maintained at or above 7.5%

Quarterly reports to the FDIC.

The FDIC does not comment on memorandums of understanding, which are not public documents.

But its examination of Commercial Bank's activities in Eastern Europe comes at a time when regulators are particularly touchy about U.S. banks' relationships with Russian depositors.

The well-publicized probe centers on $68 billion-asset Bank of New York Co., where investigators are trying to determine if as much as $10 billion was laundered since late 1996 through a half-dozen accounts. These accounts are allegedly controlled by organized crime figures.

"We understand and appreciate the FDIC's concerns about monitoring deposit originations from Eastern Europe," Mr. Fuller said.

He said his bank is not accepting any new international accounts and is focusing on its more traditional product lines such as small-business and real estate lending. But he said he has no plans to abandon private banking, which has been profitable.

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