Citibank used a variety of "sham transactions" over several years to disguise hundreds of millions of dollars in foreign exchange transactions, allowing the bank to circumvent banking regulations in several countries and improperly move profits from high-tax countries to low-tax havens on offshore islands, according to internal bank correspondence and Securities and Exchange Commission staff documents.
These and other documents, made public by a House subcommittee in hearings this week, also say that the bank paid millions of dollars in fines to certain foreign governments when some of the activity was revealed, and that Swiss officials at one time were considering action to bar Citibank from doing business in Switzerland, one of the world's most prominent banking centers.
The documents indicate an attempt on the part of some Citibank officials -- even after questions about the transactions were raised within the bank -- to evade foreign banking laws which they felt impeded the worldwide flow of money.
Citibank has said its currency transactions were "basically proper" and that it had corrected any improper actions and disciplined or fired those responsible. Beyond that, it has not commented on specific questions presented by the documents.
The bank's board of directors also commissioned the New York law firm of Shearman & Sterling to conduct a worldwide investigation that ultimately found "no pattern" of violations by the bank overseas.
In a second day of hearings scheduled for today, the House Energy and Commerce Committee's subcommittee on oversight and investigations is asking why the SEC did not follow recommendations two years ago by its own investigators to take action against Citibank.
Testimony at the hearings is raising questions about the ability of banking regulators here and abroad to enforce their rules.
In remarks prepared for today's hearings, Richard S. Dale, an economist with the Brookings Institution, said that current multinational banking regulations must be overhauled.
Dale said "the present framework for regulating and supervising international banking invites circumvention of the kind practiced by Citibank." He warns the subcommittee that "the regulatory free-for-all has contributed to the very grave crisis now enveloping the international banking system."
Subcommittee chairman John D. Dingell (D-Mich.) said in his opening statement at the hearings this week that the documents reveal an apparent attempt by Citibank's parent company, Citicorp, to "cover up" when confronted with internal evidence of abuses. "There was an effort to make some cosmetic changes but to continue the practices," he said.
Among the documents is a letter to Citibank's board of directors, dated Dec. 8, 1980, from the deputy comptroller of the currency for multinational banking, who warned the bank that many of the transactions conducted by the bank's foreign offices had raised "serious audit as well as safety and soundness implications."
The same letter said that some of the transactions, which included shifting profits from one bank branch to another, "had as their result, the avoidance of local income taxes on foreign exchange, the avoidance of stamp taxes on foreign exchange contracts, the avoidance of local exchange restrictions, and, in some cases, failure to properly reflect profits on the bank's books."
The deputy comptroller, Billy C. Wood, also had sharp criticism for the Shearman & Sterling report. "We believe," he wrote, "that these types of transactions are more serious than portrayed in the Shearman and Sterling Report. We recognize that such practices do not comport with Citibank policy; however, we understand that certain members of senior management of the bank were aware of the existence of these transactions."
The letter reveals that some top bank officials knew of the practices cited as early as 1975, but added, "It does not appear that sufficient action was taken to correct, prohibit, or eliminate the aforementioned practice at the time of its disclosure in 1975." The officials were not identified.
The letter contended that the law firm's report was limited in scope in such a way as to prevent a true analysis of the problems.
The letter concluded that "a number of the foreign exchange transactions reviewed were inconsistent with sound banking principles and exposed the bank to penalties and assessments levied by foreign supervisors."
In an internal SEC investigative report, also made public in the hearing this week, commission's investigators concluded: "the senior management of Citibank, up to and including the chairman, approved the practice of a branch holding overnight currency positions on a booking branch's books larger than the host goverment permitted; and were put on notice that such practices were circumventing the law.
"Further, middle and senior management in foreign branches and in Citibank's head office in New York City knew the law and decided to continue the practice of parking after weighing the risks of its disclosure against its profitability," the report states.
The SEC staff report called the "parking" and "round trip" transactions used by Citibank "in essence, sham transactions which enabled the dictating branch to evade (1) local exchange control laws, (2) local reserve requirements, and (3) local taxes."
The SEC staff was also sharply critical of the Shearman and Sterling Report, which it called "false and misleading." The report "was essentially a coverup, failing to disclose the key facts about Citibank's past and then ongoing practices." A spokesman for the law firm, responding to questions last July about the firm's role, said its actions "were entirely proper." On behalf of the law firm, the bank declined comment yesterday.
The SEC staff reported said that even "a careful analysis of the S&S report confirms that Citibank violated local laws in several European countries."
The full SEC commission took no action against Citibank.
The Swiss government was strongly critical of Citibank's procedures, according to other documents in the hearing record. In November, 1979, following an investigation, Citibank agreed to pay $5.2 million to Swiss authorities in back taxes and and additional $365,000 in administrative fees to compensate for profits the bank had improperly transferred from Switzerland to Nassau in 1974, according to SEC documents.
In February, 1980, the Swiss Federal Banking Commission informed Citibank's Zurich office that during its investigation into the allegations, "considerable irregularities did come to light. Under banking law, the foreign exchange transactions already criticized in a separate letter sent a week earlier by the Swiss National Bank are especially objectionable."
The letter, also part of the hearing record, cited the fact that the bank had made the Swiss investigation difficult because critical dates had been left off of trading tickets, along with other vital information, which "all greatly contributed to the difficulties encountered by those partaking in the investigation."
The Swiss wrote Citibank that one of the "pre-conditions to obtain permission to engage in the banking business in Switzerland is the existence of an administrative organization capable of supervising the business. As evidenced by the serious deficiencies in your conduct of foreign currency trading, that pre-condition was not met by your branch during the years 1973-1977.
"In addition," Citibank was warned, "your procedures did not comply with the 'Universal Banking' law. We disapprove of your past conduct in the strongest terms."
The Swiss then wrote that the bank had taken corrective actions on its own which "spared you from administrative measures on our part."
But, the Swiss warned, only because the statute of limitations had expired on many of the alleged misdeeds, and because some of the Swiss laws that it said had been violated during the earlier years had later been repealed, "has the National Bank abandoned its intent to have the Federal Banking Commission apply for the withdrawal of your business permit."
Internal Citibank documents made public by the subcommittee show that as much as five years before the stern warnings from the Swiss, a member of the bank's overseas management was aware of potential problems that could occur if the bank's activities became known.
On May 22, 1975, then-Citibank vice president Arthur Natvig wrote a memo to the bank's comptroller Steve Eyre after the bank's Swiss office had been told it was under investigation. "We cannot dismiss the possibility of severe reprisals, that Central bank action in any one country would almost certainly trigger checkups in all countries, and that in general the bank has a great deal to lose," the memo said.
And two years later, speaking at a resident auditors conference in Athens, Citibank vice president Edwin Pomeroy described one of the alleged practices--known as a "round-trip" transaction--this way:
"Round trip is really a rather euphemistic way of describing the rinky-dink deals which were resorted to by our branches to get round the local regulations and any locally imposed limits. It covers a wide area ranging from deals done to park positions to making deposit and placement deals which improve the bank's liquidity ratios."
The traditional veil of secrecy surrounding the internal operations of any major bank was first penetrated at Citibank four years ago. A young officer in the Paris branch, fired after he brought allegations of improper activity in Europe to the bank's board of directors, carried those same allegations to the SEC, and unsuccessfully sued the bank for wrongful dismissal.
That employe, David Edwards, included several internal bank documents as exhibits in that suit, triggering several stories in the press questioning the bank's operations. Investigations of Citibank's foreign currency operations were then begun by several organizations here and abroad.