The veilof secrecy surrounding the world of international finance and offshore banking may open just a bit during the next few months thanks to a disgruntled former Citibank employe who is suing the bank.
David Edwards, 33-year-old former Paris employee of Citibank, filed suit on July 24 in New York County Supreme Court, asking for $14 million from the bank and charging that he had been wrongfully dismissed because he brought alleged violations of foreign tax laws by the bank to the attention of tip management.
Edwards claims that he was fired in February after he told bank officials that Citibank was understating earnings in several European branch officials and shifting the profits to its Bahamas office in an effort to reduce the European tax bite.
"I simply felt it was not in their interest to break the law," he said in an interview yesterday.
For its part, Citibank says it has broken no laws, and is conducting its own internal investigation into the matter. And, a bank statement said, Edwards has made allegations against other Citibank employes in the past, but "was unable to produce any substantiating evidence."
Now, the Securities and Exchange Commission is taking a look into the charges raised by Edwards in his detailed complaint - complete with copies of critical correspondence concerning what Edwards claims are questionable over seas transactions.
Edward's intriguing tale began on November 14, 1974, when he joined Citibank's international staff in Paris. He had been with the bank since March 15, 1972.
In 1975, Edwards says he became aware of "certain irregularities" in Citibank's European operations which "revealed that Citibank branches in European cities such as Paris, Milan, Amsterdam, London, Frankfurt and Zurich" were understating taxable income in those countries by setting up "contrived transactions" that shifted profits from those cities to the bank's Nassau, Bahamas, branch.
One such transaction, Edwards says, involved a telex from the Paris branch instructing the Nassau branch to buy $6 million dollars worth of French francs from the Paris branch at the rate of 4.7275 francs per dollar.
Then the telex instructs Nassau to sell the $6 million at the higher exchange rate of 4.7375 francs per dollar - $4 million to the New York branch and $2 million to the Brussels branch.
"This left a profit of 60,000 French francs in the Nassau branch which the Paris branch instructed New York to . . . credit back to the Paris branch that contrived reduction in earnings," Edwards' complaint says:
Edwards said he tried for two years to alert Citibank top management to the problems in the European operations, including charges that Citibank employes were taking kickbacks on large transactions.
He said that Citibank was keeping a second set of books with the various questionable transactions recorded.
Some of the internal memorandums included with Edwards' complaint paint a murky picture of the international financial world.
In one 1976 memo, a Citibank official wrote to another warning that the "parking of positions" - selling of currency from one office to another to avoid certain restrictions - could cause problems.
"There is," the official wrote, "the potential risk of correspondence which would make obvious the nature of the transaction, and expose ourselves to the following possibilities:
"1. Severely upsetting the local Central Bank."
"2. Exposing ourselves to blackmail, for example by some unhappy staff member . . ."
Still, offshore banking has always walked a fine line of legality. U.S. bankers for years have debated the merits of whether or not one kind of transaction or another is illegal, or merely looks bad. This case, however, may force the SEC and other banking regulators to reevaluate the business of offshore banking, and attempt to clear up the fuzzy areas.
While Citibank insiders do not doubt that there are brokers taking kickbacks, few believe the bank broke any laws overseas.
In an internal memorandum released last month, Citibank executive vice president Thomas Theobald, the man who fired Edwards, claims that the bank has been investigating all of the allegations, which Theobald says "intentionally mix and confuse the two accounting systems" used by Citibank overseas.
Theobald says Edwards was fired only after he refused to be transferred back to the head office until his allegations were resolved to his satisfaction.
After Edwards was requested to resign. Theobald said, the young banker sent his boss a note saying, "I have no intention of resigning from the bank until I have been given adequate answers to the serious questions I have raised."
He was then fired.