Just Hide Me The Money

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When Citicorp and Travelers in October 1998 closed what was then the largest merger in history, creating a $751 billion financial colossus, a piece of unfinished business kept resurfacing like a bad odor amid the celebrations and predictions of imminent world dominion. This was the so-called Salinas affair, the curious tale of how a resourceful Citibanker named Amy Elliott helped Raul Salinas move some $100 million into untraceable accounts owned by offshore "trusts" that were in turn owned by dummy corporations in the Cayman Islands.

Salinas, the once high-living brother of disgraced former Mexican President Carlos Salinas, has been jailed in Mexico since 1995 on charges of illegal enrichment and murder conspiracy. He denies all the charges, and the murder case is now under way in Mexico City.

Meanwhile, in a report made public last Friday, the U.S. General Accounting Office, an investigative arm of Congress, concluded after an eight-month probe that Citibank helped Salinas build "a money-managing system that disguised the origin, destination and beneficial owner of the funds involved."

Senator Carl Levin of Michigan, who in January will become the ranking Democrat on the Permanent Subcommittee on Investigations, called for hearings on the GAO's findings. "Are major U.S. banks, wittingly or unwittingly, helping criminals move funds to safe harbors around the world?" Levin asked. "If the answer to that question is yes, then the Congress had better close down the loopholes that allow it." Already this week federal regulators will issue new rules requiring banks to confirm the identities of their customers and the sources of large fund transfers.

Noting that Citibank is cooperating with an ongoing Justice Department investigation of the Salinas matter, bank spokesman Richard J. Howe declined to answer specific questions about the GAO report. He said, without citing specific examples, that the report "contains errors of fact and interpretation" and that "it ignores recent progress in strengthening law and industry procedures, which Citibank strongly supports in keeping with our commitment to combat money laundering." Citibank declined to make Elliott available for comment but has in the past denied that she or the bank violated any laws. She remains a Citibank employee in good standing.

The Salinas affair has obviously embarrassed Citibank, a proud institution widely admired around the world. But the affair has done more: it has opened a door on the multibillion-dollar profits and potential pitfalls that beckon in a slice of the global banking business little known to the general public--a slice of the business that is growing rapidly, and for which Citigroup and its giant international rivals are competing ferociously.

Elliott was not your garden-variety Citibanker, setting up checking accounts or making business loans. She worked for the vaunted Private Bank, a highly confidential bank within the bank that provides white-glove service to clients with at least $1 million to invest. While this might seem to be an obscure part of Citibank--and indeed it was until just a few years ago--it is now the crown jewel in the financial giant's strategy for growth. That strategy calls for Citibank and its parent, Citigroup, to reduce their reliance on cyclical corporate and real estate lending, which tends to be high risk and relatively low profit. It will emphasize the lower-risk, higher-margin business of consumer banking--and especially one-stop financial shopping for the world's booming population of the newly rich.

At Citigroup and like-minded institutions around the world, folks with six- and seven-figure portfolios can find not only traditional banking services like checking and savings accounts but also strategic financial advice; introduction to high-yield investment vehicles like hedge funds; tax advice and accounting; estate planning and all manner of insurance. They can also get help in protecting their assets from potential claimants like creditors and ex-spouses, which can involve moving money discreetly from country to country.

Citibank's private-banking unit holds more than $100 billion, which makes it about the same size as the entire bank was in 1982. Those funds are in turn part of a $17 trillion global pool of money belonging to what bankers euphemistically call "high-net-worth individuals"--a pool that generates more than $150 billion a year in banking revenue. The numbers are especially impressive when you consider that except at a few sleepy British and Swiss institutions, the private-banking industry didn't exist until the 1980s. Citibank predicted early this year that it would reach $1 trillion--that's trillion with a T--in private-banking assets by the year 2010. And it faces some 4,000 competitors, from global dreadnoughts like Switzerland's UBS to secretive banks in the tiny principality of Andorra to brokerages in Miami and accountancy firms in the Channel Islands.

Why should you care? Here's why: as these wildly various institutions scramble for business, more and more of the wealthy are availing themselves of sophisticated tools that can be used--often legally, sometimes not--to avoid taxes and potential claimants. In the U.S. alone, thanks to the vibrant economy and the long bull market in stocks, more than 2.5 million households now boast investable assets of more than $1 million, up from 2 million households in 1995. "This market is exploding," says Mark Stevens, president of personal financial services for the Northern Trust Co., based in Chicago. He notes that while the U.S. population is growing 1% a year, the ranks of millionaires are growing 10 times as fast.

While most Americans, including millionaires, pay their taxes in full, the rising number of cheaters is very costly to everyone else. Last year tax "noncompliance" of all sorts cost the U.S. Treasury $245 billion, of which it recovered some $50 billion. The average taxpayer had to put up about $1,625 to cover that shortfall. And of all the ways to cheat on taxes, one of the fastest growing, according to a recent United Nations report on financial havens, banking secrecy and money laundering, is the transfer of money into foreign accounts and front companies, especially in so-called haven countries like Switzerland and the Cayman Islands, where banking-secrecy laws protect the identity of depositors. While about 140,000 foreign-bank-account reports are filed annually with the IRS, one money-laundering expert estimates that there are as many as 1.5 million anonymous offshore corporations around the world--up from 200,000 in the late 1980s--and that about 40% of those accounts are held by Americans.

Here's another reason you should care: while it's generally illegal for Americans to evade U.S. taxes on accounts and investments they hold abroad, it's often legal for them to use such accounts to protect their assets from claimants who may later sue them. So if you win a court judgment against an ex-spouse, a business associate or a doctor, he might already have used offshore accounts to shelter money that would otherwise be yours.

The spread of private banking presents what some government authorities consider a regulatory nightmare. With assets scattered among 100 countries, Citibank is too big and transnational for any single agency or government to watch. Perhaps that explains why, in the U.S. alone, the Federal Reserve System, three congressional committees, the GAO, the Comptroller of the Currency, the Treasury Department and the U.S. Attorney's office for the Southern District of New York are investigating just how private banking works, how it serves its wealthy clients and what sort of safeguards could be put in place to keep it from facilitating, even inadvertently, the designs of tax cheats and drug lords.

The best way to understand the private-banking craze and the background to the Citibank-Salinas imbroglio is to go to the cradle of the industry in Geneva, Switzerland. Here private banks beckon just across the border from France, and the fine art of serving wealthy clients has been perfected over the past two centuries. These are the sort of Swiss banks you have always heard about. Shrouded by strict secrecy laws, they are the pre-eminent safe havens in a world of political instability, financial chaos and, of course, high taxes. These institutions provide some of the best service in the world, from walking a client's poodle to advising him which Miro he should buy; from picking up a child at boarding school in England to making sure a family member has cash for a shopping spree in Tokyo. Plus, of course, taking care of his fortune.

Consider Darier Hentsch, for example, a bank founded in 1796, which served as paymaster to Napoleon's army. There are no teller counters here. The bank does not make loans. Though it is possible to have a checking account here, what the bank really does is protect and manage a portfolio of investments. Clients must have a minimum of $1.5 million in "investable" funds--meaning apart from one's house and employer-linked retirement accounts. Says managing partner Benedict Hentsch: "The only thing we do is money management. It's the only thing we have ever done." Darier Hentsch is modest by today's standards, handling some $35 billion for 20,000 clients. Like similar Swiss banks, it charges a fee of roughly 1% of the client's assets.

Down the street, sheltering behind a stone-and-wrought-iron facade, is Pictet & Co., which has steered its clients past such annoying bumps in the road as the Franco-Prussian War and the Russian Revolution. Like Darier Hentsch, Pictet manages about $35 billion in private client portfolios. "We go far in serving our clients," says partner Ivan Pictet, an eighth-generation banker whose family was prominent in Geneva 300 years before Calvin started preaching there. "Our bankers are very often used as intermediaries between children who are fighting or in things like divorces." If you hold an account at Darier or Pictet, no one other than a criminal court can find out--and not even it can if the alleged offense is tax evasion. In Switzerland that's considered a civil, not a criminal, matter.

England developed a more localized form of private banking--its prominent private banks, such as Coutts ("banker to the Queen"), tended to serve only a national clientele--and the U.S. had distant cousins of the Swiss banks in the form of trust companies and "family offices." But Switzerland's 400 banks have long been the industry's global heart. So much wealth flowed into the country--primarily from its highly taxed neighbors but also from Latin America and Asia--that it now holds some $2 trillion, or one-third of the world's wealth that resides outside its country of origin. Switzerland also boasts what are by far the two largest private banks in the world: UBS, with $580 billion in private-banking assets; and Credit Suisse, with $292 billion.

Until the mid-1980s few financial institutions followed the Swiss model. But then the U.S. began to deregulate its banks and brokerages. Suddenly the old Swiss idea of low-risk, fee-based money management seemed appealing to commercial banks like Citibank and Chase, which were suffering diminishing returns from commercial banking. The new industry also appealed to brokerages like Merrill Lynch, eager to invade the banks' turf. These newcomers and their arriviste clients liked the "private banking" moniker too, with its Anglo-Swiss overtones.

As the Americans, and then other Europeans, have established their own private banks, they have offered affluent customers primarily asset management but also a wider range of services, from checking accounts to liability insurance. And while clients of the original Swiss private banks were happy in times of turmoil to be able to count on the return of their capital, today's clients are keenly interested in obtaining high return on their capital. Most of them get it, through well-crafted portfolios of domestic and foreign stocks and bonds, mutual funds and hedge funds.

The private banker or "relationship manager" has become a guide through the complex world of financial services. The entry level for most of these private banks is $1 million, though in the fragmented industry you will find boutiques like Donaldson, Lufkin & Jenrette and J.P. Morgan that require $5 million, and aggressive players like Merrill Lynch that accept as little as $500,000.

The market these new private banks have found is huge. Some of it is the old-fashioned sort of money from Brazil or Mexico, seeking a safe haven from instability and high taxation. But most of it is "onshore": millions of newly wealthy professionals and business proprietors in Europe, Asia, Latin American, the Middle East and Africa who don't need deep secrecy and want private-banking services provided in their own countries.

There is a new sophistication to private-banking clients that has taken some old-line European banks by surprise. "People have this image of private banking as a crusty old frock-coated Lord and Lady Jemima Puddleduck having tea with the bank manager," says Simon de Ferrer of the Royal Bank of Canada. "But the new wealth is more like Richard Branson"--the flamboyant British founder of Virgin Atlantic Airways and Virgin Records.

By now most large banks and brokerages in the western hemisphere have moved into some form of private banking, with Citibank using its peerless retail network to develop business among local elites around the world. Most of the private-banking departments offer trusts and accounts in Switzerland, the Caymans and other havens with tight bank-secrecy laws. (An ad for Citibank's Monaco private bank touts its "trust companies and private investment companies in the U.S., Bahamas, Cayman Islands, Jersey or Switzerland" that "can give the client confidence that their assets are held...in a way that is both tax-efficient and confidential.")

It is perhaps no surprise that in such an intensely competitive business, some of the newer private banks are running into trouble. Citibank was only one of several private banks that, according to investigators, could have more strictly observed a central tenet that private bankers call KYC. It stands for "Know Your Customer."

The problem for Amy Elliott at Citibank was not so much what she did but whom she did it for--at least in the view of the Mexican authorities who have brought criminal charges against Raul Salinas. In addition to getting Salinas Broadway theater tickets and managing his portfolio, she employed sophisticated asset-concealment techniques on his behalf. These techniques are used quite legally by wealthy individuals--say, a surgeon who wants to secure her life savings from potential malpractice suits or an estranged husband. Elliott was helping Salinas conceal his large transfers out of the country ostensibly because, as she explained in a 1996 deposition in New York, "if a member of the family of the President wanted to have his money outside, it would be politically sensitive." But various combinations of these techniques, employed through various banks, are also favored by tax cheats, corrupt politicians and drug dealers.

According to the GAO report, Elliott set up an offshore trust company based in London and Zurich. The trust company was in turn owned by several Cayman Islands shell corporations, so it could not be traced to Salinas. The trust was managed by a Swiss subsidiary of Citicorp.

This was the basic method, minus any involvement by Citibank, that Ferdinand Marcos employed to spirit money out of the Philippines. This model "really is how it works, how dictators steal their countries to the ground," says Jack Blum, one of the authors of the recent U.N. report on financial havens. "Marcos buys an offshore company in the Isle of Man. This shell company then opens a bank account in the Caymans, managed by a trust company in Bermuda. The Philippine National Oil Co. makes payments to these untraceable accounts, and no one's the wiser."

Citibank ran into further private-banking trouble in Pakistan. In 1995, according to a New York Times story last January that quoted Pakistani government investigators and documents, Citibank's private bank opened several accounts for Asif Ali Zardari, husband of then Prime Minister Benazir Bhutto. Zardari's accounts were officially held through an offshore company in the British Virgin Islands. It was through his account at Citibank's private bank in Geneva that some $40 million flowed, according to the Times. (Pakistan's then President Farooq Leghari in 1996 dismissed Bhutto from office on charges of corruption and misrule, which she denies, saying, "I have no ill-gotten money.")

Zardari, now held on murder and corruption charges, also denies any wrongdoing and describes the accusations against him as politically motivated. Citibank closed Zardari's account after it was informed of criminal prosecutions. The bank is cooperating with Pakistani officials in the investigation.

Such incidents as the ones involving Zardari and Salinas have regulators and bankers in the U.S. and elsewhere worried. Rodolfo Bogni, head of private banking at UBS, says he is pushing for more thorough due diligence as the bank expands its prodigious worldwide private-banking operations. "The fundamental task of the private banker is to know one's client," he says. "And we have to watch political personalities very closely." At Barclays private bank in London, Michael Thomalin, global head of private banking, says that "as a matter of principle, we do not do business with politicians." Officials of the larger private banks say it's very much in their interest to police themselves, lest their governments tighten regulations--and lest they attract the sort of attention that Citibank got last week.