Wednesday March 7, 2001

Regulation, Law & Economics
Money Laundering:

Administration Cautions Senators On
Risks of Banning Certain Accounts

     Bush administration officials expressed cautious support for new ways to combat global money laundering schemes March 6, but refused to endorse an outright ban on the use of correspondent accounts with so-called shell banks, an approach recommended by a recent Senate report on the subject. 

     Joseph M. Myers, the Treasury Department's acting deputy assistant secretary for enforcement policy, and Mary Lee Warren, deputy assistant attorney general in the Justice Department's criminal division, testified before the Senate Permanent Subcommittee on Investigations, which wrapped up three days of hearings on the matter. Both said Congress should be wary of the unintended effects of passing new legislation aimed at reducing money laundering. 

     Eliminating certain correspondent accounts outright could unfairly infringe upon legitimate commerce, Myers warned. "[T]hese hearings raise serious issues that are complex and difficult," he said. For example, an overly broad definition of shell bank could result in the banning of Internet-based banks. Myers noted that the Bush administration is still formulating its position on the more detailed aspects of its anti-money laundering strategy. Treasury is due to release an annual update of this strategy in June. 

     The subcommittee hearings followed a Feb. 5 report by Sen. Carl Levin (D-Mich.), which found that U.S. banks have unwittingly allowed criminals to use correspondent accounts--accounts that banks use to provide services to other banks--to launder funds. Current estimates are that $500 billion to $1 trillion in illegal funds from organized crime, narcotics trafficking, and other criminal misconduct are laundered through banks worldwide each year, with about half going through U.S. banks. Many of these banks offer correspondent accounts opened by shell banks, which are banks that have no clear physical location and that cannot be easily identified by law enforcement officials.

     Legislation backed by the Clinton administration and introduced last year to combat money laundering fizzled in the 106th Congress in the face of privacy concerns, industry opposition, and lack of Republican support. The legislation would have given the Treasury Department new powers ranging from requiring banks to maintain additional records to imposing an outright prohibition on correspondent accounts maintained by targeted banks.

Gramm Opposes 'Complex' Requirements

     Speaking at a meeting of international bankers March 5, Senate Banking Committee Chairman Phil Gramm (R-Texas) said he would continue to oppose legislation that forces banks to comply with complex anti-money laundering requirements or that authorizes sweeping forfeiture of criminal proceeds. "I'm concerned but I don't want to give bureaucrats the power to take people's property," he said.  Defending Treasury's anti-money laundering guidance to banks, which it releases periodically, Myers said the department is attempting to help U.S. banks identify potentially illegitimate banks without explicitly instructing them on what to do. "We're not telling a driver to not cross the bridge, but we are telling the driver to be careful," he said.

     At a minimum, Levin said the U.S. government should forbid U.S. banks to deal with banks located in jurisdictions known to have lax bank regulation, and also require them to maintain a list of the beneficial owners of accounts.

     At the subcommittee's March 2 hearing on money laundering, Citibank, Bank of America, Chase Manhattan, and Bank of New York came under fire for not exercising due diligence when opening accounts for offshore banks and for not closing certain accounts after it became clear they were opened for illegitimate purposes.

By Adam Wasch

Copyright © 2001 by The Bureau of National Affairs, Inc., Washington D.C.

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