Citigroup's secret transfer of hundreds of millions of dollars for wealthy foreign politicians or their relatives during the 1990s through a global web of bank accounts will be scrutinized this week at Senate hearings on the lucrative world of private banking.
A major accusation to be explored at the hearings is that top Citigroup officials, including chief executive John Reed, knew about but paid little heed to internal bank audits in the 1990s warning that the private banking unit was vulnerable to money laundering, according to congressional investigators.
Questions about possible money laundering by Citigroup have been raised in official reports and news accounts since 1995.
Citigroup has said that private banking problems were isolated cases involving lower-level employees without the knowledge of higher-ups and that the problems have been remedied.
The hearings by the Senate's permanent subcommittee on investigations were initiated a year ago by publicity surrounding Citigroup'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 out of Mexico from 1992 to 1994 on his behalf.
The U.S. General Accounting Office, the investigative agency of Congress, found in 1998 that in handling Salinas, who is in jail after being convicted of murder, the nation's largest bank repeatedly failed to follow its own safeguards designed to protect it against money laundering.
Regulators at the Federal Reserve Board reviewed the bank's practices in 1997, stating in an internal memo that "the problem is that for years audit has been identifying problems and nothing has been done about it," according to documents obtained by the subcommittee.
After forcing the bank to substantially clean up its private banking operations in 1998, the Fed approved its pending merger with insurance giant Travelers Group in October of that year.
The subcommittee has spent a year examining Citigroup, but congressional investigators make clear in interviews and in a report by the panel's Democrats that the pattern found at Citigroup results from procedures that are standard throughout the private banking industry.
Private banking units manage an estimated $15.5 trillion worldwide for wealthy people who want to move money secretly to avoid taxes or other encounters with governments.
The subcommittee's Democrats and Republicans worked on the year-long investigation, but only staffers for Sen. Carl M. Levin (D-Mich.) wrote a report summarizing the findings.
A Republican investigator on the subcommittee said the panel's chairman, Sen. Susan Collins (R-Maine), agrees with the facts outlined in the report and its overall conclusion that Citigroup acted too slowly to correct problems. The investigator said, however, that Collins needs more time to study the report before she can say she agrees with "every line in it."
Among the report's findings:
* After Salinas was arrested in 1995 on charges of murder, Citigroup employees had taped phone conservations that show "the private bank's institutional reaction was not to assist law enforcement, but to determine whether the Salinas accounts should be moved to Switzerland to make discovery of the assets and bank records more difficult."
* Citigroup was a private banker to Asif Ali Zardari, the husband of Benazir Bhutto, the former prime minister of Pakistan. The Pakistani government claims that Bhutto and Zardari "stole over $1 billion from the country," and there have been allegations that some Citigroup accounts for Zardari "were used to disguise $10 million in kickbacks for a gold importing contract to Pakistan."
* Citigroup has had an extensive private banking relationship with El Hadj Omar Bongo, the elected president of Gabon on the West Coast of Africa, in which it has moved funds through his accounts since 1985 that have exceeded $130 million. Citigroup's private bankers believed that some funds came from Gabon's public treasury, the report says Citigroup documents show. A $5 million deposit in one of Bongo's accounts came at the same time that the International Monetary Fund "completed a new loan agreement with Gabon," the report said.
* Citigroup handled accounts for three sons of Gen. Sani Abacha, who was the military leader of Nigeria from 1993 until he died in 1998, and who, the report noted, "is widely condemned as responsible for one of the most corrupt and brutal regimes in Africa."
The report also notes a lack of aggressiveness by bank regulators at the Office of the Comptroller of the Currency, a unit of the Treasury Department, in looking into these activities. Treasury officials had no comment yesterday.
As previously reported, Reed is expected to say when he testifies at the hearings Tuesday that the bank made mistakes in its private banking unit and that problems were not attacked soon enough or aggressively enough when internal audits raised red flags in the early 1990s.
Citibank officials said the issues that will be raised at the hearings are "old news" and that the bank now has strong systems in place to guard against money laundering.