Citigroup Inc. co-Chairman John Reed failed to take decisive action after internal bank warnings for several years in the mid-1990s showed the bank was ignoring its own safeguards against money laundering, Senate investigators said yesterday.

The revelations about Reed's handling of the money-laundering issue illustrate a broader problem faced by U.S. commercial banks as they try to balance aggressive pursuit of new business against the possibility that some clients may be using the bank to hide ill-gotten gains.

In 1995, Citibank became the subject of a Justice Department investigation into the bank's relationship with Raul Salinas, the brother of the former Mexican president, and as much as $100 million in alleged drug money the bank secretly transferred on his behalf. The investigation is ongoing, though sources say it has stalled for lack of definitive proof that the money came from the sale of drugs.

Reed only began aggressive action in either late 1996 or earlier 1997, after Robert B. Shapiro, the chairman of Monsanto Corp. and then the head of the audit committee of Citicorp's board of directors, went to Reed and told him he had to be more responsive to the audits and take swift action to clean up the private banking unit, said investigators with the Senate's Permanent Subcommittee on Investigations.

Money laundering is the process of taking money gained from illegal activities, such as selling drugs, and sending it through a series of financial transactions that make the money and its true owners hard to trace and identify. Often these transactions are undertaken by bank divisions known in the industry as private banking units, which cater to rich individuals who wish to move money around in secret, often to avoid taxes or other encounters with governments.

Next week, the Senate panel plans to explore the arcane world of private banking and its relationship to criminal activity. As part of the hearings, the subcommittee will release a 64-page report summarizing a year-long investigation during which investigators examined tens of thousands of Citigroup documents and interviewed dozens of private bankers in the industry, as well as two dozen bank regulators from the Federal Reserve Board and the unit of the U.S. Treasury that regulates banks.

"It's fair to say that John Reed was aware that Citibank's own internal audits of its private banking operations showed that the private bank was neglecting its internal controls and procedures, some of which were designed to protect the bank against money laundering," said a top investigator on the panel.

Reed, who will testify at the subcommittee's hearings, is expected to acknowledge that the bank did not do a good job monitoring possible money laundering in its private banking operations. "There is no question that in the mid-1990s, the control environment in the private bank was not satisfactory," according to a copy of Reed's prepared statement. "Our internal audits showed this."

Moreover, Reed's statement says, "The internal auditors were candid and specific in expressing their concerns. Senior management and the board's audit committees took note and took action. Of course, the changes did not occur overnight, and in retrospect one could take issue with whether they happened fast enough."