DIRTY MONEY IS LOSING ITS ALLURE

A tale of laundering, drug running and murder has caught out some of the
biggest names in banking.

ON at least half-a-dozen occasions over a three-week period in the spring of
1993, Raul Salinas, the older brother and close advisor of Mexico's then
president, Carlos Salinas de Gortari, asked his wife Paulina to hand carry
about $50m (pounds 30m) in anonymous bearer bank checks drawn on Mexican
banks to the offices of Citibank in Mexico City. Although neither she nor
her husband had an account at the bank, the checks were promptly accepted
and sent to New York to support a playboy lifestyle. There, on instructions
from Raul Salinas's private banker, they were wired into either the London
or Geneva accounts of a bank secrecy-protected Cayman Island investment
company, Trocca.

Citibank officers in London accepted the account, even though they had no
documentation and no, or only vague, awareness that Mr Salinas was Trocca's
ultimate beneficial owner. The funds were then invested under instructions
from a Citi-owned Swiss company called Confidas.

This Confidas system was the heart of the scheme Citibank used to secrete
some $90m to $100m of Raul Salinas's funds outside Mexico for two years,
until 1995. Mr Salinas liked the system so much, he later told Swiss
prosecutors that - had he known of it earlier - he wouldn't have resorted to
the false passports and aliases he had previously used to clandestinely
transfer money to Switzerland. But as suspicions have grown that Raul
Salinas's fortune - he is known in Mexico as "Mr Ten Per Cent" because of
the commissions he took on business he facilitated - came from drug
traffickers, the system has made Citibank the target of a money laundering
inquiry by the US Justice Department. On Friday, the Congress's audit arm
published a study of the Salinas-Citi affair, which concluded that Citibank
"facilitated a money-managing system that disguised the origin, destination,
and beneficial owner of the funds involved".

Ronald Noble, a former US Treasury Under Secretary for Enforcement, says
that such disguises "facilitate money laundering and make it more difficult
for law enforcement to combat it".

British police have been investigating the Citicorp London link to the
affair since December 1995, when they froze $22.3m of Raul Salinas's funds.
In October, Swiss authorities asked the Home Office to seize the money
frozen as drug-related. If this money is impounded, it is likely to be
forfeited by Raul Salinas, and divided between the Swiss and British
Treasuries.

The US Congressional report on the Citibank-Salinas affair also highlights
rising worldwide concern about money laundering. Motivated initially by the
desire to combat drugs and more recently by corruption, bribery and
transnational financial crimes, governments led by the UK and US are seeking
more effective measures to crack down on the $300bn to $500bn laundered
yearly by banks and financial institutions. In 1996, the 26 members of the
Financial Action Task Force (FATF) - the G7's anti-money laundering agency
based in Paris - set out "to make bank reporting of suspicious activity
mandatory", says Stanley Morris, a former head of the US Financial Crimes
Enforcement Network.

Many countries around the world are now moving to implement legislatively 40
recommendations put forward by the task force. At a meeting starting
tomorrow in Strasbourg, the Council of Europe will begin discussions on
forming an FATF sub-agency for the nations of the former Soviet bloc, plus
Cyprus, Malta, Lichtenstein and a few other places.

In a move that's cheered US financial crime fighters, the Blair government
is playing a leading role in increasing pressure on offshore centres,
traditionally the black holes of the world financial system. BCCI hid much
of its $5bn losses in the Caymans and Dutch Antilles; Credit Lyonnais parked
losses of some $35bn in Luxembourg. Since so many of the offshore centres
have British roots, the new UK policy may add considerable momentum to
global standardisation on money laundering. But creating a seamless web of
regulation in today's porous global economy is all but impossible without
self-policing by reputable financial institutions. The first principle of a
good anti-money laundering bank programme is to "know your customer" (KYC).
Citibank had one of the most vaunted KYC programmes in banking, but it is
precisely here it seems to have slipped up in the Salinas case. The new US
Congress report, says Citi waived its usual reference demands in opening
Salinas' account. It accepted his explanation that his initial proceeds had
come from selling a construction company, but never asked for its name, its
price or to whom it was sold. Nor did the bank seem to do any other research
into Salinas's reputation, which, by 1992 and 1993, was being talked about
in police and intelligence circles. Even when the size of Salinas's deposits
jumped to $50m in three weeks, the bank made no inquiries as to the source
of the funds. It also never filed the forerunner of a "suspicious activity
report" until after the Swiss moved in November 1995 to freeze Salinas's
funds as probably stemming from drugs.

At this point, the Swiss arrested Raul Salinas's wife, Paulina, when she
tried to retrieve documents and money from a Swiss bank. By this time, Raul
Salinas was in jail in Mexico on charges of murdering his brother-in-law and
of illicit enrichment. In all, Citibank earned $1.1m in fees in managing
Salinas's accounts. The lack of adequate due diligence, suggested by the US
Congress report, could subject the bank to further scrutiny - in London as
well as the US.

For other City-based bankers, meanwhile, the Citibank-Salinas affair is a
harsh lesson in what can go wrong - especially now that the global
anti-money laundering movement is gathering force.

Checked-by: Don Beck