Citibank and Misdirected Russian IMF Loans

Since the United States was a substantial contributor to international financial aid organizations, it provided its own governmental aid, and private American corporations invested in Russia, the looting of Russia’s aid packages resulted in white-collar crimes committed in the United States and generated Congressional and criminal investigations. Major American banks, such as Citibank and Bank of New York, were entangled with Russia’s capital flight and money laundering problems and, in the process, violated banking and anti-money laundering laws within the United States.

The Russian Federation experienced an increase in crime, capital flight, banking crises, and destabilization of the ruble during the transition into a capitalist economy. In money laundered related capital flight, Russia lost an estimated $133 billion between 1992 and 1997. To help stabilize the region, Russia and other Central and Eastern European countries received diverse aid packages from the international community. The aid included multinational financial aid, such as loans from the World Bank and International Monetary Fund (IMF), bilateral assistance from nongovernmental organizations (NGOs), and financial and technical support from various governmental agencies and corporations. Russia was plagued with corruption and criminals who fleeced the county.

In 1999, a scandal broke involving Russia, misdirected IMF funds, Western banks, and money laundering. The U.S. Congress began investigating the money laundering allegations and misuse of IMF funding. Oligarchs, businessmen, officials, and criminals moved money and IMF funds out of Russia via money laundering techniques, the Central Bank of the Russian Federation, Western banks, and offshore and private investment firms. Russia provided easy entry ports for illegally gained funds, and the banks reaped profits from the accounts. The siphoned funds and capital flight totaled in the billions. The American bank most associated with the laundered funds from Russia was the Bank of New York; however, there were many other American and Western banks involved, including Citibank, a division of Citigroup.

International Monetary Fund (IMF)

The purpose of the IMF loans was to stabilize the Russian ruble, lessen the effects of the economic crisis, enhance infrastructures, and subsidize the government to make up for tax collections shortages. The Central Bank received the aid and then distributed it to the government, Russian banks, and accounts at the Central Bank’s offshore firm Fimaco. In 1996, Russia hid part of its currency reserves in Fimaco to mislead the IMF and secure more loans.

The Central Bank issued special licenses to politically connected Russian banks so that the banks and their clients could participate in international banking activities and the distribution of the IMF loans. Many of these banks had substantial ties to organized crime, such as Mikhail Khodorkovsky’s Bank Menatep. Three multimillion transfers, marked as a payment for improvements to Russia’s automotive industry infrastructure, originated from Bank Menatep and were deposited into American bank accounts. Additionally, Semyon Mogilevich, known as the Godfather of Russian organized crime, used banks in Russia and the northeastern United States to move hundreds of millions of dollars, including funds linked to Russian “quasi-governmental” organizations.

Russia had lax accounting procedures, and IMF loans could not be tracked after the money was transferred to the Central Bank; therefore, conclusively determining whether specific wire transfers from Russian to American banks contained IMF funds is difficult. Additionally, the Yeltsin administration and the Duma were reluctant to pass anti-money laundering laws, thus making the IMF loans vulnerable. As early as 1993, American intelligence believed that the KGB, oligarchs, and corrupt government officials were laundering Western aid and loan money out of Russia as soon as it entered the country by converting it to hard currency and then shipping it to foreign and offshore accounts.

The Central Bank used very little of the financial aid to support the ruble, pay salaries, improve the world’s confidence in Russia, or improve infrastructures. Instead, funds were used to help finance President Yeltsin’s campaign (linked to corruption and criminals) and were transferred to overseas accounts; at least $2.9 billion of IMF loans may be housed in offshore banks, and a former Russian prosecutor general alleged that $3.9 billion of a 1998 $4.8 billion IMF bailout never reached Russia. Representatives from the IMF and the World Bank could account for 2 to 3 billion rubles that were used to support Russian agriculture. Less than 10 percent of a 1998 $4.4 billion dollar payment was used to support the ruble. The Central Bank transferred the bulk of the $4.4 billion to Russian banks so that the banks could convert short-term loans known as GKOs (for Gosudarstvennoe Kratkosrochnoe Obyazatelstvo, “state treasury bonds”) to hard currency before the government defaulted on the GKO. At one point the GKO market, characterized as a pyramid scheme, had a rate of return of almost 300 percent and was covered by IMF loans.

More than $10 billion passed through the Bank of New York, and $1.4 billion passed through Citibank of New York and Commercial Bank of San Francisco. After the 1998 bank crisis, IMF lending, in its current form, was suspended. Nevertheless, the IMF stated that there was no evidence to support claims that IMF’s loan disbursements, made during the 1998 crisis, were diverted.

Irakly Kaveladze and Citibank

In 1991 Irakly Kaveladze, a Georgian-born businessman, immigrated to the United States and established International Business Creations (IBC). A few years later, Kaveladze created Euro-American Corporate Services, Inc., located in Delaware, to form more than 2,000 corporations for Russian and other Eastern European brokers. Kaveladze charged his clients $350 for each incorporation and $450 to open a bank account. As a formality, employees of IBC/Euro-American visited the Delaware office once every three months. IBC had all phone calls and mail forwarded to an office in New York. From 1991 until 2000, Kaveladze opened approximately 136 accounts for himself or clients of IBC/Euro-American and assisted 50 nonresident aliens to open credit card accounts at Citibank of New York. The addresses listed on the bank and credit card accounts were IBC/Euro-American’s business address. The accounts yielded more than $300,000 in profits for Citibank. Kaveladze opened an additional 100 accounts at Commercial Bank of San Francisco for his clients.

The president of IBC/Euro-American stated the purpose of the accounts at Citibank of New York and Commercial Bank of San Francisco was to move money out of Russia. From 1991 to 2000, more than $800 million passed through IBC/Euro-American related accounts at Citibank of New York. Four of IBC/Euro-American’s Citibank accounts processed approximately $280 million alone. The funds originated in foreign countries, including Russia, they were deposited into the accounts at Citibank through wire transfers, and then over 70 percent of the funds were transferred out of the U.S. banking system to foreign countries and money laundering havens.

Citibank’s Actions and Responses

Citibank agreed to open the questionable accounts based on the assurance that Kaveladze knew the officers of the Russian companies and that they would appear in person to provide the required documents within thirty days of opening the account. Account holders are required to present two forms of identification and incorporation papers when they open the accounts, and financial institutions are to perform background checks on account holders and verify the legality of the funds. IBC/Euro-American had supposedly performed background checks, when required by law, on the companies and the officers. Citibank of New York accepted the word of IBC/Euro-American and did not perform due diligence. The accounts were fully functional, including international wire transfer capabilities, during the 30-day grace period. Moreover, Citibank did not close any of the accounts within four months when account holders failed to appear with the required documentation.

John Reed, then Co-Chief Executive of Citibank, acknowledged that the bank was slow to take appropriate actions, had weak controls, and did not follow their policy to know more about their wealthier clients. Citibank also acknowledged that a U.S. branch allowed $725 million of questionable Russian funds to flow through the accounts associated with Kaveladze. In 1996, the bank’s compliance unit detected questionable transactions to or from offshore, high risk jurisdictions and monitored the credit card accounts. The compliance unit closed the credit card accounts. However, Citibank of New York resisted the recommendation of closing most of the bank accounts for four more years.

Citibank failed to conduct due diligence on the IBC/Euro-American accounts, did not follow “know your customer” policies, and violated money laundering provisions of the Bank Secrecy Act, which requires banks to identify and report suspicious activities. Citibank conceded that oversights, such as relying on Kaveladze’s word concerning client’s background checks, allowing account holders to fail to appear in person, not questioning the large number of the accounts at one address, and not closing the accounts when their own compliance unit advised the closures, occurred in the IBC/Euro-American case. The U.S. Congress had investigated Citibank for similar violations prior to the bank’s actions with the Russian and Kaveladze accounts.

Citibank’s Additional Russian Activities

Beyond opening accounts in the United States, Citibank was involved in several other activities in Russia. In 1994, Citibank opened the first fully foreign-owned commercial bank in Russia, offering Russian businesses investment banking, financial advisory, financing, and other services. Citibank, along with other major American banks and the U.S. Federal Reserve, provided technical support and had an advisory role with its participation in the Russian-American Bankers Forum. The Forum’s purpose was to help with the restructuring of Russia’s financial system. Like many other Western banks, Citibank invested in Russia’s GKO market. When the market collapsed in 1998, Citibank lost hundreds of millions of dollars. Citibank also participated in nonresident, “S-special” accounts and purchased 4.8 million shares of LUKoil’s stock for 1 billion rubles. In order to circumvent tighter controls on limiting capital flight, Russian companies, including companies involved in the controversial loans-for-shares program, would sell shares of their companies, in rubles, to foreign companies and banks. Then the Russian company would buy the same shares back in hard currencies. The funds would remain in overseas, S-Special accounts. The transactions allowed companies to have sizable accounts in foreign banks and to participate in the proliferation of capital flight.

Citibank Private Bank and Its Other Customers

In 1999, Citibank Private Bank had 40,000 clients and accounted for approximately 2.5 percent of Citigroup’s business. Private Banks are usually banks within larger banks and offer a one-on-one private banker to manage the assets within the account and provide a variety of services. Clients included honest wealthy individuals, but also corrupt politicians and criminals. Many of the larger and more notorious cases of money laundering and capital flight were through accounts in Private Banks.

The private banking industry is competitive, and returns on the accounts are lucrative. Generally, the accounts usually have more than $1 million in assets ($3 million or more for Citibank Private Bank), which can include property, stocks, arts, or valuables as well as money. The services offered to the client include private trusts, estate planning, tax assistance, financial advice, loans, international wire transfers, offshore accounts, shell companies (known as private investment corporations), secret accounts, and code names. Secrecy and privacy are of paramount importance. Private banking can also conceal the source, routing, and destination of funds that may have been gained through illegal activity. In the United States, banks are forbidden to handle the proceeds of drug trafficking, kidnapping, bank fraud, and other criminal activities. Private banking allows wealthy and powerful clients to conduct business in ways that are permissible abroad and offshore but prohibited in the United States. After the Bank of New York scandal, and after billions of dollars were siphoned out of Russia, the U.S. Senate’s Permanent Subcommittee on Investigations and the House’s General Accounting Office (GAO) investigated American banks and private banks, in particular Citibank Private Bank, to determine whether they are susceptible to money laundering and whether they may not have failed to report suspicious activities.

Citibank Private Bank has approximately 350 clients that are officials and their families. More notable clients include Asif Ali Zardari, the former Prime Minister of Pakistan’s spouse, imprisoned for kickbacks and money laundering; Omar Bongo, President of Gabon, investigated for bribery; Mohammed and Ibrahim Abacha, sons of the former military leader of Nigeria, one of whom was imprisoned for murder and investigated in two countries for money laundering; the daughters of Radon Suharto, the former President of Indonesia who allegedly looted billions of dollars from Indonesia; former Chilean dictator Augusto Pinochet and his family, who had 63 accounts at Citibank New York and Citibank Miami; and Raul Salinas, brother to the former President of Mexico, who, with other members of his family, moved between $80 to $100 million through accounts at Citibank Mexico, Citibank New York, Cititrust (Cayman Islands), Citibank London, and Citibank Switzerland. Citibank assisted Salinas and his wife in setting up an offshore private investigation company, allowed Salinas and his wife to use aliases in Mexico, and wired funds from Citibank Mexico to Citibank New York before moving the funds offshore. Additionally, Citibank failed to generate a financial and banking profile, in accordance to its own “know your customer” policy.